Earning money while you sleep is the dream.
And although there are plenty of passive income opportunities in traditional finance, a fairly new income stream that has become popular over the past few years is cryptocurrency staking.
But what exactly is crypto staking, and can you actually make any money from it?
We’ll break down the details of staking cryptocurrency, how it works, where you can stake your crypto, and cover the pros and cons of this investment.
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
Get Priority Access
What Is Staking Cryptocurrency?
Cryptocurrency staking is the process of locking up crypto into a smart contract for the purposes of becoming a blockchain network validator.
That may sound confusing, so let’s break it down a bit further.
Crypto staking happens on proof-of-stake (PoS) blockchains, meaning that the computers that run the network must “prove” they are trustworthy by committing a large amount of crypto as collateral.
The node operators are known as validators and earn crypto rewards by validating transactions and adding blocks to the blockchain.
The staked funds and rewards are handled automatically by a smart contract on the blockchain, which is a type of digital agreement.
Most people don’t stake their crypto directly on the blockchain, but instead use a crypto exchange or other crypto applications to contribute funds to validators in return for a slice of their rewards.
More on that below.
How Staking Works
Staking requires depositing cryptocurrency into a smart contract on a proof-of-stake blockchain as collateral. This collateral qualifies a user to become a network validator on the blockchain, running a “validator node” that verifies transactions and keeps an updated record of blockchain activity.
Crypto rewards are given to validators in a randomized rewards system, but there is a greater chance at recording a block and receiving rewards given to users who stake more crypto. These rewards are given per block, which can end up being thousands of dollars.
There are also “staking pools” available on crypto applications and exchanges that allow users to pool together crypto funds for the purpose of staking. A validator uses these funds to earn more rewards and distributes the rewards to investors based on their total investment, or stake.
Most staking happens through third-party applications and not directly by validators. This allows users to deposit smaller amounts and reap the rewards without needing to commit a large amount of funds and computing resources.
What Is Proof of Stake?
Proof-of-stake (PoS) is a blockchain consensus mechanism that regulates how transactions are processed and validated. Instead of the energy-intensive proof-of-work (PoW) mechanism that requires massive computing power to solve increasingly complex mathematical equations to earn rewards, PoS instead requires a large amount of deposited collateral and minimal computing resources.
The staked crypto acts as collateral to build trust in the network, as the validator is putting their own funds at risk if they fail to operate their node honestly. It also reduces the incentive for cyberattacks because the economic penalties for misbehavior on the network are costly.
Proof-of-stake networks are much more energy-efficient than Proof-of-work networks, helping reduce the carbon footprint of modern blockchains. Most new cryptocurrencies are running on PoS-style networks, including Ethereum 2.0, which will migrate Ethereum off the old proof-of-work network.
Pros & Cons of Staking Cryptocurrency
Staking cryptocurrency can help create passive income for investors, but can be complicated. And while there are simple-to-use exchanges that offer staking, there are some risks involved. Here are a few of the pros and cons of cryptocurrency staking.
Staking offers rewards incentives to investors without the energy-intensive requirements of Bitcoin and other proof-of-work cryptocurrencies. Here are a few things we like about staking crypto:
- Passive Income. Staking crypto is a simple way to earn income with your cryptocurrency. While the funds are typically locked into a contract, the interest earned can be 5%, 10%, or even 20% or more. This is a truly passive investment.
- Staking Pools Make it Easy to Invest. Although some have the technical know-how and upfront capital to become a validator, most users can simply join a staking pool to earn rewards. These pools are available on both centralized and decentralized (DeFi) exchanges, and offer more flexible terms than direct staking.
- More Energy-Efficient Technology. Proof-of-stake technology allows crypto blockchains to operate much more efficiently, reducing the carbon emissions from node operators by a massive amount.
- Helps Secure the Blockchain. The more crypto staked on a blockchain, the more secure the network becomes. This collateral helps ensure trustworthy operators are running each validator note and makes the blockchain less vulnerable to attack.
Although staking offers a more “green” solution to cryptocurrency blockchain networks, there are some risks involved. Here are a few things we don’t prefer about crypto staking:
- Crypto Coins Are Locked up. When staking, the crypto is typically locked up for a period of time, up to multiple years. Staked coins cannot be transferred or sold when locked up.
- Governance Issues. Proof-of-stake networks offer voting controls to holders of the cryptocurrency on that blockchain, which means users may be able to exercise outsize voting rights by holding more tokens than others. This could cause an imbalance of power over the direction of a project, with large token holders having the ability to effectively veto proposals they don’t agree with, and push through their own proposals.
- Smart Contract Vulnerability. The smart contracts that govern the proof-of-stake network are programs written by humans and can be vulnerable to cyberattack. If hacked, your funds could be lost, or confidence in the project could be shaken, causing the price of the token to drop drastically (losing you money).
Can You Make Money Staking Cryptocurrency?
Yes, you can.
Although staking directly on the blockchain and becoming a network validator can be a bit complicated — and more expensive — most investors make money by joining a staking pool. These pools are available through cryptocurrency exchanges and platforms, allowing users to deposit smaller amounts with more flexible terms.
For example; Coinbase offers staking of several crypto through staking pools, including Ethereum 2.0, Cosmo (ATOM), and Cardano (ADA). Users can earn up to 5% APY (sometimes more) on staked crypto, with rewards deposited on a different set schedule per asset.
Staking Cryptocurrency FAQs
Staking crypto can be a great way to earn passive income with crypto, but it can get complicated. Here are the answers to some of the most common questions about crypto staking:
How Much Can I Make Staking Crypto?
Cryptocurrency staking offers various rewards, with more rewards available to users who stake the most on a given blockchain network. But when investing through an exchange or other cryptocurrency platform, the return is typically based on an annual interest percentage.
While some cryptocurrencies offer only over 2% or 3% APY for staking, others offer 15% APY or more, depending on the platform and asset. Still others, including DeFi platforms, offer up to 100% APY, but these tokens typically have a much smaller market cap and may be more volatile than some of the more popular cryptocurrencies.
What Cryptocurrencies Can I Stake?
Almost any proof-of-stake blockchain offers staking rewards. Some of the most popular coins include:
- Ethereum 2.0 (ETH)
- Algorand (ALGO)
- Cardano (ADA)
- Near Protocol (NEAR)
- Tezos (XTZ)
There are dozens of others available, and CoinMarketCap offers an extensive list of the most popular cryptocurrencies that offer staking.
How Do I Get Started Staking Crypto?
The simplest way to start staking crypto is through a cryptocurrency exchange that offers staking. Platforms like Coinbase and Binance.us offer staking rewards with a simple user interface. Here’s how to get started:
- Create an Account. Choose your favorite crypto exchange that offers staking and create an account. You may need to verify your identity before you can use the staking feature.
- Deposit or Buy Crypto. Once your account is created, you can choose which crypto you wish to stake, and either deposit it to the platform from your own wallet or purchase it directly through the exchange.
- Review Terms. Some exchanges offer flexible staking terms, meaning you can deposit and withdraw funds at any time. Others require a minimum lockup period. Review the terms of staking on the platform before committing your funds to staking.
- Collect Rewards. Once your crypto is staked, you will start collecting rewards. This typically happens on a set schedule, which can vary by currency. For example, Binance.us pays out rewards on a weekly basis.
What Is a Staking Pool?
A staking pool is a collection of user crypto funds that are used to “pool together” the resources of multiple parties to fund a proof-of-stake node validator. These funds increase the odds of earning block rewards for validators, and the rewards are shared with the pool of investors.
The pooled funds are locked into a smart contract, and rewards are distributed based on the percentage of the total pool an investor has contributed. Staking pools are typically more flexible than directly staking, and you can deposit and withdraw funds at any time. There may be a lockup period though, so always review the terms and conditions of any staking pool before participating.
Crypto staking is a great way to earn passive income with your cryptocurrency. If you currently own any proof-of-stake crypto or are looking to invest, staking can earn you additional yield.
Staking is not without risk though, and the lockup periods may cause investors to be stuck holding crypto that drops a significant amount in value. Locking up funds in crypto staking is probably best left to long-term investors who can risk losing the funds, and not traders simply trying to grab some extra yield.
Overall, if you are a long-term crypto investor with a strong belief in a given project, staking crypto can be a good investment.