Crypto Staking: What Is It, How It Works & Is It Profitable?

Key takeaways:

• Staking plays an essential role in the consensus mechanisms used to validate and process transactions on the blockchain.
• Staking is more energy-efficient and requires less effort than mining. To stake coins, individuals need a wallet that supports the process.
• Staking enables participants to earn rewards from holding certain cryptocurrencies which are typically a percentage of the amount staked.

This Is Cryptocurrency Staking Means

Cryptocurrency staking involves delegating tokens in wallets for a specific period to participate in the network's governance. Investors can earn cryptocurrency in return for holding the coins, verifying transactions, and contributing to the network's overall security. The staking reward is percentage-based on the number of tokens locked in and participating wallets. Staking cryptocurrency can offer yields between 0.5% and 12% APY.

The Reasons Investors Stake Their Crypto

Staking crypto does not require a lot of money or effort to get started which is a major reason why many individuals have turned to staking. Compared to mining, there is no complicated equipment or demanding energy required. With a low barrier for entry and good upside potential with staking rewards, people who decide to stake their assets can generate low-risk returns and potential asset price appreciation. To get started, read our full tutorial on how to stake cryptocurrencies.

Explaining How Crypto Staking Works

Coins that are delegated to a Proof-of-Stake network for a specific period of time are removed from the circulating supply and “put to work”. Participants that lock up their coins are known as “validators”. The coins that are delegated for staking will be randomly selected from the batch of locked funds. The validators are chosen to create a new block. Each time a block is added to the blockchain, new coins are created and distributed as staking rewards to the validator.

Is there a minimum for crypto staking?

Each blockchain will typically assign a minimum of tokens that need to be staked to become a validator and create a node. Some staking processes are more straightforward than others, as they can be staked either on one's wallet or by joining a staking pool using a cryptocurrency trading platform. For example, Ethereum and Chainlink require users to create a node to become network validators, with the former requiring a minimum of 32 ETH to operate a full node.

How are staking rewards calculated?

Staking rewards differ for each blockchain project and are generally calculated based on an APY or APR. The Annual Percentage Rate varies based on the total number of validators and coins staked on the network. Therefore, the more participants delegate their coins to the network, the lower the staking reward percentage rate for creating new blocks will be.

Staking in a pool differs from staking on an individual node. Staking calculators provide an estimate of the daily, monthly and annual pay-outs. However, it is important to consider that APYs are subject to change often. Metrics such as the demand for staking and the total amount of coins delegated will affect the staking reward payout.

How are the staking rewards distributed?

The staking rewards distributed to participants for their efforts in creating new blocks are based on the number of coins pledged. Staking participants who delegate larger amounts have a higher chance of being chosen as the next block validator.

Where are the staking rewards paid?

The staking rewards are paid out in the native currency a wallet is staking in. For example, participants who stake on the Cardano network will be paid rewards in ADA tokens. The higher the number of people who participate in a staking pool, the lower the pay-out. Thus, joining a new project that does not have many participants staking on the network can yield higher returns than already established pools.

Staking Crypto Can Be Worth It

Staking the best cryptocurrencies can be profitable and worth the effort. Projects that use the Proof-of-Stake model, such as Cardano, Tezos, and Cosmos, do not require a lot of money to get started. In addition, individuals who stake their coins with stable projects with potential upside can benefit from both staking rewards and asset price appreciation.

Staking is one of the best ways to make money with crypto because it removes the entry barrier and allows investors to start low-risk staking with a minimum amount. For example, Coinbase allows staking on several coins to earn up to 5.0% APY from as little as $1. Early investors can lock in high staking rewards by investing and staking in new projects that are in the development phase. There are fewer participants which results in high yields. However, there are certain risks to investing with coins at the early stage that should also be considered.

Crypto Staking Can Incur Loses

Staking crypto will generally provide a positive yield in a perfect environment but there are several instances where the investor can lose money. These can be the result of the staking protocol failing and the tokens being frozen and lost. More likely causes for losing money due to volatility, in particular with locked staking where the asset price can suddenly decline. The investor's assets will be locked within a fixed period and unable to sell to avoid further losses.

These Are The Main Risks of Staking Crypto

Staking cryptocurrencies requires users to lock up their cryptocurrencies for a specific period. During that time, funds cannot be withdrawn or sold. The biggest risks with staking crypto are due to malicious actions, offline nodes, failure to validate transactions and market crashes. With cryptocurrency markets being known for their high volatility, investors can incur substantial financial losses if prices suddenly decline due to either a market correction or a bear market. This means the staked coins could potentially be worth less than their market value at the beginning of the staking term.

Centralized cryptocurrency exchanges such as Binance, Crypto.com, Kraken, and KuCoin offer flexible staking arrangements. Staking participants can un-stake their coins at any time and withdraw the funds. However, the staking reward APY for flexible terms is less than that for a fixed term.

Where You Can Stake Crypto

The major global cryptocurrency exchanges support coin staking to earn rewards. Each crypto exchange allows different projects that can be staked, with varying payouts and terms. The team at Hedge With Crypto has put together a list of the best crypto staking platforms and wallets in the market to choose from.

Coins That Can Be Staked

The best coins for staking offer stable staking rewards, carry a low risk of failure, and are long-term projects with continuous development. Examples of good coins to stake include: Here is a list of the top choices to consider and which platforms are best to stake them on:

• Ethereum (ETH)
• Cardano (ADA)
• Binance Coin (BNB)
• Polkadot (DOT)
• Solana (SOL)
• Cosmos (ATOM)
• Algorand (ALGO)
• Tezos (XTZ)
• Shiba Inu (SHIB)
• Axie Infinity (AXS)
• Polygon (MATIC)
• Pancakeswap (CAKE)
• Cronos (CRO)
• Elrond (EGLD)
• Internet Computer (ICP)
• Near Protocol (NEAR)
• ThorChain (Rune)
• Tron (TRX)
• Aave (AAVE)
• Flow (FLOW)
• Mina (MINA)
• Fantom (FTM)

Yes, You Can Make Money With Staking

Staking generates a positive yield for participants who delegate their coins under a flexible or fixed-term arrangement. As there is no upfront capital expenditure or ongoing costs, staking crypto is a profitable way to earn a passive income. Crypto holders who believe in a project and have a long-term investment strategy can increase their holdings by staking their tokens even if the return is as low as 1.5% APY.s low as 1.5%. 

If the value of a project depreciates, investors who have staked their coins can benefit from a decrease in total staked value and an increase in the percentage rate. When the value of a project regains stability and momentum, participants who have staked coins could obtain higher gains from better staking yields and overall token capital gain. For a comparison of staking vs yield farming rewards, read this article next.

Staking Cryptocurrency Isn't 100% Safe

Cryptocurrency staking is safe as long as users have control of their private keys. Staking on the project's wallet or creating your server to run a node is ideal because individuals have control over their keys. However, much like any other crypto investment or interaction, software or human error risks leading to financial losses.

In contrast, staking on exchanges or in pools can be risky because the private keys to the particular cryptocurrency are held by the exchange and not the investor. There is a risk of loss of funds if the crypto exchange is hacked, the system goes offline or there is a KYC issue that prevents access.

Frequently Asked Questions

Conclusion

Staking is a new form of leveraging blockchain technology to generate a passive income that suits long-term investment strategies. The Proof of stake consensus mechanism benefits both market adoption as well as network usage. While Proof-of-Work requires a thorough step-up process, staking newer coins can be done on centralized, decentralized platforms and leading cryptocurrency wallets. In summary, cryptocurrency staking is an excellent way to invest in projects while increasing the token share by earning staking rewards.