If 2020 can be viewed as the Year of Decentralized Finance (DeFi), then an honorable mention must be made of the central role that cryptocurrency staking played in the ascent of this new generation of crypto assets.
The industry witnessed a steady rise, and oftentimes a surge, in the number of users staking crypto to earn fixed interest or yield farming rewards, as the number of miners on proof-of-work (PoW) blockchains slowly began to dwindle, market-leading Bitcoin excluded of course.
In fact, more than a billion dollars worth of crypto have been staked in Kraken’s platform alone, while Binance, Huobi and other major exchanges also hold humongous amounts of staked crypto. Meanwhile, the total assets staked in DeFi platforms amount to $21-$23 billion in January 2021. This is a true testament to the demand for staking.
What Is Crypto Staking?
Staking is an activity where a user locks or holds his funds in a cryptocurrency wallet to participate in maintaining the operations of a proof-of-stake (PoS)-based blockchain system. It is similar to crypto mining in the sense that it helps a network achieve consensus while rewarding users who participate.
In staking, the right to validate transactions is baked into how many coins are “locked” inside a wallet. However, just like mining on a PoW platform, stakers are incentivized to find a new block or add a transaction on a blockchain. Apart from incentives, PoS blockchain platforms are scalable and have high transaction speeds.
What Can I Stake?
Thanks to the growing popularity of staking, there are tons of options for users who want to earn passive income with their idle crypto-assets. We’ll briefly cover some of the biggest cryptocurrencies offering staking rewards right now:
One of the hottest staking options is Ethereum 2.0, since Ethereum is the second-most popular cryptocurrency platform to date. And if you are invested in ETH, you can essentially help the system flourish by becoming one of its early validators.
Of course, if you followed the DeFi industry’s explosion in 2020, you’ll know that much of their growth can be attributed to the staggering potential rewards that yield farming protocols operating as ERC20 tokens offer to investors. We discuss this further down in more detail.
Tezos’ native currency is called XTZ and calls the staking process, “baking.” Bakers are rewarded using the native coin. Furthermore, malicious bakers are penalized by having their stake confiscated.
To become a staker/baker on Tezos, a user needs to hold 8,000 XTZ coins and run a full node. Luckily, third party services have emerged, allowing small coin holders to delegate small XTZ quantities and share baking rewards. Annual percentage yield on XTZ staking ranges anywhere from five to six percent.
Algorand (ALGO)’s main aim is to drive low-cost cross-border payments. Being a PoS protocol, the network needs stakers for security and transaction processing. Unlike Tezos, it uses the pure proof-of-stake (PPoS) consensus mechanism. However, it still requires stakers to run full nodes.
Furthermore, there are third parties who support ALGO delegation. Staking rewards on these networks range between five and ten percent annually. Note that the rewards are influenced by the platform used. For example, those using Binance Staking enjoy an APY (annual percentage yield) of 8%.
The complex Korean blockchain project Icon (ICX) offers another platform that natively allows staking. However, Icon differs from Algorand and Tezos in that it uses the delegated-proof-of stake (DPoS) consensus algorithm. With this model, a select number of users find new blocks and verify transactions while others delegate their coins to these entities.
Icon has a native token called ICX. Annual staking rewards on ICON range anywhere between six and 36 percent.
Where Can I Stake?
Exchanges have naturally jumped into the staking business, thanks to the extensive number of users on their platforms.
By staking, traders can diversify their income stream and monetize their idle funds on exchanges. The leading cryptocurrency exchanges that support staking include, but are not limited to:
Binance is the largest digital currency exchange by trading volume. Therefore, many investors find it at the top of their lists when they contemplate staking through trading platforms. In line with this, the Binance staking service for Ethereum 2.0 came to life in December 2020.
In addition, the exchange supports DeFi staking, where it accommodates cryptos such as DAI, Tether (USDT), Binance USD (BUSD), BTC and Binance Coin (BNB).
Coinbase is another leading cryptocurrency exchange where you can stake a selection of cryptocurrencies. Apart from ETH 2.0 staking, other coins accommodated on Coinbase staking include ALGO and XTZ.
This form of staking is also called cold staking. However, a staker has to keep staked coins in the same address, since moving them breaks the lock-up period, which consequently causes them to lose staking rewards.
Leading offline/private cryptocurrency wallets supporting staking include:
- Ledger – Ledger is the industry leader for cold wallets. The advantage of hardware wallets is that you still maintain full control of your coins during a staking session.
On top of its security, Ledger allows its users to stake up to seven coins. Some of its supported coins for staking are Tron (TRX), ATOM and ALGO.
- Trust Wallet – The versatile Trust Wallet is a private wallet supported by Binance. The wallet allows users to earn a passive income by staking XTZ, ATOM, VeChain (VET), TRX, IoTeX (IOTX), ALGO, TomoChain (TOMO) and Callisto (CLO).
- CoolWallet S- The first Bluetooth mobile hardware wallet CoolWallet S offers stablecoin (USDT) staking in-app through its X-Savings feature
- Trezor - The world’s oldest hardware wallet also supports staking of some assets like Tezos through thirty-party apps like the Exodus wallet
Unlike cryptocurrency exchanges and wallets that double up as trading and storage avenues, respectively, staking-as-a-service platforms are dedicated to staking only. However, these platforms take a percentage of the rewards earned to cover their fees. Staking on these platforms is also known as soft staking.
- Stake Capital – It supports the staking of Loom Network (LOOM), KAVA, XTZ, Aion (AION), Livepeer (LPT) and Cosmos (ATOM).
- MyCointainer – MyCointainer users choose between Power Max, Power Plus and Basic options when staking their virtual assets. The three levels depict the staking charges.
For example, Basic users pay as little as $1, while those on the Power Max plan pay more than $10 per month. The platform accommodates the staking of more than 50 cryptocurrencies with on-chain staking support.
To check yields from DeFi staking, go over to the staking calculator webpage.
- Maker (MKR)- The platform allows users to borrow stablecoins against a volatile cryptocurrency such as Bitcoin. Its popularity has made it one of the prominent decentralized finance protocols on the Ethereum blockchain (currently number one in total volume locked (TVL) as of January 2021). Notably, DAI is the primary stablecoin of the network. Therefore, yield farmers deposit DAI which is lent to borrowers, while they receive rewards from the interest charged on loans.
- Synthetix (SNX)- Synthetix has a native currency called SNX. As the name suggests, the platform is used in the issuance of synthetic assets, commonly known as Synths. Synths are virtual assets used to represent physical and real assets such as stocks, cryptos, and fiat.
- Yearn Finance (YFI)- The protocol came into existence in February 2020 as a DeFi aggregator. Therefore, instead of facilitating lending and borrowing, it distributes deposited funds into platforms with the best yields and lower risk profiles. For instance, it distributes funds between Aave and Compound whenever it finds these two to provide the most rewarding and less risky yields.
- Compound (COMP)- Compound enables users to borrow or and lend a small range of cryptocurrencies such as ETH, USD Coin (USDC), Basic Attention Token (BAT), Ethereum (ETH) and DAI. The platform uses lending pools and charges interest on loans. For collateral, the protocol requires borrowers to deposit a given amount of supported coins.
How to Choose a Staking Platform
Before hurrying to stake your coins, your choice of staking platform is as important as the rewards. Making the wrong choice may see you lose your rewards and staked coins all together. Here are some best practices when choosing a staking platform:
- When it comes to new DeFi platforms, never take a founder’s or team’s word for whatever protocol they are trying to introduce, especially if you are a non-tech person. Go over to Reddit and Twitter and see what others are saying about the protocol. Dev users can usually spot the possibility of a rug pull and will usually alert the community for any signs of foul play or code vulnerability they can find.
- Don’t get too caught up in annualized rewards or APYs. There are many other crucial factors to consider such as the reputation and age of the platform.
- As much as possible, stick with reputable platforms like Maker, Cool Wallet, etc., instead of risking your crypto wealth on fishy-looking platforms that promise extremely high staking yields.
- Use reliable analytics such as CoinMarketCap to check information on a PoS-based platform. This also applies to staking-as-a-service platforms and third party staking services.
- Before staking, read the terms and conditions or rules governing the staking process. The rules take care of things like whether the wallet needs to be connected to the internet 24/7, staked crypto has to go through a cooling period before being unstaked and a minimum staking amount, among other factors.
How to Stake Crypto
The process of staking digital currencies depends on your staking option. For example, cold staking is different from directly being a validator on a PoS platform. Moreover, using staking-as-a-service platforms follow a different route from third party or exchange-based staking.
Staking on an Exchange
Here we shall look at how to stake crypto using an exchange. Let’s use Binance as our platform of choice and Ethereum as our cryptocurrency.
- First, you need to have a Binance account and some ETH coins. Luckily being an exchange, you can exchange your other coins to ETH.
- When logged in, access Finance>Binance Earn>ETH 2.0 staking.
- Note that staked ETH coins have a lock-up period of up to 24 months. Binance tokenizes the staked ETH and distributes rewards in the form of BETH.
- Hit “Stake Now” and specify the amount of ETH you wish to allocate to staking.
- Click “Confirm.” On the second window that pops up, review the terms and conditions before clicking “Confirm” again.
Staking On a Hardware Wallet
The process of staking crypto on a hardware wallet like Ledger is similarly straight forward.
- The first step is to install the coin’s (e.g., ALGO) app on Ledger.
- Create a new account on Ledger Live and migrate the coins you wish to stake using Ledger Live.
- And you’re done!
But that’s not all. You can use coins stored in your Ledger wallet, but manage the crypto using other wallet applications. Staking using this formula follows the same steps as the above procedure, but after step one, you select a third party crypto storage.
After that, you need to send funds from the wallet to Ledger and start staking. Note that the third party wallet manages your crypto.
The Future of Crypto Staking
Ready … set … stake. From the above discussion, it’s clear that staking is healthier (environmentally and perhaps economically) than PoW-based mining. As such, it’s rightfully gaining momentum and an increasing market share in the crypto sector. The shift towards staking received new strength when Ethereum finally made the shift and officially welcomed staking in December 2020.
And in 2021, the popularity of both decentralized and centralized staking appears to be at an all-time high as DeFi staking continues to flourish.
Lastly, DeFi staking, despite its FOMO-inducing growth, should be approached with caution, especially the newly-created protocols promising suspiciously high rewards for yield farmers or liquidity providers.
Remember that crypto staking comes with significant risk, therefore it is absolutely essential to do thorough research and invest wisely. Happy staking!