ZoneBitcoin EditorialStaking is certainly the most common strategy when it comes to passive income. Certainly, but it is also one of the least understood concepts. We very often use the word indiscriminately. The takeaway from staking is that it's about locking tokens, waiting, and earning rewards. The longer you keep them, the higher the rewards. Staking allows you to earn APY (Annual Percentage Yield) attractive by locking tokens in a protocol.
This is what we generally know about staking. However, it's not that simple or that watered down.
First, you should know that not all cryptocurrencies offer staking. If someone talks to you about staking on bitcoin, for example; take your chances, because this is technically not possible. Bitcoin, due to its configuration, does not work on Proof of Stake.
Likewise, staking is different from one blockchain to another. And even more, the rules can evolve within the same network.
Let's see in this article what staking really is, the issues, the different types of staking and how to do staking.
—> There is also a video on the subject, which you can watch here.
Understanding Proof-of-Stake Consensus
Proof-of-Stake (PoS) consensus is the consensus mechanism used by some blockchains to secure and validate the creation of new blocks. So, typically, a network validator will “lock” tokens into a blockchain to secure and validate transactions. For this work, validators receive staking rewards. These rewards are distributed in the form of new tokens.
There are several consensuses used by blockchains to secure and produce new blocks. For example, you are certainly familiar with the Bitcoin Proof-of-Work consensus. This consists – to explain it quickly here – of solving complex computer calculations to validate and produce new blocks. These calculations are carried out by specific computers which consume energy.
This is part of the reason why the Ethereum blockchain decided to use the change in its consensus and switch to a PoS consensus in what was called “The Merge”. Today, it is said that its energy consumption has been reduced by 99%.
Although there are many consensus mechanisms, most blockchains today use “Proof-of-Stake” or hybrid mechanisms derived from it.
How many rewards can you earn?
Interest rates from staking and lock periods vary from one blockchain to another. Typically, rates range from 2-18% APY. There may also be higher APY rates.
You can see on aggregator sites like StakingRewards.com to see the different staking rates depending on the blockchains. The site does not take into account the APYs of exchange platforms who also offer staking like Binance for example.
The staking reward site can be used as an overview to see which cryptocurrencies are using PoS, APY rates and validator sites for staking.
Before staking, it is essential to make a fundamental analysis in order to choose the most reliable cryptocurrency and the one likely to increase in value in the long term.
What are the advantages and disadvantages of crypto staking
Like any method, there are advantages and disadvantages when staking cryptocurrencies.
✅ The Benefits
- Create a simple passive income : It is possible to generate staking in a simple and passive way. You automatically receive tokens in your wallets, without anything else to do.
- Limit the circulating supply and increase the scarcity of tokens : When you stake, you withdraw tokens from the market. This then creates less supply and this can then determine a higher price, according to the law of supply and demand. This is why many protocols seek to attract people to lock their tokens.
- Secure the blockchain and decentralize the network: By staking, you help validators produce new blocks and secure the network in general. The more decentralized a blockchain is and has different validators, the less it has centralized vulnerabilities that can harm the entire network. The more validators there are, the more decentralized and secure the network is.
🔻 Disadvantages :
- Lockdown periods : To get the juiciest staking rewards, you will usually need to lock your tokens for a long period of time. This is problematic if you need liquidity during this time.
- Rewards that do not indicate the inflation rate of cryptocurrency : Cryptocurrency emissions determine the inflation rate of a cryptocurrency. For example, Solana has an inflation rate of between 1,5 and 5% per year. It is then necessary to deduct the inflation rate from the APY rate to obtain a real rate of return.
- Give up full control of your funds : In most cases, staking means that you must deposit your crypto into a staking contract. Slashing and validation hacks are rare, and operators have a vested interest in the security of the chain they validate, but the risks of loss of funds do exist. This is even more likely if you are staking on centralized platforms.
Confusions about crypto staking
There are many misconceptions about staking. Just because you deposit tokens and are given rewards does not mean you are staking. There are a lot of confusions on the subject which we must be wary of.
Very often, people confuse staking, liquidity mining and Yield farming, For example. Let's quickly recall the differences here:
- Yield farming : You earn rewards by lending, borrowing and receiving rewards from the protocols used.
- Liquidity mining : By providing liquidity generally to a DEX, you earn protocol tokens like UNI if you use uniswap.
Although these practices are very similar to staking, they are distinct methods. When you deposit and lock tokens in DeFI protocols, such as on PancakeSwap, you become a liquidity provider For example. You are not staking in any way in the sense of Proof-of-stake. You're not helping secure the non-existent blockchain because it's a protocol here.
It's the same thing for staking NFTs in a protocol. For example, when you stake NFTs CyberKongz To earn Banana tokens, it is not staking in the literal sense. You are not securing the network or helping produce new blocks.
You mainly serve to reduce the circulating supply so that the token in question can increase in value depending on the law of supply and demand.
What are the different types of staking?
There are several ways to stake with varying degrees of difficulty. Here are the main methods:
➡️ Use an exchange platform (very easy) : Most exchange platforms like Binance or Kucoin offers to do staking. These exchanges “custody” your cryptocurrencies and send your rewards directly to your wallets. The process is very simple as you simply deposit your funds with the click of a button.
➡️ Delegate to a validator (easy) : It is also possible to delegate your tokens to a validator who can be a single person or even a specialized company. This is the validator that will manage the node for you. This allows you to be able to do non-custodial staking as you will receive your rewards directly to your non-custodial wallet. In this method, you maintain control of your funds.
–> Read the article: Here are the sites for non-custodial staking and finding validators
➡️ Use a staking pool (medium difficulty) : Here, it involves pooling your tokens with other people in order to do staking. This allows you to stake with less offset while avoiding the complexities of configurations if you were to run your node yourself. Sites like Lido or Stakely allows you to join staking pools.
➡️ Make Liquid Staking Pool (medium difficulty): Liquid staking pools provide a token that is considered “liquid,” meaning the token can be traded during the staking period. This is a popular staking method that offers high returns since you can lend your token to earn additional rewards.
➡️ Run your own validator (hard): This is clearly the most direct way to do staking but requires a certain technical skill because you have to run your own validation node. You can also receive tokens from other people who will delegate their tokens to you? You then have greater responsibility. However, you can also earn commission fees on staking done for others.
How to do staking simply?
Although there are different ways to stake, the simplest method is to stake by delegating your tokens to validators. You can do this on your non-custodial wallet or on centralized platforms.
Staking on an exchange platform
If you want an even simpler method, you can do it directly on the exchange platform you are using. In this case, you will have nothing else to do than click on the "stake" button.
If you use Binance, just click on the “Binance Earn” tab then choose the staking tab to have the table of all the cryptocurrencies offering staking.
It's up to you to choose the cryptocurrency of your choice, the locking period as well as the amount you want to allocate to staking.
Staking in 5 steps by delegating to a validator:
▶️ Step 1: You must choose a cryptocurrency that you have studied and which works on the Proof-of-Stake consensus mechanism.
▶️ Step 2: Choose a secure wallet that can host your cryptocurrency. This is the most tedious step because you are spoiled for choice. You can read the article to find out 7 sites for staking cryptocurrency.
For example, you can do this on non-custodial wallets that allow staking. This is the case of Guarda wallet or even Atomic Wallet. It is also possible to opt for a more secure hardware wallet like Legder for example. For those who want to stake on several protocols, it is also possible to choose Metamask as their wallet.
▶️ Step 3: Now you need to transfer your crypto to your wallet.
▶️ Step 4: In this step, you can join a staking pool, or transfer your tokens to a validator. There are sites that allow you to find validators like Stakingrewards for example or even sites presenting you with validators on AllNodesEg.
▶️ Step 5: Once you have validated the previous operation, staking begins. Your winnings are automatically transferred to your address.
Final word on staking
Staking remains a simple and accessible method to generate income regularly. However, as we have seen, staking also carries risks.
It is important to choose the cryptocurrency on which you stake by carrying out diligent fundamental analysis. It would be pointless to generate tokens that are not worth much, naturally.
Similarly, we have seen that most of the time, the word "staking" is misused and that it consists of attracting investors, without the incentives being legitimate.
Likewise, currently, there are numerous legal cases, particularly in the United States where platforms offering staking such as Coinbase are at the center of investigations. The SEC is cracking down on platforms over their staking programs. Thus, staking on centralized platforms can be risky and it would therefore be preferable to opt for staking in a decentralized manner.
—>See the video about staking here.
FAQ
What are the easiest cryptos to stake?
If you are staking on exchanges like Binance, the process is simple regardless of the cryptocurrency you choose to stake. We only talk about complexity level in the case where you want to run a node yourself. In this case, the difficulty will differ from one blockchain to another. You need to find out about the cryptocurrency site of your choice.
However, staking cryptocurrencies like Ethereum, Cardano, Avalanche are some of the easiest cryptos to stake.
Which platforms offer staking?
There are several sites and platforms that offer staking.
➡️ Non-custodial wallets: GuardaWallet, Atomic Wallet or even the physical wallet Ledger allow you to stake securely.
➡️ Protocol and validator aggregator sites: AllNodes, stakeFish, Stakely, Lido, etc.
➡️ Trading platforms: We can cite Binance, OKX, Kucoin, Coinbase or even Crypto.cm.
➡️ Dedicated sites: MyContainer.
How do I recover my tokens after staking?
At the end of the lock period, you can recover your staked tokens. Some cryptocurrencies have lock periods and others do not. The period varies from one blockchain to another. At the end of the period, you can get your stake back.
How often do we receive our profits?
The frequency of profit payment once again depends on the blockchain you choose. Some providers pay you the winnings at the end of the lockout period and others pay them to you continuously, on a regular basis.
Do we receive the winnings guaranteed?
No, PoS blockchains randomly select validators for each new block. This process relies more on a system of probability and statistics. However, generally speaking, by staking, depositors receive rewards regularly.
What are the risks of staking?
Staknng, seemingly simple to carry out, involves risks. For example, it is possible to delegate your tokens to a dishonest validator. The latter can ultimately steal user tokens. It is therefore essential to carefully check the credibility of the selected validator. There are several possible losses also depending on the Smart contract used such as slashing, etc…
Other risks relate to the loss of value of the cryptocurrency used in your staking. If you have locked tokens for a long time, you may end up with tokens that are no longer worth anything, for example. And if something happens black swan as happened with FTX or Luna, you simply risk not being able to withdraw your funds, and are doomed to see your tokens lose value...
Disclaimer: This is not investment advice. Every investment involves risks. Always do your own research.
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