Cryptocurrency staking offers an opportunity to investors to be able to maximize their holdings. Investors can choose to stake their crypto to earn rewards on their digital assets that are locked up as part of the process to validate transactions on certain blockchain networks.
The consensus mechanism proof-of-stake (PoS) has introduced the ability for users to stake their cryptocurrency to help the blockchain network validate transactions. In turn, users could be able to earn a bit of income without needing to mine or trade digital assets.
This article will take you through the basics of what is crypto staking and the steps for investors to start earning rewards on their cryptocurrencies, as well as some of the best staking coins.
What is crypto staking?
Some blockchains rely on the proof-of-stake consensus mechanism, which involves the selection of validators that confirm transactions on the network based on how much of the cryptocurrency they hold in their node.
Similar to the Bitcoin proof-of-work (PoW) model, miners are rewarded with cryptocurrency based on their computational efforts used to solve the puzzle required to validate a transaction, validators on PoS networks are also compensated with digital assets.
In comparison, PoS protocols are less energy-intensive than PoW as it reduces the need for using vast amounts of mining equipment to keep the blockchain network secure. Staking is the process of actively participating in transaction validation on the blockchain. Most of the time, the network requires a minimum balance of the specific cryptocurrency to be able to validate transactions and earn staking rewards.
Investors can choose to lock up their cryptocurrency holdings by leaving their assets in their wallets to participate in the networks’ consensus-taking processes involved with approving and verifying transactions on the blockchain. Validators who stake their digital assets would be able to earn interest proportional to the amount of crypto staked.
Best staking coins and how to start staking crypto
As the number of PoS networks continues to grow, additional ways of staking crypto have emerged. There have been launches of staking pools, which allow users to stake as part of a group, enabling the democratization of access to opportunities for those who hold a smaller number of tokens on a particular blockchain network.
There are many different types of cryptocurrencies to choose from to stake and earn rewards.
The top five cryptocurrencies by market capitalization to choose from as the best staking coins are Ethereum 2.0, Cardano, Polkadot, Solana and Polygon. Other popular staking coins include Tezos, DAI, Cosmos and Algorand.
How to stake Ethereum
Ethereum is transitioning to PoS as ETH 2.0 nears, and validators on the network can earn around a 7% annual interest rate on their Ether, depending on the number of validators on the network.
Users would be required to set up a staking node running software ETH 1.0 and ETH 2.0 clients that interact with the blockchain network to stake on Ethereum directly. A few of the compatible software for staking nodes include Prysm, Nimbus, Teku, Lighthouse and Lodestar.
Stakers would need to use a computer to download both Ethereum blockchains and be connected to the internet 24/7. Once the validator software is installed, users would need to lock away at least 32 ETH to the Ethereum staking contract address.
Rewards given to the stakers also depend on the total amount of ETH staked and the number of validators on the network. Stakers would be able to withdraw staked funds once Ethereum 2.0 and Ethereum 1.0 merge.
If a validator breaks the network rules, they are removed, with their staked ETH also taken away as a penalty.
Although 32 ETH is needed to run a node independently for staking, platforms including Coinbase and Gemini allow users to stake Ether with no minimum amount required.
How to stake Cardano
Another leading PoS blockchain and Ethereum killer Cardano also allows users to earn a 4.6% annual interest rate on their crypto paid out in ADA tokens.
Cardano uses a form of PoS, known as delegated proof-of-stake and referred to as Ouroboros on the network. The key parties involved are the stake pool operators (SPOs) and delegators.
Similar to Ethereum, the SPOs are the nodes on the network that validate transactions on the blockchain. The amount of ADA staked in their pool would determine the likelihood of the SPO being chosen to confirm transactions on the network.
In a simpler process, delegators can stake their ADA tokens with a chosen staking pool, increasing the chances of the SPO being selected to validate transactions. Delegators would be compensated accordingly through a digital asset wallet or indirectly on a crypto exchange. ADA holders would be then able to receive their rewards every five days if they choose to stake their assets.
To start staking ADA, investors could choose to stake their tokens in a cryptocurrency wallet, like Exodus,
Ledger, etc., or through centralized crypto exchanges including Binance, Bittrex, KuCoin and Kraken. Investors should note that while staking on exchanges, users are not given the choice of distributing tokens across multiple staking pools.
According to Cardano, it suggests two specific online wallets – Daedalus and Yoroi. Daedalus is a desktop wallet that can be run on Windows, macOS and Linux that acts as a full node wallet, catering to those who wish to create a node and become an SPO on the network.
Yoroi is a staking wallet designed for those who intend to stake ADA as a delegator and runs as a browser-extension wallet on Google Chrome, Microsoft Edge and Firefox.
Decentralized finance service providers also support ADA lending, which gives out rewards to users as well. However, it may pose higher risks and complexity compared to the aforementioned methods.
Get to know more about Cardano with our in-depth Cardano guide
Pros and cons of staking
Staking crypto is considered to be a passive form of investment. Therefore, there may be little downside. Investors can earn extra rewards through staking without having to actively trade and manage their funds.
Before staking cryptocurrencies, users should always consider the risks involved in the process. The main risk with staking is the volatility of the cryptocurrency asset chosen for staking. Since the annual interest given as a reward may be somewhat constant, but the digital asset may drop in value, this could cause investors to be underwater.
This means that investors should always stake cryptocurrencies that they believe have underlying value, even if the rewards given may be lower than those of new cryptocurrencies that offer over 50% interest in an attempt to lure speculators to purchase the digital asset.
Another factor to take into consideration is that some cryptocurrencies may not let users take out their investments at any time due to defined lock-up periods. As previously mentioned, Ether stakers would only be able to withdraw their ETH once the ETH 2.0 upgrade goes live.
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