Some blockchains have been created that allow investors to earn additional cryptocurrency by contributing to the network through the process of staking. This gives investors a way to earn a return on their cryptocurrency assets to maximise their returns, similar to how dividends work with stocks or coupon payments work with bonds.
In this post, I’ll cover what is crypto staking, how staking works, which cryptocurrencies you can stake and most importantly, how you can participate yourself to earn rewards.
Contents
What is Proof of Stake?
You can think of staking as a less resource-intensive version of cryptocurrency mining. With the original proof-of-work consensus algorithm, miners compete to solve a complex mathematical problem and whoever solves it first is given the right to add the next block of transactions to the blockchain.
Bitcoin is the most popular proof-of-work blockchain which has proven to be a great method to facilitate transactions in a decentralised matter. However, the problem is that it requires a ton of arbitrary computation to compete to solve the problem and earn rewards, which often sees Bitcoin criticised in the news, rightly or wrongly.
This has led to the creation of the proof-of-stake consensus algorithm. Instead of having to solve complex mathematical equations to be given the right to add the next block of transactions, the newer proof-of-stake consensus algorithm allows participants to stake their cryptocurrency by holding funds in a wallet to support to operations and security of the network.
The protocol then randomly assigns the task of adding the next block of transactions to the blockchain to a participant that has staked their cryptocurrency.
Not all cryptocurrencies are built using a proof-of-stake consensus algorithm, although more are being built this way due to being significantly less resource-intensive and they’re also more appealing to investors.
Staking coins also gives the participant some decision power on the network by being able to vote on what happens on the network, such as
How Do You Stake Crypto?
In order to stake your cryptocurrency, you have to either hold funds in a specific wallet, lock them in a smart contract or activate staking through an exchange.
For beginners it’s a lot easier to stake through an exchange, especailly as that’s most likely going to be the place where you buy your cryptocurrency from to start with.
One of the best exchanges that offers staking through their platform is Binance and they currently offer the option to stake 51 cryptocurrencies with a few clicks. Rewards are then paid back to your Binance account where you can then get access to them to sell, hold or even add the newly earned rewards back into staking for compound growth.
You can also stake through a staking pool, which is where multiple stakeholders combine their resources together to increase the chances of being rewarded. Rewards are then distributed evenly to all the participants in the pool.
Staking through a staking pool or using an exchange also comes with the added benefit of having significantly lower minimum staking amounts. For example, staking for Ethereum 2.0 requires you to stake a minimum of 32 Ethereum to do it on your own, quite a hefty price tag for most investors now each Ethereum is over $2k.
What is a Staking Pool?
The pool itself is just a server that is set up and managed by a pool operator and is connected into the blockchain where the participants are seeking to earn rewards.
It is similar to the traditional mining pool model where participants combine their resources together to increase their chances of a reward. This helps to make the reward percentages more reliable and predictable compared with solo staking. This benefit is offset by the staking pools charging fees to run the software and hardware behind the pool, although most of the time these fees are very small, but make sure to do your research.
How Do You Join a Staking Pool?
In order to join a staking pool you need to find a pool that is active with the cryptocurrency that you’re looking to stake. Once you’ve found the pool you want to join, they will have a instructions on how to stake your coins.
Make sure you do your own thorough research before you join any staking pools as it can be quite complicated, especially for beginners. Some people try to exploit people in this relatively new market and try to get people to hand over sensitive information, such as their public and private wallet keys where they can be stolen.
Is Staking Worth It? Staking Rewards
The probability of being selected is proportional to the number of coins you have staked in the network and the staking reward rules built into the protocol. Some coins have higher rewards than others and are based on a variety of different factors, although the average annual return is between 5-7% with some being much higher.
One downside that does come with staking is the fact that you have to lock up your cryptocurrency for a period of time. This can vary quite significantly between which route you go down, although using Binance as an example, they offer 30, 60 and 90 day lock-up periods.
Thankfully if you want to access any cryptocurrency within the locked period you can redeem it and get your cryptocurrency back the following day although can take up to 72 hours.
However, other options, such as staking your Ethereum for the Ethereum 2.0 (ETH2) upgrade locks your cryptocurrency up until the upgrade is complete. So please make sure you fully understand what each stake entails before you get started.
Which Coins Can Be Staked?
Coins are being created regularly that can be staked and usually as coins increase their market cap, their staking rewards decrease
- 1inch (1INCH)
- AdEX (ADX)
- Aion (AION)
- Akash Network(AKT)
- Algorand (ALGO)
- Anchor Protocol (ANC)
- Ark (ARK)
- Arpa (ARPA)
- Avalanche (AVAX)
- BakerySwap (BAKE)
- Balancer (BAL)
- Band Protocol (BAND)
- Basic Attention Token (BAT)
- Bean Cash (BITB)
- Beefy.Finance (BIFI)
- Bepro Network (BEPRO)
- Binance Coin (BNB)
- Binance USD (BUSD)
- Bitcoin (XBT|BTC)
- Bitcoin Cash (BCH)
- Bitcoin PoS (BPS)
- BitGreen (BITG)
- BlackCoin (BLK)
- Blocknet (BLOCK)
- Bonfida (FIDA)
- Bonded Finance (BOND)
- Brazilian Digital Token (BRL/BRZ)
- Callisto (CLO)
- Cardano (ADA)
- Cartesi (CTSI)
- Celer Network (CELR)
- Celo (CELO)
- Chainlink (LINK)
- Chromia (CHR)
- Civic (CVC)
- CloakCoin (CLOAK)
- ColossusXT (COLX)
- Combine.finance (COMB)
- Constellation (DAG)
- Contentos (COS)
- Cosmos (ATOM)
- Coti (COTI)
- CRDT (CRDT)
- Crown (CRW)
- Cudos (CUDOS)
- Curve DAO Token (CRV)
- Dai (DAI)
- Dash (DASH)
- Decred (DCR)
- DeepOnion (ONION)
- Definer (FIN)
- Defi Yield Protocol (DYP)
- DIA (DIA)
- Divi (DIVI)
- Dodo (DODO)
- EasyFi (EASY)
- Elastos (ELA)
- Electra (ECA)
- Elrond (EGLD)
- Enecuum (ENQ)
- Energi (NRG)
- EOS (EOS)
- EOSForce (EOSC)
- Ethereum 2(ETH2)
- Ethereum (ETH)
- Ethereum Classic (ETC)
- Euro (EURO)
- ExclusiveCoin (EXCL)
- Fetch.ai (FET)
- Filecoin (FIL)
- Firo (formerly Zcoin)(FIRO)
- Flow (FLOW)
- Frontier (FRONT)
- Fusion (FSN)
- FYDcoin (FYD)
- Geeq (GEEQ)
- GXChain (GXS)
- Harmony (ONE)
- Horizen (ZEN)
- Hydra (HYDRA)
- I/O Coin (IOC)
- ICON (ICX)
- Ideaology (IDEA)
- IOST (IOST)
- IOTA (MIOTA)
- IoTex (IOTX)
- IRISnet (IRIS)
- Kava (KAVA)
- Kira Network (KEX)
- Know Your Developer (KYDC)
- Komodo (KMD)
- KuCoin Shares (KCS)
- Kusama (KSM)
- Kyber Network (KNC)
- Lattice Token (LTX)
- Linear (LINA)
- LISK (LSK)
- Litecoin (LTC)
- Lition (LIT)
- Livepeer (LPT)
- Loki (LOKI)
- Loom (LOOM)
- LTO Network (LTO)
- MANTRA DAO(OM)
- Metrix Coin (MRX)
- Minter (BIP)
- MMOCoin(MMO)
- Monero(XMR)
- Monetary Unit(MUE)
- Morpheus Labs (MITX)
- MultiVAC (MTV)
- NavCoin (NAV)
- Near Protocol (NEAR)
- Neblio (NEBL)
- Nebulas (NAS)
- NEM (XEM)
- Neo (NEO)
- Neutrino Dollar (USDN)
- NIX (NIX)
- Nord Finance (NORD)
- NOW Token (NOW)
- Nsure.Network (NSURE)
- Nuls (NULS)
- Oasis Network (ROSE)
- OAX (OAX)
- OkCash (OK)
- Ontology (ONT)
- Origin Protocol (OGN)
- Orion Protocol (ORN)
- PancakeSwap (CAKE)
- Peercoin (PPC)
- Phore (PHR)
- PIVX (PIVX)
- PlotX (PLOT)
- Pluton (PLU)
- pNetwork (PNT)
- Polis (POLIS)
- Polkadot (DOT)
- Polygon (MATIC)
- Qtum (QTUM)
- Quant (QNT)
- Rapids (RPD)
- ReddCoin (RDD)
- RioDefi (RFUEL)
- Ripple (XRP)
- Russian Ruble (RUB)
- Router Protocol (ROUTE)
- SafeInsure (SINS)
- Secret Network (SCRT)
- Serum (SRM)
- SmartCash (SMART)
- Social Send (SEND)
- Solana (SOL)
- Stafi (FIS)
- Stakenet (XSN)
- Stellar (XLM)
- Stratis (STRAX)
- SushiSwap (SUSHI)
- Swingby (SWINGBY)
- Swipe (SXP)
- Synthetix Network Token (SNX)
- Syscoin (SYS)
- Terra (LUNA)
- TerraCredit (CREDIT)
- Terra Virtua (TVK)
- Tether (USDT)
- Tezos (XTZ)
- The Graph (GRT)
- Theta Network (THETA)
- ThorChain (RUNE)
- TomoChain (TOMO)
- Tron (TRX)
- Troy (TROY)
- Uniswap (UNI)
- US Dollar (USD)
- USD Coin(USDC)
- V.Systems (VSYS)
- Validity (formerly Radium) (VAL)
- Vechain (VET)
- Velo (VELO)
- Vitae (VITAE)
- Wanchain (WAN)
- Waves Enterprise (WEST)
- Waves Protocol (WAVES)
- Woo Trade (WOO)
- xDai (STAKE)
- yearn.finance (YFI)
- Zcash (ZEC)
- ZeroSwap (ZEE)
- Zilliqa (ZIL)
Can You Lose Money Staking? Risks of Staking
In short, yes. The first thing to note is that investing in cryptocurrency is high risk and past returns are not a guarantee of future returns, with many coins losing significant sums of value or even ceasing to exist.
This market risk brings risk to staking, as the expected annual returns are not pegged onto something that is a fixed price. This means if you stake coin A, with an expected 5% return and the value of coin A decreases by 20%, in real terms, you will still lose money. However, this can also work the other way round, so if coin A increased by 20% your staking returns would also be 20% higher when compared to fiat (dollar) currency.
To help mitigate this risk don’t choose which coins you want to stake purely on their expected staking returns, make sure to also consider their medium to longer term price predictions depending on how long you’re looking to stake the asset.
For people just getting started in staking, it’s essential to do a lot of research before joining any staking pools or downloading any third-party applications. Staking cryptocurrency can be complicated and some people look to exploit this by getting you to hand over your sensitive information. Make sure to never hand over your secret passphrase or private key as many people have fallen victim to theft.
Staking cryptocurrency when done right is very safe as effectively you’re just entering into a lottery system and being rewarded for participation, although as it’s still relatively new technology becoming part of this lottery could be improved. I have no doubt this will become more intuitive in time as adoption increases, just make sure you’re extra vigilant and enjoy these rewards.
How Are Staking Rewards Paid?
Staking rewards are paid out to participants directly to their wallet. Depending on which avenue you go down when staking, rewards can be distributed monthly, weekly or even daily.
Distribution frequency depends on the platform you stake with and can also depend on the specific coin you stake. A lot of staking pool operators choose to distribute the rewards monthly to minimise transaction fees and maximise returns.
When staking through a centralised exchange, like Binance, their rewards are distributed daily so make sure to do you know the distribution schedule before you get started.
How Are Staking Rewards Calculated?
Staking rewards are calculated based on the amount of cryptocurrency you actively stake to the blockchain network. The more cryptocurrency you stake, the more potential rewards you will receive.
The rewards distributed will be dependent on the protocol of each blockchain network and the frequency of blocks produced. Rewards are usually between 5-7% of the total cryptocurrency stake per year, however can be significantly higher depending on the coin.
How Are Staking Rewards Taxed?
Staking rewards are taxed as ordinary income, similar to that of cryptocurrency mining. The sale of this cryptocurrency will then trigger a capital gains tax event where any gains or losses contribute to your tax liability.
Centralised Exchanges That Offer Staking
Below is a list of the current exchanges that offer staking through their platform. The coins you can stake on each platform varies as well as the fees to participate, so make sure to do your research before getting started.
- Binance
- eToro
- Coinbase
- KuCoin
- Kraken
- Poloniex
Verdict – Should You Stake?
As long as you’re aware of the risks and thoroughly research the different avenues you can go down then staking can be an excellent way to increase your cryptocurrency investment returns.
Staking allows you to participate in both capital appreciation and earn a return on your cryptocurrency holdings.
If you want to know more about cryptocurrency investing make sure to read this post on how to invest in cryptocurrency.
Hi, I’m John. I’ve always had a keen interest in Finance, so much so that I’ve made a career out of it! This site is a place where I can share everything I’ve learned as well as give me the excuse to research certain topics.
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