Crypto staking is the act of pledging your cryptocurrency to support the blockchain’s transaction validation. Typically, machines in the network will validate transactions instead of you personally, and you can stake easily through programs at many large exchanges.
Earning rewards provides a strong motivation for staking. Staking incentives are a form of compensation given to cryptocurrency owners that assist in policing and validating a currency’s transactions. In that regard, the benefits of staking carry a far higher risk than dividends or interest on savings accounts. Rewards are given out in the digital currency you are betting.
The SEC has recently begun to take action against exchanges that provide staking without first registering the services. One of the biggest cryptocurrency exchanges, Kraken, was fined by the SEC in February 2023 and ordered to pay $30 million in fines as well as shut down its staking service for consumers in the United States. Despite this, several sizable exchanges continue to provide staking-as-a-service. That might soon change, though, given the rising pressure from government authorities.
For the time being, here’s how you make money by staking cryptocurrencies and an explanation of the hazards involved.
What is crypto staking?
A crucial component of cryptocurrencies that use “proof-of-stake” validation is staking. In a proof-of-stake method, investors who own the cryptocurrency can assist in validating transactions in the blockchain database of a certain cryptocurrency. Usually, before they are allowed to become a validator, they must possess a certain minimum number of coins in order to validate transactions.
What is crypto validation?
Participating in the decentralized computer network that verifies transactions and makes sure those stored in a cryptocurrency’s blockchain are accurate are called “validators.” They receive payment in the form of cryptocurrency in return. But for people who stake their coins and sign up as validators, it’s not a risk-free operation because they risk losing some of their investment if they approve transactions that may be fraudulent or don’t follow the laws of a cryptocurrency.
Anyone can pledge their coins with a validator and receive benefits, even if they don’t have enough to become one themselves. As a result, by using a cryptocurrency exchange or other crypto platform, even users with a small quantity of coins can take part in staking rewards. Rewards can be deposited into your account as you earn them.
Proof-of-stake validation is used by many of the most well-known cryptocurrencies, including Ethereum, but not all of them, including the most valued cryptocurrency, Bitcoin. To validate transactions and maintain the blockchain for that coin, Bitcoin uses proof-of-work, which consumes more computer power than proof-of-stake.
How much can you earn through crypto staking?
Depending on the staking platform, the cryptocurrency, and the number of people who are actively staking a particular coin, there are a wide range of staking incentives that can be won. Â
According to Eddie Rajcevic, a former member of the research team of financial media network tastylive, “the rewards vary from 5 to 20 percent with the more well-known coins such as Ethereum, Cardano, and Polkadot.” Additionally, if you stake your coins through a cryptocurrency exchange, the incentives you earn may vary from one exchange to the next. Some might keep a portion of any staking rewards, while others might give you the full amount. Different regulations and incentives apply on other trading platforms. Â
According to Claudiu Minea, CEO and co-founder of SeedOn, a blockchainbased crowdfunding platform, “some platforms 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.” Â
Finally, it’s critical to realize that these staking yields can vary according to the number of participants and size of the overall reward pool.
According to Ivan Zhang, CEO and co-founder of Pennyworks, a platform that rewards decentralized finance (DeFi) lending, “Yields change largely because the rewards are fixed over time but the amount of capital that participates in staking or lending changes.” “The rewards decrease as more people stake or lend, and vice versa.”
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How to start staking your crypto
According to experts, an exchange might be a simple route for individuals who are just starting to stake because many cryptocurrency exchanges give staking rewards on at least a few coins. Owners of cryptocurrencies do, however, have alternative options, such as staking-as-a-service platforms and DeFi lending services.
1. Choose a platform
Staking is available on the majority of major exchanges, including Coinbase, KuCoin, CoinRaja,Binance, Gemini, and OKX. You can start it through the exchange’s app or website. In general, the initial step is to look over the list of tokens that can be staked. For instance, Coinbase has the following currencies available for stake: Cardano Â
Cosmos
Ethereum Â
Solana Â
Tezos Â
Each token has a distinct rewards rate, and what is available depends on your exchange. For instance, as of March 2023, the five tokens provided on Coinbase gave incentives ranging from 2.0 percent APY to more than 6.0 percent APY. Hundreds of tokens are available for staking, according to OKX. Some tokens on OKX earned as much as 35% APY, with terms ranging from flexible to 120 days.
2. Decide on the token and term
Once you’re on an exchange that supports staking, choose which token and how much to stake while bearing in mind the staking term. Some exchanges provide “flexible” terms, which allow you to withdraw your money whenever you choose rather than having to lock it away for a predetermined period of time, which is often 30, 60, 90, or 120 days. Even with flexible terms, you’ll normally have to wait a day before getting access to your money once more. Â
Auto-staking is a service provided by some exchanges, including Binance, for users who wish to optimize rewards but don’t require quick access to their tokens. Once the first staking term has ended, you won’t need to manually restake tokens because auto-staking will renew your subscription to staking goods.
There isn’t much to do when you start the staking process other than wait. Reward payments are made straight into your account in accordance with the exchange’s set timetable.
3. Consider alternatives
Due to the less volatile stablecoins they utilize, working with a DeFi lending platform may be a more appealing alternative for many crypto owners, but it also comes with additional hazards. According to Minea, Binance provides support for both DeFi lending, a similar business that offers rewards on stablecoins like Tether, and proof-of-stake coins. Â
You are lending stablecoins like Tether in these circumstances, according to Zhang. Â
Stablecoins, in contrast to the majority of cryptocurrencies like Bitcoin and Ethereum, have a steadier worth because they are frequently backed by tangible assets like dollars or even bonds. These coins are subsequently lent to other people, thus there is always a chance that they won’t be paid back.
According to Zhang, “Yields also vary considerably and may be comparable to staking, but without all of the volatility.”
What are the risks of staking?
While taking part in crypto staking may appear like a way to gain free money, it’s crucial to realize that there are serious hazards involved:
The underlying cryptocurrency is volatile
“The biggest risk is price movement in the cryptocurrency you are staking,” asserts Rajcevic. So even though a 20 percent income sounds appealing, you will lose money if the price of the cryptocurrency declines by 50 percent. Â
The possible downside of the coin is paid as a price for staking rewards. In this regard, the dangers are significantly greater than those associated with a savings account, where your capital is guaranteed, or even a dividend stock or ETF, where the volatility is significantly lower than that of a cryptocurrency.
Potential rewards may be too good to be true
Working with a cryptocurrency or platform that offers enormous benefits requires caution. Â
Smaller cryptos will typically offer bigger benefits, but Rajcevic advises that you conduct your own study. “Many of these initiatives fail or cause hyperinflation. Therefore, even if you might get a 150 percent yield, the value of the cryptocurrency you get might keep falling, leaving you with a bag that is useless.
You may have to lock up your cryptocurrency
You might need to lock up your Bitcoin for a while with some staking partners in order to take part. Rajcevic mentions several exchanges where your coins could be locked up for up to 180 days, making it impossible for you to unstake and sell them. Â
This means that if the value of the cryptocurrency significantly lowers while you are in the lock-up period, you must wait until the time period is through before you may un-stake, the author explains.
Hacking
If you continue to retain specific cryptocurrencies, you are accepting the dangers of hacking that could affect either a platform or that particular coin. Â
According to Minea, staking platforms that have been around for a while and are trusted by millions of users are nevertheless vulnerable to hacking or other cyber security risks. Some cryptocurrency investors choose to stake their tokens on hardware wallets primarily for this reason.
Fraudulent or insecure staking platforms
Some staking platforms may make very high return claims in an effort to entice customers to engage without fully understanding the risks involved. So it’s crucial that cryptocurrency owners thoroughly investigate any platform. Â “Depositing and staking your tokens on a platform that is not trustworthy may result in the loss of funds and rewards,” warns Minea.
Should you stake your cryptocurrency holdings?
To what extent does staking support your investment thesis is the most crucial question to ask yourself. Do you want to hang onto your cryptocurrency for a while or do you want to swap it for a profit? Â
Staking might not be the best option if you want to make a speedy trade, especially if the platform demands a lock-up. If you believe that cryptocurrencies will have a bright future, then perhaps accepting a lock-up during which you are unable to sell is worthwhile. The staking benefits may then be little more than a bonus for you.
Naturally, you should also take into account the dangers outlined above as well as any other ones that could be relevant to the cryptocurrency or staking platform you’re using. Additionally, Minea advises understanding the terms of any agreement before staking crypto assets.
- These circumstances include:
- Whether you must store your possessions in a safe and for how long
- What potential rate of return there is
- If there is a minimum quantity needed to lock up, what is it?
- What the maximum payout per user or the maximum stake amount is
- How big the overall prize pool is, if any
These factors all affect your decision to engage in staking and, eventually, how much money you can make. You must determine whether the risks you are taking are worth the potential rewards.
Bottom line
Staking cryptocurrencies gives cryptocurrency owners a chance to generate revenue other from exchanging the coins. While the revenue from holding a currency may be a nice perk and appear risk-free, it’s vital to keep in mind the risks associated with owning and trading cryptocurrencies, which may overshadow what in many cases may be modest staking returns.
Remember, investing in cryptocurrencies involves risks, and it’s important to conduct thorough research and seek professional advice before making any financial decisions.
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(Please keep in mind that this post is solely for informative purposes and should not be construed as financial or investment advice.)
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