Staking is one of the major ways to earn passive income in the cryptosphere made possible by DeFi (Decentralized Finance). In this section, we will cover everything you need to know about staking, types of staking, benefits and risk of staking, how to stake your coins on various exchanges and staking platforms, etc.
What is Staking in the Crypto Space?
Crypto staking is an activity where users hold or lock their funds in a crypto wallet in order to take part in maintaining the operations of a blockchain system that uses the proof-of-stake (PoS) consensus mechanism. A consensus mechanism is a method of validating entries that are recorded in a distributed database (blockchain), and also keeping the database secure.
The 2 main types of consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS).
Bitcoin uses the PoW consensus mechanism, which relies on energy-intensive crypto mining, where massive computational efforts and equipment are required before a transaction can be processed, and a new block created and submitted by miners. The first miner to correctly solve the complex mathematical problems, earns a mining reward.
Proof of staking consensus mechanism works in a different way. Here, validators process and create new blocks in a blockchain, just like miners in PoS consensus mechanism. But in PoS, nodes (computers that participate in creating new blocks in a blockchain) don’t struggle to solve complex mathematical problems to create a new block in the blockchain, rather they set aside or stake a certain amount of their crypto asset or native coin of that blockchain (for example, Ether, ETH for Ethereum blockchain network). A validator is then semi-randomly chosen for each block from all the nodes that have staked a minimum required amount of a cryptocurrency. Now, the chosen validator forges the new block, and other validators validate it. The validator will be rewarded with the native coin of that blockchain if the information contained in the new block are accurate. But if the new block (proposed block) is found to have inaccurate information, the validators involved will lose a part of their stake, in a process called slashing.
In order to become a validator, you must stake a specific amount of the native coin of the blockchain network. For example, in order to become a validator, you must stake at least 32 ETH. Also note that new blocks are validated by more than one validator. A new block will only be finalized and added to a blockchain when a certain number of validators have verified that the information contained in the new block are accurate. Also note that there are different types of PoS mechanism, and different PoS mechanisms have different methods of validating new blocks.
You can learn more about proof of stake from this Binance Academy guide.
Staking vs. Mining
The main difference between mining and staking is the type of consensus mechanism associated with each term. Mining is associated with Proof of Work (PoW) consensus mechanism, while staking is used for Proof of Stake (PoS) consensus mechanism.
Staking vs. Yield Farming
Most crypto traders and investors find it difficult to differentiate between staking and yield farming. The difference is clear.
Staking is a mainly associated with Proof of Stake (PoS) consensus mechanism where validators pledge their coins in order to help secure the blockchain network, and then earn staking reward in the native coin of that blockchain network.
While in yield farming, crypto investors invest their crypto assets in liquidity pools of protocols and is mainly associated with decentralized finance (DeFi). In order to earn from yield farming, you need to first provide liquidity, mostly in decentralized exchanges (DExs) like Uniswap, Sushiswap, Yearn, Pancakeswap, etc. This process of providing liquidity in DExs in order to earn rewards is called liquidity mining. Now, when you provide liquidity in a DEx, you will receive liqudity provider (LP) token. Then you can now lock your LP token in another DeFi protocol, called yield farm, where you earn more of the same LP token or a different token as reward.
Another major difference between staking and yield farming is that in staking, you are required to lock up your coin for a specific period of time. While in most yield farms or DeFi protocols, you can “unstake” your LP token any time you wish, unless otherwise stated by the protocol.
Below is the summary of the differences between staking, yield farming and liquidity mining.
What are your Reasons for Staking?
Although staking is one of the ways to earn passive income in the crypto space, but you need to have an aim for staking your coins. Staking is not just an act of pledging coins in order to earn rewards, it goes beyond that.
Are you staking just earn rewards, without really participating in the activities of the project? Or are you staking for rewards and power?
If you are planning to stake your coins for a longer period, then you should choose a good staking aim.
Staking for Reward vs. Staking for Reward, Participation and Power
Staking for rewards only is the act of locking your coins just to earn passive income, without doing any work in the project. While it might work for you in short term, it might be harmful to you in long term because some projects require active participation from stakers, like voting and project-level decision making.
After voting, your coins will returned back to you, as well as the staking rewards. It is always recommended that you vote rightly. If you vote against the interest of the project, you will still get your immediate reward, but over time, you will suffer the negative market effect of the bad decisions you voted. Remember that staking is an investment, so you should help determine the direction of the game. So this gives you the responsibility of making informed decisions. That is why you need to understand a project fully well if you wish to stake long term.
Note that not all projects give stakers the right to contribute in its decision making. So when choosing a project to stake, you need to stake the one that incorporates your sovereignty as a user. On your own part, in order to participate actively in the project, you need to keep up on changes to its consensus rules and vote actively for what you believe will help the project move forward.
You can learn more about why you should stake the right project in this article at CoinDesk.
See:
Different Types of Staking or Proof of Stake
Here are some of the popular types of staking or proof of stake:
Regular Proof of Stake
In this type of proof of stake, the validator to create the next new block is chosen through various combinations of random selection, usually by amount staked, not by computing power, as in the case of PoW consensus mechanism.
For projects that use this type of PoS, anyone can stake the coin with his/her own wallet.
Delegated Proof of Stake (DPOS)
Daniel Larimer created this type of PoS consensus mechanism in the year 2014, in order to solve the perceived Bitcoin scaling issue. Since then, it has become the most notable type of PoS consensus mechanism, and has been adopted by most PoS projects. Here, users are allowed to commit their coin balances as votes, and users voting right or power is directly proportional to the number of coins committed. A number of delegates are now elected to manage the blockchain on behalf of their voters for a certain period of time.
The staking rewards in this case are distributed to the elected delegates, who now shares a part of the rewards to their voters, according to the individual’s contribution towards the voting process.
Leased Proof of Stake (LPoS)
This is an enhanced type of PoS where token holders are allowed to “lease” there to full nodes, and then earn a percentage of the pay-out as staking rewards. Users are also giving the privilege to choose between running a full node, and leasing their stake to a full node, in both cases, for staking rewards.
Waves blockchain network uses this type of PoS.
Masternode Proof of Stake
This type of PoS is also called Proof of Stake for a reason. In order to run a masternode, you must have at least a specified minimum amount of the native coin of that blockchain network. For instance, DASH is one of the popular blockchain networks that implement masternode PoS consensus mechanism. In order to run a masternode on DASH blockchain network, you need at least 1000 units of DASH token, which is quite a huge investment. Masternode operators are rewarded with tangible crypto earning, usually a percentage of their stake. Another blockchain network that uses masternode PoS is PIVX.
Some Staking and PoS Terminologies you should know
Here are some of the basic staking terminologies you need to understand before you can stake your coin on any crypto staking platform.
Principal/Staking Amount
This is your staking capital, which is the number of units of a coin/token you staked or wish to stake in a staking platform. It also determines the amount of staking rewards you will earn at the end of the staking period.
Staking/Lockup Period
This is the period in which the crypto asset you staked will be locked up in a smart contract. It may be mostly specified in days or months. Most staking platforms have minimum staking/lockup period. For most staking platforms, within these period, you might not have access to crypto asset you staked.
Annual Percentage Yield (APY)
It is the estimated annual rate of returns from staking for a whole year. Here, the effect of compounding interest is also taken into consideration. Note that for any staking pool, as more funds are being staked or locked, the APY reduces.
Staking Reward
This is the passive income you earn for staking your coin in a crypto staking platform. You can use a staking calculator to estimate the total staking reward you will earn before you commit your asset. The staking reward can also be estimated on daily basis.
You can estimate your daily and total staking rewards using this Free Crypto DeFi Staking Rewards/Yields Calculator App by Buzzing Point.
Common Ways to Stake your PoS Coins
Here are some of the common ways you can stake your PoS coins and earn rewards:
- Staking on an Exchange
- Staking on a Hardware Wallet
- Using Staking-as-a-Service (SaaS) Platforms
- Participating in a Staking pool
- DeFi Staking
- Becoming a Validator
Each of these staking options has its own advantages and disadvantages.
Staking platforms display the Annual Percentage Yield (APY) that you will earn for staking a coin in their platforms, though this APY is not fixed. As more funds are being staked or locked, the APY reduces. Sometimes it is good to estimate the your staking rewards based on the APY offered by a platform, your staking capital and the period of time you wish to stake.
Benefits of Staking your Cryptocurrencies
- It is one of the easiest ways to earn passive income from the crypto space.
- Also, you don’t need any special equipment to stake your coins, unlike mining in PoW consensus mechanism. Also, it cost-effective and cheaper to run, since it does not require expensive equipment to run.
- Even if you don’t have a deep knowledge of how crypto works, you can still stake your coins and earn rewards. Staking-as-a-Service (SaaS) platforms have made it possible for users who have no prior knowledge of cyptocurrencies to stake and earn rewards easily, since these platforms takes care of all the technical aspects of the staking process.
Risks in Staking Coins
Coin Market Price Risk
Generally, the prices of cryptocurrencies are highly volatile. You might run into huge loss if the price of the coin you staked drop so much at the end of the staking period. For example, assuming you staked a coin and was earning 20% APY and then at the end of the staking period, the price of the coin drops by 60%, you have made a loss. That is why it always recommended to stake coins that have large market capitalization (market cap.) and also have enough liquidity in exchanges, because there prices are not as volatile as low market cap. coins.
Delay in Reward Pay-Out
Some staking platforms don’t pay staking rewards daily. So, you have to wait a longer period to receive your staking rewards. If the price of the token drops too much during the payout period, you might end up in a loss.
Risk of Locking your Coins in an Exchange
If you staked your coin with a centralized exchange for long term, you might suffer a risk of losing your staking capital if the exchange is hacked. That is why cold-wallet staking is always the safest staking option.
Trusted Sites to Stake PoS Altcoins and Stable Coins for Interest
NOTE: Nothing is assured forever. A company might be legit today and then tomorrow their standard might change. So before you use any of these sites, make further research. But as of time of writing, these are some of the trusted sites for staking your coins:
- BlockFi – blockfi.com
- YouHolder – youhodler.com
- Coinloan – app.coinloan.io
- BTCPOP – btcpop.co
- Xcoins – xcoins.io
- Stake Capital – stake.capital
- MyCointainer – mycointainer.com
- Figment Networks – figment.network
- Stake Fish – stake.fish
- Staked – staked.us
- StakingLab – stakinglab.io
- Staking Facilities – stakingfacilities.com
- Stake with us – stakewith.us
- P2P Validator – p2p.org
- Dokia Capital – staking.dokia.cloud
Note that most of these sites mentioned above are Staking-as-a-Service (SaaS) platforms, which are special centralized platforms that are dedicated only to staking.
Below is the summary of the first 5 sites mentioned above:
Top Exchanges that Offer Staking
- Binance
- Coinbase
- KuCoin
- Kraken
- Poloniex
- Huobi
- Okex
Top DeFi and PoS Project Tokens
- NEAR
- FLX
- BNB
- CAKE
- KCS
- DOT
- SOL
- FLOW
- AKT
- XTZ
- DG
- DASH
- NEO
- NEBL
- QTUM
- STRAT
- WAVES
- ORN
- WOO
- ICX
- ALGO
- LPT
- ATOM
- LOOM
- VET
- TOMO
- YEFI
- PPAY
- KAVA
- AION
- LSK (LISK)
- EGLD
- ADA
- PIVX
- NAV
- IOST
How to Know the Best Validator to Stake with in any Staking Platform
Practically, there is no sure way to know the best validator. The best validator for you depends on your main reason for staking. Is your main staking goal to just staking rewards? Then you can choose a validator that offers a high percentage reward. Do you want to stake for short term? Then you can choose a validator with a staking period that suits your range.
Sometimes, the best option is to stake with multiple validators. It has the lowest risk of losing your asset. Also keep in mind that most blockchains halt if a certain percentage of validators mess up. So if you want o be safe, you can split your staking capital as much as possible. It also helps to decentralize the network, though it might pose more work for you, but it worths the stress.
Always do your own research. Not everything on the internet is correct. Avoid those medium articles that shill some validators as the best. Sometimes you follow your instinct. Experience will also teach you better.
How to Choose a Reliable Staking Platform
Never be in a hurry to stake your coin in any staking platform. There are some important factors you need to consider before you commit your coins in any staking platform.
- Do not be tempted by some excessively high APYs offered by some staking platforms, especially new DeFi protocols. Take time to check their reputations, reviews and ratings in platforms like Reddit and Twitter. This will help reduce your chances of being a victim of rug pull. But also remember that not everything you see online is true.
- Before you stake your coin any staking platform, take time to read the terms and conditions for staking in that platform. For example, some platforms specify in their staking terms and conditions that the staked coin will first undergo a cooling period before it can be unstaked. Some other platforms specify a minimum staking amount or even staking period, etc.
- You can also use reliable crypto analytics tools, such as Coinmarketcap and Coingecko to check up the details of any PoS-based platform and even stake-as-a-service platforms.
- Always stick with popular staking platforms, such as Maker, Pancakeswap, etc.
How to Stake Coins on any Staking Platform
Below are general steps for staking PoS coins:
- First, setup your crypto wallet you wish to use for staking.
- Transfer the PoS coin you wish to stake to that wallet.
- Choose a suiting staking pool from the available options.
- Specify the number of units of the coin you wish to stake and then lock it up (stake).
- Next is to start receiving your staking rewards. Some staking platforms send your staking rewards directly to your wallet, while others require that you claim your rewards manually.
Check:
Tutorial Video on How to Stake Coins on KuCoin Exchange App
Below is a recommended YouTube video tutorial for learning how to stake PoS coins using KuCoin exchange app:
https://www.youtube.com/watch?v=Pm2kLhdTRvY
How to Stake Coins on Binance Exchange App
Below is a recommended YouTube video tutorial for learning how to stake PoS coins using Binance exchange app:
How to Stake Coins on Coinbase Exchange App
Below is a recommended YouTube video tutorial for learning how to stake PoS coins using Coinbase exchange app:
https://www.youtube.com/watch?v=M6zr-7y3K2Q
How to Stake Coins on Kraken Exchange App
Below is a recommended YouTube video tutorial for learning how to stake PoS coins using Kraken exchange app:
How to Swap, Stake Coins, Provide Liquidity and Farm on PancakeSwap
Pancakeswap is one the popular decentralized exchanges on Binance Smart Chain (BSC), where you can swap and stake your BSC coins, provide liquidity and even farm your liquidity tokens, and lot more.
Below is a recommended YouTube video tutorial for learning how to swap, stake coins, provide liquidity and farm your LP tokens using pancakeswap decentralized exchange app.
See:
- Free Crypto Trading Profit/Loss Calculator App by Buzzing Point
- How to Spot Crypto Projects with Powerful Potentials
