- About staking
- What is staking?
- Blockchain consensus algorithms
- What is the purpose of staking?
- Types of staking
- Risks
- How should you choose a staking platform?
- How can you calculate potential profits?
- How should you choose a cryptocurrency?
- The perspectives of staking
About staking
Making money with crypto is not only for miners and traders. There are numerous options to earn passive income even without studying the technical and financial aspects of crypto. One of them is staking.
What is staking?
It is the act of locking up (staking) your assets in a wallet for a certain period of time. Interest is accrued on the locked coins. The potential profit depends on the platform and should be assessed by an investor. In fact, staking is similar to a bank deposit but offers significantly higher interest rates.
Blockchain consensus algorithms
To understand the principles of staking, let us at first consider two algorithms.
Proof of Work (PoW)
This algorithm is used for mining. Miners purchase expensive hardware equipment, generate blocks and receive a reward in the form of newly created coins. Usually, mining is rather expensive and new individual miners are unlikely to make a profit. They have an option, however, to contribute their computing power to a mining pool and receive their share of income.
The purpose of mining is to support the operations of a blockchain and its transactions. Information about a crypto transaction is recorded in each block, and a transaction fee is provided to the miner that has generated the block. The whole process of mining supports blockchain operations.
Proof of Stake (PoS)
This algorithm was introduced to reduce energy consumption for block generation. The chances of adding a new block depend on the share contributed by a participant. Instead of computing power, however, participants contribute coins. The algorithm is used to validate transactions ensuring network security.
What is the purpose of staking?
For investors, staking is a great way to earn additional income on the crypto they hold in their wallets without paying much effort. At the same time, the blockchains and platforms that offer staking services get to ensure the security of their network and sufficient crypto funds.
Types of staking
Staking offers income opportunities for both tech-savvy users and new investors who do not know much about blockchain operations. Advanced users may act independently and try technical staking. It refers to directly validating blockchain transactions. The more coins they lock up, the higher the voting power.
Since validators form a network node, they need to provide sufficient power to ensure its continuous operation. Users need to purchase hardware such as an ASIC or a GPU, launch the node and synchronize it with a selected blockchain. After that, they need to deposit coins to their wallet, including the collateral. This method is cost-intensive and requires a lot of attention. If a validator is caught validating improper transactions, their votes may be suspended, and staking may not bring any profit at all.
Usually, the technical aspect of staking is undertaken by exchanges and DeFi platforms. They do all the technical work and offer common users various options to make money on staking. This makes staking very convenient and contributes to its popularity.
Like banks offer various deposit options, crypto exchanges offer various staking plans. There are three main types.
Fixed
The funds are locked for a specific fixed period that should be complied with. It is impossible to withdraw your assets before the end of this period. However, this method offers the highest interest rates. The profits also depend on the reputation of exchanges: the most popular exchanges with reliable currencies have lower rates, while startups can offer higher profitability. However, the risks are high as well.
Flexible
No contract end date is specified, and users can withdraw their funds at any moment. Interest may be paid daily. The frequency of interest accrual depends on the selected conditions.
DeFi
Exchanges offer various staking options. You can make use of compounding by earning interest on the accumulated interest.
Risks
The main risk is the volatility of crypto. It is not common but sometimes the interest rate simply does not cover the current value of the cryptocurrency.
Another risk is fraud. New projects may collect assets and then announce a scam.
Sometimes, an idea falls short of expectations and fails to collect enough funds for blockchain operations. In this case, the investors may lose all their funds.
How should you choose a staking platform?
Pay attention to the margins, the number of available currencies, and the platform’s reputation. Sometimes startups succeed and the first users receive extraordinary profits. Mostly it just comes down to luck.
Users who are not willing to risk invest on reliable platforms, such as Binance, CoinBase, etc. They offer various income opportunities, but the interest rates are lower.
A large number of available coins allows users to diversify their funds, protect themselves against risks and increase profits.
When analyzing the margins, pay attention to the value of a selected currency throughout its entire life cycle. Also make sure to analyze the current situation and check the viability, functionality, and relevance of the blockchain. For example, Ethereum offers great opportunities and has a growing number of users. Therefore, it may be assumed that Ethereum is a stable network.
How can you calculate potential profits?
Usually, the annual percentage rate (APR) is specified for staking options. If the staking period is less than a year, you should divide the APR by 365 and multiply it by the number of days. For example, by locking up BNB on Binance, you can make 5.23%/365=0.0143% a day.
The DYDX currency at the DYDX exchange offers significantly higher interest rates. Although the platform was founded in 2017 and is growing steadily, the risks are still rather high. Currently, the price of DYDX is going down.
However, if you choose the right moment, you can earn a profit within one month.
How should you choose a cryptocurrency?
It depends on the level of risks that a user is willing to undertake. For a small but steady income, it is better to choose a well-known cryptocurrency. Stablecoins are characterized by the lowest risk possible since their price is pegged to a fiat currency, usually the U.S. dollar. However, in this case, the interest rate of staking is similar to that of bank deposits.
Those who are willing to risk might be interested in projects with interest rates over 50%. Some coins offer annual percentage rates of over 1000%.
You can analyze various options and weigh the pros and cons at stakingrewards.com.
The perspectives of staking
According to the data tracking website beaconcha.in, staking has become increasingly popular due to the fact that numerous PoS blockchains were launched at the end of 2020 and 2021. Among them were Solana and Avalanche. As an additional incentive, many new blockchains offer first investors higher coin rewards.
According to the crypto market intelligence company Messari and staking data provider Staking Rewards, the incredibly profitable rewards resulted in over 70% of all tokens issued on many blockchains being staked by the end of 2021. These blockchains included Cardano, Binance Smart Chain, and Solana. According to Coinbase Global Inc., by the end of the third quarter of 2021, about 2.8 million people were making a profit from their cryptocurrency assets, mostly by staking.
This trend continues to develop due to the increase in the number of staking options and triple-digit potential returns. According to staking service Staked, a department of the Kraken cryptocurrency exchange, in the fourth quarter of 2021, the share of staked coins increased to 7.7% of the $2 trillion crypto market compared to 1.8% the year before. This trend is growing even though it is impossible to stake Bitcoin, most Ethereum coins, XRP, and numerous stablecoins amounting to over 70% of the total estimated crypto market size.
