You want to make a passive income staking crypto, but you don't know how.
A lot of newcomers to crypto hear that staking is an easy way to make a nice passive income without risk. But is that true?
Staking crypto can be easy money. But you probably heard that trading can be easy money too, and often, it is not. This guide will teach you all you need to know about making a passive income with staking:
The article will cover these topics:
- What staking is
- What rewards are
- Why you need to know the difference between centralized and decentralized staking (and what LP token staking has to do with them)
- The risks of staking
- How to stake crypto on Binance
- How to stake crypto on Kucoin
- How to stake crypto on Crypto.com
- The final verdict about staking crypto
After reading this guide, you will know exactly how to make money staking crypto and which banana skins to avoid.
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There are two ways to explain staking
: the quick metaphor for dummies and the longer explanation for serious crypto investors.
The quick metaphor is: staking crypto is like a savings account at a bank
(without the insurance). You can deposit your dollars into a bank account, the bank will pay you a tiny interest rate (the average is 0.06%
) to store it and then use the capital for investments. Until a certain sum, your savings are insured. If the bank goes bankrupt, the state guarantees you get your funds back.
If you stake crypto, your cryptocurrency is your dollars, and your crypto exchange or decentralized protocol is the bank. You deposit your coins/tokens and earn interest in that cryptocurrency. The only difference is that often your funds are not insured.
The longer explanation
is that staking is necessary to ensure the safety and functionality of a blockchain
. Blockchains with a proof-of-stake consensus mechanism
need the staked coins as collateral to verify that transactions are safe and validated. In other words, stakers vouch with their coins that all transactions are processed correctly. For this privilege, they receive interest in the form of tokens minted when a new block is added, but they can also pay a penalty (called slashing) if they don't behave correctly.
In many blockchains, you can stake your cryptocurrency but don't actually have to do the work and process transactions. That is the work of validators
. When you stake your crypto with a centralized or decentralized staking pool, your coins are pooled with those of others, and the platform acts as the validator.
For their work, validators earn a reward known as the staking reward. It is akin to the interest a bank pays to depositors. The size of the staking reward can depend on several factors:
- The cryptocurrency you are staking.
- The staking provider you choose.
- Whether you act as a validator yourself or stake on an existing validator.
- The duration you commit your tokens for.
As an end-user, you see the staking reward expressed as the annual percentage yield (APY)
. Staking rewards are usually paid in the cryptocurrency you staked — if you stake Ether
, you receive Ether rewards. However, if you stake liquidity provider tokens
, you may receive another dedicated reward token.
Centralized staking is picking a provider like Binance
, i.e., a crypto exchange or a dedicated crypto staking service
. Centralized providers pool the deposits they receive from users and act as validators to verify transactions on the blockchain. They take a cut of the staking rewards for their services but still offer attractive APYs (depending on the staked coin).
and cryptocurrencies are available for staking, with stablecoins sometimes almost 10% in APY. Some providers also offer insurance on stablecoin deposits.
Decentralized staking providers like Lido
often offer better APYs
but come with smart contract risk
. One of the most popular decentralized stablecoin staking protocols is Anchor
. It offers a 19.5% APY on deposits in the UST
token. However, decentralized pools are often less convenient to use
and have a steeper learning curve. They also do not offer insurance, although you can get one through third-party protocols.
You can also stake liquidity provider tokens. This differs slightly from staking a "regular" cryptocurrency. Let’s look at an example, where you hold ETH and want to stake liquidity provider tokens on a decentralized exchange like Sushiswap
Under its "Farm" tab, Sushi lists trading pairs that users can provide liquidity for.
For instance, the USDC/WETH pool pays an annualized 12%. However, to provide liquidity for this pool and get the 12% interest, you have to:
- Have crypto in a cold wallet or hot wallet.
- Swap your cryptocurrency to WETH and USDC at an equal ratio.
- Provide liquidity to the pool.
- Stake the liquidity provider (LP) token you received (which acts as proof of your deposit).
The interest you accrue is paid from fees the exchange levies for swaps between USDC
. Furthermore, you receive some interest in a reward token, in Sushiswap's case SUSHI
. Safe to say that this process is only recommended for experienced DeFi users
that know how to navigate a decentralized exchange and swap tokens
. It also incurs gas
fees at every step of the way and is thus only recommended to users with a significant amount of capital to deploy
. However, you can also provide liquidity to blockchains with lower gas fees than Ethereum.
First, you log in with your email and mobile phone to pass the Binance two-factor authentication. When you are logged in, look for the Earn tab and click on Savings.
You will find two options: flexible savings and locked savings. The difference between them: with flexible savings you can unstake your crypto at any time. With locked savings, you commit to a certain amount of time (often 7 or 15 days).
Most cryptocurrencies are under flexible savings, giving you maximum flexibility on how long you want to commit your crypto. You can see the APY and its trend (APYs can also change) over the last few days. The Auto Transfer option would automatically transfer the balance of your spot portfolio (the crypto you own but do not trade on Binance) to your savings account. Imagine it like a direct debit from your checking account to your savings account.
Click Subscribe on one of the available cryptocurrencies:
You can see different tiers on the APYs. The juiciest APY on Binance is only available up to a relatively small sum. The same is true for all other cryptocurrencies.
For locked savings, the principle is the same. The only difference is that you can pick a lockup period for some cryptocurrencies.
Choose the amount you want to stake, tick the box, and click agree. If you want to unstake, you can do so in the same menu. For locked savings, your stake will automatically unstake after the lockup period.
Log into the Crypto.com app with your account details. Click on the blue Crypto.com icon at the bottom and click on Earn in the Finance tab.
Click on Start Earning Now
and choose one of the coins you want to stake.
Like on Binance, Crypto.com has flexible interest rates — the more you stake, the lower the APY. Unlike on Binance, you can also choose to lock up your crypto for longer and profit from a better APY. USDT can pay up to 6% APY if you stake it for three months.
Accept the terms & conditions and start staking.
Staking on KuCoin works similarly to Binance. Log in to your KuCoin account (on the desktop or mobile) and look for the KuCoin Earn section in the Earn tab.
The interface is almost identical to Binance. You can choose from several different cryptocurrencies that you want to stake. Some are flexible, while others have fixed staking periods. Click on Subscribe, enter the amount of cryptocurrency you wish to stake and tick the agreement box.
Although staking is, in principle, less risky than trading or hunting undervalued altcoins, it is not without danger.
This is less of a risk and more an opportunity cost that you as the investor need to consider. Some staking pools have long lock-up periods
, meaning that you will not be able to sell until your coins get released
, no matter what. In case of a significant price drop, your crypto will be "stuck." On the other hand, you will be forced to HODL
for not selling your coins) in case of a substantial appreciation. Thus, lock-up periods can be a double-edged sword, and you need to be aware of your expectations.
Smart Contract Risk
Crypto has had its fair share of hacks
— including the Coincheck hack
, Poly Network hack
, Africrypt hack
, Mt Gox
and Bithumb hacks
. Both centralized and decentralized exchanges have been hit, and you simply need to be aware of this risk. Part of the reason why crypto offers much better returns and APYs is that they compensate for the danger of losing your funds entirely
. Protocols like Nexus Mutual
can provide some coverage in case your funds are stolen.
A similar risk is a rug pull
, although staking pools are rarely affected by those.
If you are staking liquidity provider tokens, you may face impermanent loss
in case the token prices change too much. Put simply, if one token rises in value too much compared to the other, you may have been better off just holding that token instead of providing liquidity. Impermanent loss is quite technical
and you can find our detailed explainer of impermanent loss here
Yes, crypto staking is worth it for three reasons:
- It is (relatively) passive income.
- Crypto staking is comparatively low risk.
- You can stake a lot of different cryptocurrencies.
If you buy a cryptocurrency and plan to hold it for a long time, you absolutely should stake it to increase your stack. Some cryptocurrencies are also inflationary, so staking is the only way to keep your share of the supply constant. However, make sure to research the quality and security of the staking provider before you commit.
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