Most people think that trading crypto is the only way to earn crypto, but there is another way to generate passive income from your crypto assets without selling them.
Also known as staking, which is the crypto version of depositing money in a high-interest savings account and earning some interest. Traditionally, when you deposit money into your bank, the bank often loans your money to other customers at a higher interest rate and pays you back a small interest for putting your money with them.
In the crypto world, staking is keeping your coins in a validator. By doing so, you help run the blockchain and keep it safe from malicious attacks. In return, you get rewarded in crypto, just like how miners do with mining, except there is no investment in hardware and electricity.
Staking rewards are determined by a percentage return in APY or APR. More often than not, staking provides a significantly higher APY than the rates offered by traditional financial institutions. Some of the cryptocurrencies with the highest stake rewards include Looks (LOOKS), Polkadot (DOT), and Cardano (ADA). For long-term staking, one can look at blockchains like Ethereum (ETH) which just went through a merge, Solana (SOL), and Uniswap (UNI) because of their strong fundamentals.
Staking vs. Mining
Proof-Of-Work or 'Mining', was the main consensus mechanism and still is for blockchains like Bitcoin. Then, Peercoin used Proof-Of-Stake as a consensus mechanism, after which many other tokens like Cardano (ADA), NEO (NEO), and VeChain (VET) followed suit, boasting a cheaper and greener way of verifying transactions on the blockchain.
While both systems provide a way to earn passive income with crypto, staking is considered to be the cheaper, easier, and safer option.
In Proof-of-Work, you will need to purchase miners, which can cost upwards of US$12,000, and provide stable internet connectivity and electricity to ensure that the miners can process blocks on the network. However, not everyone might have the capital to start mining crypto, and hence turn to Proof-Of-Stake as an alternative to earn crypto while supporting the network.
How does staking work?
Proof of Stake decreases the use of resources significantly by not forcing miners to churn through math problems, which is an energy-intensive operation. Transactions are instead validated by those who have literally invested in the blockchain through staking.
Staking is similar to mining in that it is the method by which a network participant is chosen to add the most recent batch of transactions to the blockchain and earn some cryptocurrencies in exchange.
The specific implementation will differ from project to project, but generally speaking, users stake their tokens for the opportunity to add a new block or verify a block on the blockchain, which in turn gives a payout. The staked token is a pledge that ensures the legitimacy of new transactions that are added to the network.
Many PoS use validators which are chosen at random by the network, however, there are some projects that select validators depending on the size of their investment and the length of time they've held it.
Slashing of Stake rewards
To prevent validators from approving malicious activities, projects like Ethereum implemented reward slashing of validators. If a validator is found approving malicious activities, their staking rewards will be slashed which significantly reduces the rewards they can receive.
How do I get started with Crypto Staking?
To start staking, you will have to identify projects that you feel will flourish and at the same time has a PoS consensus mechanism that allows you to stake your token.
For example, upon purchasing LOOKS, you can transfer them to your Web3 wallet like Metamask and interact with their platform directly.
Staking LOOKS provides a 53.86% APY but this APY will fluctuate over time.
Keep in mind that the coins you stake are still technically yours even after they have been added to a staking platform. Your staked assets are never lost and you can withdraw them at any moment, albeit the processing time may vary depending on the project or staking pool.
Alternatively, you can also become a validator and run your own staking pool. However, this requires a lot more time, knowledge, and money. Furthermore, on some blockchains, becoming a validator requires first raising enough currency from delegate stakes.
Are There Risks with Staking Crypto?
Just like any other investment tool, staking does carry some risks. Here are some risks associated with staking:
Cryptocurrency is highly volatile in nature and the price of assets you staked may depreciate or appreciate over time. Therefore, volatility is something to keep in mind before staking.
Depending on the assets you staked, you might not have access to them during the staking period. For example, Ethereum has a staking function but upon staking, you won’t have access to your Ethereum until the “ShangHai” which will allow users to withdraw from their validators.
Slashing is a penalty for bad actions, inactivity, and false validations. This punishment system discourages harmful validator activity and promotes network participation. Though this punishment might seem harsh, it promotes node security and stability of the blockchain.
There are many DeFi staking providers as well as centralized staking pools that one can leverage if you don’t have the required amount of cryptocurrency to start. However, this comes with a cost as some of these services charge a commission on the stakes or rewards that you receive.
This varies from provider to provider, hence, double-check before depositing your cryptocurrencies into these platforms.
How Much Money Can You Earn From Staking?
Staking is a good option for investors interested in generating yields on their long-term investments. Depending on the cryptocurrency that you are staking, you might get very different yields.
If you are staking via the blockchain’s native wallet, Polkadot ($DOT) provides a 13.9% annual percentage yield (APY), $AXS gives a 44% APY, $MATIC has 8.75% APY, and ETH gives an average of 4% APY, but keep in mind that these APYs will fluctuate with time.
For example, if you are staking 1 Ethereum, you can look to receive 0.04ETH as a reward after a year. This means that if the price of Ethereum appreciates, you will earn free ETH from staking and also benefit from the price appreciation, but the reverse could happen as well.
Staking as Passive Income
Though staking might sound like a good way to start getting some free cryptocurrencies, you should always keep in mind, the cryptocurrency you staked might not be liquid which means you might not have access to it anytime soon.
Thus, if you have some cryptocurrencies that you won’t be touching anytime soon, it might be wise to put them to work, which allows you to start earning a source of passive income.
But, before putting any money into cryptocurrency, it's important to determine whether or not it's a viable investment. Buying a cryptocurrency for the sole purpose of staking makes little sense unless you also view it as a solid investment. With your newfound understanding of staking, you can begin looking into other cryptocurrencies that allow this method of earning passive income.
Disclaimer: The information and publications in this article are not intended to be and do not constitute financial advice, investment advice, trading advice, or any other advice or recommendation offered or endorsed by Coins.
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