A Beginner's Guide to Crypto Staking

2020 marked the beginning of a new era of rapid growth in decentralized finance (DeFi). Since then, the cryptocurrency industry has experienced ups and downs, but investors and crypto-enthusiasts keep their coins in accounts, exchange them and hold them for investment purposes.

Staking has become one of the essential tools for passive cryptocurrency earning. This allows crypto holders to profit from decentralized coins stored in a wallet, like a counterpart to bank savings. However, the cryptocurrency industry's APY (Annual Percentage Yield) is much higher. That's why it's attracting more investors and enthusiasts looking for ways to make more profits in a volatile market by staking crypto.

What is crypto staking?

Crypto staking is a consensus mechanism used primarily in the PoS (Proof-of-Stake) network. It is an excellent alternative to traditional mining, which wastes too much energy and other resources.

The staking process involves using crypto coins in a user's wallet as a validator of other users' transactions. A special algorithm selects random validators and rewards them with a few coins. This passive income can bring anywhere between 1% and 50% APY (Annual Percentage Yield), depending on selected terms and staking coins.

How does crypto staking work?

Let's dive into the specifics of this process, could bring additional profit to all cryptocurrency holders.

Previously, staking was mainly used by large validators like platforms, exchanges or so-called “whales”. However, this feature is now available on most cryptocurrency exchanges for all retail and institutional users. As a rule, you can stake even one coin, which was impossible before.

This allows absolutely any user to become a passive validator, earning rewards for storing cryptocurrencies. All you have to do is choose a platform for staking, a coin, specify a staking period and activate it.

This consensus mechanism involves freezing assets for the duration of the staking period. It means you will not be able to use the coins while the validation process lasts. That's why most cryptocurrency platforms allow you to choose a different staking period, starting from 7-10 days going up to a year or even more. Daily rewards will be credited to the user's wallet in the form of APY during the selected period, which is also different for each coin, exchange, and selected period.

During the selected period, the frozen assets will be displayed on your cryptocurrency wallet, but you cannot use them.

How much can you earn through crypto staking?

There are many factors that determine the profitability of staking:

The cryptocurrency platform and its rates
The chosen coin
The staking period (the longer — the higher the yield)
The popularity of the selected coin at the time of staking activation

Accordingly, there is no single rate, and each cryptocurrency platform or exchange offers a different fee for staking coins.

“With the more popular coins such as Ethereum, Cardano and Polkadot, the rewards vary from 5 to 20 percent,” says Eddie Rajcevic, research team member at Tastytrade, a financial media network. “With smaller cryptocurrencies, these rewards can even be above 100 percent.”

The more popular and stable the cryptocurrency, the lower its yield in staking. However, on average, users receive from 5% to 20% reward per year in the selected coin.

This is a profitable passive income, especially if you have enough crypto savings in your wallet. All platforms and exchanges guarantee transparency, honesty, and safety of such consensus mechanisms as staking, giving clients reassurance. It means that exchange moderators monitor the entire process, and all payouts are made on time without delays. This is provided that you have chosen a proven and safe exchange with sufficient liquidity.

“There are platforms that choose to have a fixed yield for a specific lock-up term with a maximum reward per user, while others adjust their yield daily based on the staking rewards left within a specific pool,” says Claudiu Minea, CEO and co-founder at SeedOn, a blockchain-based crowdfunding platform.

You always have a choice of which platform you prefer. Your profitability and other staking factors depend on it. Treat it responsibly in order to make your staking process seamless and profitable.

How to start crypto staking?

Let's move on to a step-by-step guide to starting crypto staking. It's not a complicated process, but for crypto-enthusiasts, it's exciting and important.

Choose an exchange or cryptocurrency platform. The most reliable exchanges offer a smaller APY. Nevertheless, you can reduce investment risks by deciding on a platform from the top 10.
Study the terms of staking on the chosen platform and the coins available (for example, $ETH, $APE, or NAGA Coin ($NGC)). Each exchange offers different terms with different minimum deposits, saving periods, coin freezing terms, payment frequency, etc.
Deposit on the platform in your chosen coin, or connect your crypto wallet for a deposit. You will need to deposit your coin to activate staking. You can use any deposit method, including bank cards, e-wallets, and transfers.
Choose a staking period (usually available from 7-10 days going up to a year or even more). APY depends on the chosen period, so consider this when forming your investment strategy.
Activate staking and check your wallet regularly for commissions. Cryptocurrency exchanges accrue profits from staking with different periodicities: from daily to monthly. You can find out about this in the terms and conditions of the platform.

For those holding the appropriate crypto in an exchange-hosted crypto wallet, the exchange handles all the staking on the backend, and users simply have to hold the crypto in their wallets.

That's why staking is a passive investment tool. You don't have to perform any actions, technical or fundamental analysis, etc.

Benefits of staking crypto

Less energy-intensive. Proof-of-stake coins use much less energy than PoW (Proof-of-Work). So, each mining machine requires a constant electricity supply and consumes much more power than a regular computer.
Easier to earn rewards. Crypto staking and mining rewards are very different. Almost anyone can stake a small amount of crypto on a crypto exchange and earn some kind of yield. To become a miner, however, often requires a much bigger commitment. First, you’d need to acquire the proper computer, which can be costly; then you’d need to learn to use it and how to mine on a blockchain, which can be time-consuming.
No special equipment is required. Anyone can become a PoW or PoS validator using a regular computer, assuming they have enough money and can keep the node running constantly. By contrast, mining requires specialized hardware.

Risks of staking crypto

Cryptocurrency staking is a stable source of passive income. However, as with everything in life, there are some basic risks to consider.

Crypto prices can be volatile. Unfortunately, staking returns can be offset by a decline in the value of the selected coin during the freeze period. The cryptocurrency market is very volatile, so no one can guarantee the final profitability of such investments. Since the commission is paid in the selected cryptocurrency, the final return may rise or fall.
In most cases, you cannot withdraw your coins during the freeze period. For example, long-term staking (lasting from six months) yields the highest rewards. However, you cannot react to any market changes or get your assets back during the staking period.
Staking is not protected by insurance or other guarantee instruments. The chosen cryptocurrency platform or exchange is responsible for fulfilling its obligations. In the event of hacks or other force majeure circumstances, you could lose your assets or profits due to the risks of the counterparty.

Some of these risks are unique to this type of passive income plan. Therefore, not all investors are ready to invest large sums in crypto staking. However, it is an excellent tool for diversifying savings, bringing many tens and hundreds of thousands of dollars of profit.

3 things to consider when staking

Some recommendations for crypto-staking can increase returns and reduce risks.

First and foremost, you should select a licensed public cryptocurrency platform or exchange to freeze crypto assets. This can be any top 10 exchange with an actual physical office, a general team, and a long history of operations.

Secondly, you must diversify your savings and choose a few coins to stake. This will reduce the risk of losing profits due to the increased volatility of one selected coin. Among the most stable and potentially profitable coins for staking, analysts and investors name Ethereum (ETH), Cardano (ADA), Solana (SOL), and Polkadot (DOT).

Third, you need to choose a suitable staking period. A lot depends on it because, during the freeze period, the staked assets are not available for any transactions, including withdrawals. Investors often opt to stake for 3-6 months because this provides a sufficiently high yield (APY) while assets are frozen for a short period.

Conclusion

For the investor, crypto staking is a passive investment. When a crypto investor stakes their holdings, the network can use them to forge new blocks on the blockchain. It’s like making your crypto work for you. The more crypto you’re staking, the better the odds are that your holdings will be selected.

At the same time, the profitability of such an instrument can exceed the profitability of bank savings and other types of investments. However, in staking, cryptocurrency payments are made, so price changes also affect the final yield.

Given all the advantages and risks, you might consider staking if you deem it a good investment tool for diversifying savings and generating passive income.

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