It's 2022, and despite a lacklustre 2021 for DeFi, TVL continues to grow as stakers increase — but what exactly is staking, and how can you stake in the crypto markets?
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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.
How Does Proof-of-Stake Work?
There are some variations as to how PoS systems work depending on which protocol, but generally, the algorithm chooses blocks at random and assigns them to a validator node for review. The validator then checks the legitimacy of the transactions. If everything is accurate, the validator adds the block to the ledger and receives the block rewards and transaction fees. However, if a validator adds a block with the wrong data, its staked holdings will be penalized.
Mining vs Staking
The following are some of the differences between mining and staking:
- Mining – miners solve complicated mathematical puzzles vs Staking – nodes in the network engage in validating new blocks by locking up their funds.
- Mining – the first miner to solve the mathematical puzzle adds a block to the blockchain vs Staking – nodes validate a new block by locking up native tokens in a smart contract.
- Mining – requires specialised mining hardware (e.g. GPU) which consumes a lot of energy vs Staking – widely considered to be more environmentally sustainable, saving over 99% of energy consumption according to Vitalik Buterin.
- Mining – more computational power (work), higher chance of solving the block and getting rewarded vs Staking – more native tokens staked (stored value), more likely to get selected to validate new blocks.
What Can I Stake?
Chainlink (LINK) Staking
Nominators can stake their DOT by nominating a validator, earning them a share of the validator rewards. Your rewards will be dependent on the performance of your validator, so choose wisely. Note that you can unstake your DOT at any time. However, there is a 28-day unbonding period before your funds can be transferred.
Terra (LUNA) Staking
- LUNA staking rewards (through bLUNA tokens)
- DEX transaction fee rewards (a portion of the fees of your liquidity pool)
- Potentially with DEX tokens (such as LOOP)
Staking on Tezos (XTZ)
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.
Staking on Algorand (ALGO)
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 2.9%, as of March 2022.
Staking on Icon (ICX)
Icon has a native token called ICX. Annual staking rewards on ICON is currently 14.27% on Binance Staking, as of March 2022.
- USDC: 2.79% in Binance, 0.15% in Coinbase, 2.5% in ByBit
- BUSD: 3.21% in Binance, 4.5% in ByBit
- DAI: 3.78% in Binance, 0.15% in Coinbase, 5% in ByBit
- USDT: 3.12% in Binance, 3% in ByBit
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 proof-of-stake coins like 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 a US-based exchange listed on the NASDAQ, and it 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.
Users can easily view their Earn balance and combined trading balance on the Gemini platform.
Cold or Private Wallets
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 third-party apps like the Exodus wallet
Staking-as-a-Service (SaaS) Platforms
- 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.
- 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 March 2022). 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
- 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.
Where Can You Earn The Highest Staking Rewards on Exchanges?
As of March 2022, here are some of the top exchanges where you can earn the highest staking rewards:
- Binance: 8.19% for BTC, 25.12% for dYdX, 6.49% for AAVE, 5.23% for BNB (Higher yields and more crypto assets available on locked staking)
- Coinbase: 4.5% for ETH, 5% for ATOM, 4.63% for XTZ and 0.45% for XTZ
- Kraken: 4-7% for ETH, 12% for DOT, 4-6% for ADA, 12% for ATOM and more
- ByBit: 20% for UST, 5% for LUNA, 5% for SHIB, 3% for MATIC, 2% for SOL, AVAX and FTM
Staking On a Hardware Wallet
- 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!
After that, you need to send funds from the wallet to Ledger and start staking. Note that the third party wallet manages your crypto.
Where Can You Earn The Highest Staking Rewards on a Hardware Wallet?
As of March 2022, here are two of the top hardware wallet where you can earn the highest staking rewards:
- Ledger: 6% for XTZ, 7% for TRX, 8-10% for ATOM, 5-6% for ALGO and 10% for DOT (yields are an estimate and have not taken into account validator’s fees or commissions)
- Trezor: Trezor wallet does not support direct staking on its UI. However, you can connect to wallet apps like Exodus. Yields are 8.98% for ATOM, 4.91% for ADA, 5.46% for XTZ and more.
Benefits and Risks of Staking Crypto
From the attractive yields above, it is clear why staking has grown so popular among crypto holders, as it gives them additional income from the crypto sitting in their accounts. Furthermore, with eye-popping hundred percent yields in some protocols, staking has properly cemented its place in the world of crypto. However, before you leap into the world of staking, here are some upsides and potential disadvantages you should consider.
Some of the benefits of staking crypto:
- Passive income generation – yields can range from attractive to outright outrageous, and can provide passive income catering to people with different risk appetites
- Low entry – staking is easy and can be done in a few simple clicks, especially with major exchanges now offering staking services. Users do not need a huge amount to get started and staking is also energy efficient.
However, you might ask: is staking crypto safe? Here are some of the risks of staking crypto:
- Possibility of hacking/cyber attacks on the protocol or exchange – this is the main reason some crypto investors stake on hardware wallets.
- Possibility of fall in value of the coin, especially in volatile market conditions. When locked up in the staking period, you are unable to liquidate your holdings when downturn in price happens.
- Validator nodes holding your staked tokens may be penalised if it does not uphold 100% uptime in processing transactions.
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 2022, 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!