Crypto staking is a great way of generating passive income out of your crypto holdings, as it promises way better incentives than just putting your money on the spot. Let’s look into what exactly crypto staking is and how you can stake your parked holdings and collect rewards for it.
What Is Crypto Staking
In simple words, you can think of crypto staking as a fixed deposit (FD) plan. The only difference between the two is that, unlike FDs, crypto-staking is not governed by a central authority that’s in charge of your earnings.
The process of crypto staking is in some ways akin to locking up your money in a bank, where you earn interest for it. However, things are not that simple in the crypto world. When users lock a certain amount of crypto (the “stake”) to a blockchain network, they become a node for the network. The protocol, then randomly selects one, at various intervals, to validate the next block which makes them a validator node. Usually participants that stake higher amounts have a better chance of being picked.
Validators are treated as high-priority users who share the responsibility of securing the network and making it faster. Now, as a reward for their contributions towards securing the network, the blockchain provides validator nodes with newly minted coins.
Every network has its own minimum staking requirements that you must comply to become a staker or a validator node for that particular network. For example, you can become a validator node for Polkadot by staking 350 DOT coins. Alternatively you need only 2000 AVAX coins to become a validator for Avalanche.
So if you’re a long-term holder, you can stake cryptocurrency on crypto-staking platforms instead of parking it in your crypto-wallet. This way, you get assured predetermined interests on your investment. On top of that you’ll also help in enhancing the security of the network.
Also read: 7 Ways to Earn Free Cryptocurrencies
Risks Involved in Staking Crypto
Even though crypto-staking can offer great rewards, it does not come without its fair share of risks. We’ll go over a few of them in what follows.
Volatility
Crypto is a highly volatile form of currency, which means that its value keeps on changing every moment. Even though you can reap predetermined interests on your investments, there is always a risk of an abrupt fall in its price. In other words, if the value of a cryptocurrency falls more than the interest it yields, you will suffer a loss.
However, this aspect of crypto is a double-edged sword as you can also earn higher profits if its value skyrockets.
Locking Periods
Similar to having a fixed deposit, some cryptocurrencies also have a defined locking period, during which you won’t be able to extract your returns. However, the length of this period depends on the third-party platform you’re using to stake crypto. For example, if you stake on Polkadot, you will have to lock your assets for a minimum of 28 days. In contrast, there is only a 7-day lockup period on Kusama.
If you are a short-term daily investor, you should go for the cryptocurrencies with a short locking period. Another factor worth noting is the reward period. Some crypto-coins don’t pay the rewards on a daily basis, and depending on the currency and the platform, it can be as long as 2-3 months.
Validator Risk
If you’re running a validator node for staking a cryptocurrency, you can maximize your returns by making sure that your node has 100% uptime. However, if the node misbehaves, the network will penalize you. Not only can it marginalize your profits, but in severe cases, your stake can get slashed, and you might lose a large share of your staked tokens.
Validator Cost
If you’re running your own validator node, you will have to invest in high-end hardware and the cost of electricity for running it. Even if you’re using a third-party platform to stake cryptocurrency, you will have to pay a small percentage of your staking rewards. You’ll need to make sure that you don’t invest more than your expected profits from staking crypto.
Liquidity Risk
Since crypto assets are quite volatile, it’s important to ensure that the coin you are staking has enough liquidity to be sold at any given price point. If you stake a microcap coin that barely has any trading volume, you might face difficulty while booking your profits and swapping your crypto for stable coins.
Let’s say you stake a coin when it was worth $4, and you make 11% interest over a year. Now the market suddenly starts dumping, and you want to sell your coins to book your profits. However, you might not be able to sell your coins right away as there are not enough buyers who want to acquire them at that price, and you’ll have to wait until the exchange finds a buyer at a lower price.
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Best Crypto Coins for Staking
1. Ethereum (ETH)
Ethereum is the second-largest cryptocurrency in the world. It was initially based on the Proof-of-Work consensus but has recently been moved to a Proof-of-Stake consensus which means that now you can actually stake ethereum and collect passive rewards. However, to become a validator and stake ethereum, you will need to put in a minimum of 32 ETH.
This makes it very hard for most holders with a small portfolio to participate in ethereum’s official staking program directly. However, you can work your way around it by joining various staking pools offered by exchanges or staking services. With their help, you can stake any amount of etherium and collect 4% to 6% interest, depending on the platform you use to stake ETH.
You can stake etherium on a variety of exchanges like Binance, Coinbase, and Kraken. Wallets like Trust Wallet and Atomic Wallet also give you this option.
Tezos (XTZ)
If you’re looking to build a crypto portfolio for staking but want to start with a small sum of money, Tezos is a coin for you. This is because, unlike most other crypto coins that require a significant number of tokens to begin staking, you can start staking XTZ with just one coin.
You can easily stake Tezos on a number of exchanges, including Binance and Kraken. There are a lot of wallets like Atomic Wallet and Ledger that support Tezos staking too. As for the rewards, you can expect to get a return of around 4% and 8.5% depending on your staking platform and duration.
Polkadot (DOT)
Polkadot improves on the problem of scalability in ethereum and has managed to earn a fair chunk of the crypto market share. Even though its fundamentals and roadmap leading to a promising future, you can also stake DOT on exchanges such as Binance and Kraken, as well as wallets like Fearless Wallet to get additional rewards.
Validators, much as on other PoS systems, are required to test transactions on Polkadot. However, being a Polkadot validator is far from simple. Setting one up requires some technological expertise, and validating requires a continual supply of DOT.
At the time of writing, 160 DOT is required to become a validator. However, because the quantity fluctuates so often, it’s impossible to offer a solid estimate. Polkadot has an average of 14% yearly return, which is incredible and would be quite unusual with other coins.
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Cardano (ADA)
Cardano is another popular cryptocurrency that stands tall in the list of the top ten cryptocurrencies in terms of market cap. It also has a very high trading daily trading volume of over $1.5 billion. Moreover, you can easily stake Cardano on a number of exchanges like Bitfinex and Kraken and also on wallets such as Trust Wallet and Atomic Wallet.
Cardano’s blockchain has a number of extraordinary features that have helped it earn the title of the ethereum killer. Even though that’s a completely different matter altogether, the highlight is that, unlike Etherium, Cardano is very easy to stake.
First of all, you don’t need to have a lot of ADA tokens to begin staking. You can start with just a few coins, and one ADA coin costs around $0.89 at the time of writing this article. The most important part is that you also get rewarded with a fair percentage of coins each year, with actual rates varying from 3% to 6% depending on the platform you have staked on.
Algorand (ALGO)
Similar to Cardano, Algorand is another crypto coin that can be staked on many exchange platforms and wallets, including Exodus, Coinbase, and Trust Wallet. Even though each of these platforms offers a different minimum ALGO staking limit, it won’t cost you more than a few hundred dollars to get started.
In other words, if you’re looking for low-investment staking and you have lots of ALGO stacked up, it provides a nice market to begin with. Moreover, this crypto coin offers a lot of value in terms of rewards. And you can get from 3% up to 10% returns on your investment. It is a nice currency to begin with, if you’re a newcomer to staking.
Additionally, the Algorand network is known for its speedy transactions, and it offers a unique concession algorithm that makes ALGO’s blockchain less risky to fork. You can claim your rewards every time you make a transaction, and the fund is directly transferred to your global account.
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Types Of Crypto Staking Platforms
Exchanges
If you are a newcomer to staking cryptocurrency, an exchange is a nice platform to start on. This platform essentially acts as a middleman between the staking party and the validating party.
In other words, if you don’t have enough tokens but want to start staking crypto, you can get in touch with people who have the required amount to be a staker. Then, you can combine your resources to get a small percentage of the reward. All you have to do is mention the number of coins you want to stake, and exchanges will search for a suitable validating node for you.
When you stake with an exchange, you’re basically parking your stackable assets in your trading account wallet. Even though this method favors simplicity above anything else, it does involve a risk factor as you don’t hold the key to your crypto coins. Instead, you’re trusting the platform to do that on your behalf.
Wallets
Just like exchanges or dedicated crypto staking services, you can also use cryptocurrency hardware wallets or online hot wallets to stake your crypto. This way, you can not only store your crypto safely but also stake it on the same platform.
Generally, wallets have a lower pricing scheme compared to most exchanges, but it varies from one platform to another and also on the coin you want to stake.
Service Platforms
There are many exchange platforms that also stake crypto on your behalf. Similarly, you can also find platforms that are solely dedicated to providing staking services. These platforms make sensible investments and make participating in blockchain more accessible and less complicated for the casual investor. This method is also called “soft staking.”
You are only charged a small percentage of the reward as the staking fee. However, these staking service platforms come under a centralized system where a large organization has all the power over your investments.
Best Crypto Staking Platforms
Binance
Binance is the most popular crypto exchange with the largest 24h trading volume. Other than just buying or seeking crypto, Binance also offers a crypto-staking service called Binance Earn. Here, you can stake VET, XTZ, ATOM, EOS, ONE, ALGO, as well as stablecoins and earn a commission for it.
Staking on Binance works in two ways. You can either lock an asset for a fixed amount of time, after which you will get it back along with the interest you’ve earned. It also acts as a vendor and can connect you with DeFi staking services that manage your assets right from the Binance app. The best part of using Binance to stake your crypto assets is that there is no staking fee.
Also read: What Is DeFi And How Does It Work
KuCoin
KuCoin is a Hong Kong-based exchange platform for crypto where you can stake cryptocurrency and earn passive rewards from it. It supports 15 different crypto coins such as ATOM, LUNA, LINK, KSM, ANC, MATIC, EOS, TOMO, VSYS, WAN, TRX, ZIL, HYDRA, OUSD, and ADA.
This platform utilizes “soft staking” and other popular options, including but not limited to IOST and Wanchain. KuCoin offers one of the cheapest staking-fee structures, and they only charge you 10% of your total profits. However, if you’re staking Zilliqa, you’ll only be charged 5% of the reward.
Atomic Wallet
Atomic Wallet is a cold crypto wallet that provides easy access to both desktop and mobile users. Not only can you use Atomic Wallet to store your assets, but also stake a variety of coins such as ALGO, SOL, and ADA.
Similar to other staking platforms, Atomic Wallet also charges you a small staking fee. They only charge 5% of the profit if you’re staking ZIL, ADA, and SOL. However, for coins such as KMD and ALGO, you won’t have to pay any fee at all. Furthermore, Atomic Wallet also offers a short locking period of only up to 4 days.
Trust Wallet
Trust Wallet is one of the most widely used crypto hot wallets, with a user base of over ten million active users. It has recently been bought by the Binance group to add more flexibility in connecting a hot wallet with their exchange.
However, just like Binance, you can also directly stake your parked crypto on the wallet itself and begin collecting your annual returns. As of now, you can stake BNB, ADA, KAVA ALGO, and many more without paying any commission.
Stake Capital
Stake Capital is a reliable DeFi platform that offers staking services for a variety of cryptocurrencies like ATOM, LOOM, and XTZ. Apart from the top market cap coins, you can also find certain less popular alternatives on Stake Capital that aren’t supported by other major exchange platforms like Livepeer.
In terms of charges, Stake Capital’s fee depends on the token of your choice. For example, they charge an 8% commission on the reward for coins like ATOM. However, if you invest in XTZ, you won’t have to pay any fee at all.
Also read: 7 of the Best Cryptocurrency Tracker Apps for Android
Frequently Asked Questions
1. What platform offers maximum returns for staking stablecoins?
Currently, the maximum returns you can get on staking any stablecoin is Terra’s UST. However, you can only stake it on the Anchor Protocol that offers over 20% APY.
2. Is it better to stake crypto in a cold wallet or a hot wallet?
If you are staking your crypto for a very short time period, it’s better to do so in a hot wallet as you won’t have to go through the hassle of moving your assets from one place to another. However, if you are a long-term holder and want to stake your crypto for a few months or even years, it’s best to do so in a cold wallet as it completely eliminates any chances of it getting hacked or stolen.
3. Is my staked crypto taxable?
As of now, the IRS has not released any guidelines for the tax scheme on staking rewards. The closest guidelines that can be referred to is the Notice 2014-21 which states that every new token earned while mining is to be taxed as soon as it is swapped for fiat money. Even though staking rewards are not the same as mining rewards, they are very similar.
Image credits: Pexels
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