What is cryptocurrency staking and how to make money on it?

Main

• Staking (from the English stake – “share”) is a way to receive passive income from cryptocurrencies operating on the Proof-of-Stake (PoS) consensus algorithm and its varieties.
• The essence of staking is to block a certain number of coins in the wallet in order to obtain the right to participate directly or through intermediaries in maintaining the blockchain of this asset and receive a reward for this. Staking plays a similar role in PoS blockchains as mining does in the Bitcoin network.
• Staking seems to be a profitable alternative to simply holding cryptocurrencies in a wallet, being an analogue of a bank deposit in the crypto industry. The profitability of staking differs depending on the blockchain, its value can reach tens of percent per annum and more.

What is the Proof-of-Stake (PoS) algorithm and how does it relate to staking?

Proof-of-Stake (from the English “Proof of ownership”) is a consensus mechanism in which the right to generate new blocks, verify transactions and include them in the blockchain according to a certain algorithm is played between computing nodes (nodes), taking into account how much coins of this blockchain they own.

In the base scenario, the node that owns 1% of all coins in circulation gets the right to process 1% of the blocks, and for its work receives 1% of all network rewards. However, many cryptocurrencies also take into account the period of ownership of coins and other factors.

One way or another, staking is getting the same reward for producing new blocks and verifying data using your share (native coins).

First Proof-of-Stake Algorithm was implemented in 2012 in the PPCoin cryptocurrency (now known as PeerCoin). Subsequently, it has become the most used consensus mechanism in blockchain projects.

One of the most popular and commonly used PoS modifications is Delegated-proof-of-stake (DPoS). This algorithm was created in 2013 by Daniel Larimer for the BitShares blockchain platform, and now it is also used in many networks.

The main advantage of DPoS is that the owner of the coins does not have to deploy his own node to participate in staking – he can delegate them to validators who manage high-performance nodes and ensure their smooth operation.

Many similar mechanisms have been developed on the principle of delegation. Here are just a few of them:

• Leased Proof-of-Stake (LPoS) – leased proof of stake. Used on the Waves network.
• Nominated Proof-of-Stake (NPoS) – provides for nominators who pay deposits for validators and are responsible for their good faith. Used in the Polkadot blockchain.
• Proof-of-Staked-Authority (PoA) is a hybrid algorithm that combines PoS and the reputation of validators (Proof-of-Authority). BNB Chain runs on PoSA.

How staking works in Proof-of-Stake?

In cryptocurrencies operating on the “classic” PoS, each official wallet acts as a full node, that is, it checks and confirms transactions and releases new blocks.

The technical requirements differ from one blockchain to another: in some networks, a home computer is enough to deploy and manage a node, and in some, professional server equipment will be required. This ensures the decentralization and security of the blockchain without the huge energy costs inherent in cryptocurrencies operating on the Proof-of-Work consensus mechanism.

Staking conditions may vary. The general mechanism is to buy the native coin you want to stake and send it to the smart contract yourself (for example, through a wallet) or pass it to a validator.

Depending on the speed of issuing coins, the profitability of staking can reach tens and hundreds of percent. At the same time, it is a way to issue cryptocurrencies, so too high a reward rate can lead to coin inflation, which will negatively affect profits.

What is the difference between staking in Delegated Proof-of-Stake?

In DPoS blockchains, each wallet with coins on the balance can vote for validating delegates — computing nodes between which, according to a complex algorithm, the right to generate blocks, verify transactions, and receive rewards and commissions for transfers is transferred.

The number of validators can differ significantly for different blockchains: there are only 21 of them in BNB Chain, and about 1800 in Solana.

As an example, here is the sequence of actions when staking Cardano (ADA):

• install the Daedalus desktop wallet or the Yoroi browser wallet on your computer;
• wait for the wallet to sync with the Cardano blockchain;
• create a new wallet address;
• transfer at least 10 ADA to the wallet;
• in the Delegation Center section, select a suitable validator and use the Delegate button to vote for it by sending your coins;
• staking rewards will be credited to the wallet at the end of each five-day epoch.

A similar procedure applies to other popular PoS networks. To receive Solana (SOL) coins from staking, you need to select a suitable validator from the list in the Phantom wallet and delegate your coins to him. Rewards are distributed at the end of each era, which lasts about two days, and the yield is 7% per annum.

Since the total reward for staking in each epoch is the same, its profitability depends on what proportion of the issued coins are locked in the wallets of the validators. For popular blockchain platforms, this value is 50-90% of the total turnover.

Who are staking providers?

Staking is a popular strategy for investing in digital assets. However, setting up a node or a stake in a separate crypto project can take a lot of time.

Therefore, special platforms providing services for staking on the principle of “all in one” have become widespread in the cryptocurrency market. They are applications where users can simply send their funds to various pools through the provider’s wallet.

Staking providers also allow you to analyze the current staking profitability of the selected network and show other relevant data. Staking platforms make it as easy as possible for users by charging a small commission on the rewards they receive.

Staking services are offered by both specialized services (Midas Investments, Everstake, Stake.fish, etc.) and centralized crypto exchanges (Coinbase, KuCoin, eToro, etc.). Cryptocurrency staking is also possible through multi-currency crypto wallets such as Trust Wallet and Atomic Wallet.

The current rating of services for staking is available on the website Staking Rewards.

How does ETH staking work in Ethereum 2.0?

In December 2020, as part of a large-scale update called Ethereum 2.0, which involves the transition of the blockchain to the PoS algorithm, an official test network called Beacon Chain appeared. It should become the basis for a new blockchain. The merger with the current Ethereum mainnet will be a separate major event called The Merge and will take place before the end of 2022.

Ethereum 2.0 provides for staking, and you can become a member right now. To do this, you need to send ETH coins to a special smart contract. And those who own at least 32 ETH can become validators of the new network.

A number of staking providers allow small investors who do not have the required number of coins to run a node to participate in ETH staking.

For example, the Lido Finance decentralized application allows you to block any amount of ETH and receive in return not only rewards from staking, but also stETH liquidity tokens. The protocol delegates the collected funds to large validators and distributes 4% per annum staking income daily among stETH holders.

The risk of participating in ETH staking – the coins sent to the contract cannot be taken back until The Merge stage is completed. Although some staking service providers exempt from this restriction. We recommend checking the detailed conditions in advance.

What are the risks of staking cryptocurrencies?

Staking appears to be a profitable and relatively safe alternative to simply holding cryptocurrencies in a wallet, promising returns that can be substantial. However, there are a number of risks that can significantly reduce expected returns and even lead to losses:

• since staking participants receive income in coins of this cryptocurrency, fluctuations in its exchange rate affect the cost of invested funds and the real profitability of staking;
• The high profitability of staking offered by some PoS cryptocurrencies (tens and hundreds of percent per annum) is achieved due to the high speed of issuing coins. This often leads to a rapid drop in the market price of the coin and a rapid depreciation of investments in this cryptocurrency;
• requirements for stakers may include blocking coins for a period of several days to several months. During this period, the owner cannot withdraw and sell his coins;
• staking cryptocurrencies using staking providers bears all the risks associated with trusting a third-party organization, which may be attacked by hackers or embezzle assets collected from stakers.

What other types of staking are there?

In addition to staking PoS cryptocurrencies, there is the so-called DeFi staking. It consists in blocking different types of tokens (utility and governance tokens, NFTs) in a smart contract in order to receive a reward or access to any services.

Most often, DeFi staking is used by blockchain projects to raise liquidity as well as increase the intrinsic value of their native tokens. This tool is actively used by decentralized crypto exchanges and DeFi services, issuing their management tokens as a reward for placing liquidity.

Some blockchain games also offer in-game NFT staking by paying out game tokens as a reward, issuing other non-fungible tokens, or providing access to the game in this way.

FAQ

What is the point of staking?

Staking in simple terms is participation in the confirmation of transactions and the production of new blockchain blocks using cryptocurrency. Staking participants receive rewards for their work – new coins of this network.

How to participate in staking?

The main participants in staking are validators who manage nodes and play the role of miners in blockchains based on the Proof-of-Stake consensus algorithm. Often, the holder of even the minimum amount of cryptocurrency can delegate it to validators and, thus, participate in staking and receive rewards for it.

Can you make money staking cryptocurrencies?

Cryptocurrency staking is a popular way of passive income. Profitability depends on two main parameters: the volume of rewards, that is, the rate of production of new coins through staking, as well as the price of the cryptocurrency.

How is mining different from staking?

Mining is used in networks based on the Proof-of-Work algorithm, such as Bitcoin. The main difference between mining and staking is the need to use special computing equipment. For staking, only the coins of this blockchain are required (if you participate in it through an intermediary – a validator).

What is the difference between staking and farming?

Staking is the maintenance of the blockchain itself with the help of its native coins. Farming, on the other hand, is receiving commissions for exchange in the liquidity pool of a decentralized exchange, which is an application built on the blockchain.