Staking is a way to make money from your idle Proof-of-Stake (PoS) cryptocurrency without trading while getting genuinely involved with its network. By staking, you are locking up your PoS collateral in exchange for actively partaking in verifying transactions and creating new blocks. As such, you're becoming an honest participant in the network since you have a stake to lose if you are not. Staking secures the network, backs the price of its native token and contributes to decentralization. In exchange for the stake, you receive staking rewards or percentage yield, typically in the same coin, paid regularly and almost always higher than any interest rate of traditional savings accounts or payments on treasury bonds.
Also, it is important to point out that there are no guarantees when it comes to staking, just like there are no guarantees in crypto trading or stock investing, for that matter. This article breaks down the steps for starting staking if you can handle some risks.
1) Determine how to stake
Bear in mind that validating transactions is more complex and time-consuming if you run your own node or easier and safer if you host your node with a reliable provider. You can also delegate your stake to a validator and save the time and money required for special staking hardware, software, maintenance, and extensive expertise.
2) Decide on your staking goals and risk tolerance
Your staking goals can be short or long-term with varying degrees of risk. Some PoS protocols require substantial collateral with prolonged staking periods and moderate yield, but these might be established or less risky networks, solving real problems and spurring innovation.
Newer PoS blockchains may be riskier but generate hefty APR with shorter staking duration requirements and unbonding periods which is how quickly you can withdraw your stake from the network. There is no general rule, however. Every PoS protocol is different and should be well-researched before staking.
3) Choose where to stake
Next, it's time to choose where to stake. Your options include centralized exchanges and custodial platforms or decentralized exchanges (DEXs) and non-custodial staking platforms. The main difference between centralized and decentralized exchanges comes down to control.
Centralized entities offer staking services for an unclear percentage of your rewards in exchange for complete control of your digital assets. In addition, your staking rewards are often lower, sometimes substantially, than rewards from DEXs or non-custodial entities for the same protocol.
Yet, it is the easiest type of staking.
Non-custodial staking platforms, on the other hand, have no access to your digital funds. They provide node hosting or delegation services for a fixed monthly payment or commission fee. The more reputable platforms are invested in maximizing their members' staking rewards. And their intuitive UX and UI make staking simple, fast, and efficient. You are more involved with a non-custodian, more vigilance is required since you are in control over your assets, but the rewards are greater. So, it's something to consider.
4) Invest in a hardware wallet
Please invest in a hardware wallet if you decide to stake on a non-custodial platform or DEXs. Keeping your assets in a hardware wallet is generally a good practice, especially if you are just holding. Your goal is to secure your funds, making it very hard for someone to steal even if you lose the physical device. Plus, staking is fully integrated with some hardware wallets, so it's a question of necessity if you are your own custodian.
5) Select the right validator
When you use custodial services, you don't have a say in where your stake goes, nor do you know. But when delegating on your own, selecting a trustworthy validator will ensure the safety of your stake and reward. Slashing or loss of funds and jailing or loss of rating and subsequent staking rewards occurs when a validator misbehaves. Again, proper research will help avoid such validators.
You are looking at reliability, reputation, and rates, of course. A reliable validator is always online, measured by uptime. An uptime of 99.9% SLA or higher is desirable. You can infer a validator's reputation through reviews, valid and ongoing online presence, and other publicly disclosed information. If hosting your own node, look for reasonable monthly fees that align with your node's infrastructure requirements. And if delegating, look for commission fees between 0 and 10% but keep in mind that zero percent is not forever, and validators reserve the right to increase their node operating fees at any time.
6) Learn to auto-compound!
The compounding effect is the ultimate way to accumulate higher profits from staking rewards. It is a reward on the initial staked amount that has collected staking rewards or interest on interest. The more you auto-compound, the higher your return.
Automated auto-compounding is possible for some protocols on decentralized applications (DApps) and selected non-custodial staking platforms. Manual auto-compounding is available for most PoS protocols but requires more involvement. Nevertheless, it is entirely worth learning about.