To many, the concept of crypto staking might sound niche and technical. But it actually has many parallels with the legacy financial infrastructure. Staking is a process whereby the holder of crypto assets locks them within a certain ecosystem.
The assets are locked up and the owner is rewarded in the form of interest. This is very similar to what happens (or used to happen, more accurately), in a deposit account within the banking system.
But crypto staking builds on this as it has enhanced flexibility. Everything about cryptocurrency allows for more innovation and flexibility, so the owners have full ownership of the assets. This stands in stark contrast to the banking sector where you don’t really own your own funds.
Just What Is Crypto Staking?
Crypto staking can be done from an online exchange, or, in some instances, from a typical crypto wallet. It’s very simple to do, usually with just the click of a button. You will then receive rewards at fixed intervals, depending on the cryptocurrency in question.
Staking is only available on proof-of-stake blockchains. So, you can’t stake your Bitcoin, as this is a proof-of-work blockchain. Proof-of-stake and proof-of-work are both known as consensus mechanisms. There are various forms of consensus mechanisms and multiple variants, but we’re going to keep it simple for the purpose of this guide.
Only proof-of-work allows holders to attain a passive income from their holding. Proof-of-stake is generally accepted as being more environmentally friendly and a better consensus mechanism than proof-of-stake.
So, in a nutshell, crypto staking is a means whereby you lock in your crypto assets in return for specific rewards. You can stake practically any coin on a proof-of-stake network.
Rewards for Crypto Staking
Of course, the big question is how much is possible in the way of rewards? Right now, you actually pay to have your funds kept in a bank when all fees are accounted for. There is effectively a negative interest rate in place, though it is not advertised as such.
Crypto staking rewards differ greatly depending on the platform in question. It also depends on whether you are staking directly from a wallet, which will usually cut down on fees. Below are staking rewards for typical online providers.
Some platforms are simply better than others. Coinbase, for example, only allows 6 cryptocurrencies to be staked with a 25% staking fee and an average APY of 5%. This is extremely poor by staking standards.
However, it is also safer than other crypto staking options. As always, more risk does mean more reward if it pays off.
But Coinbase takes a 25% staking fee which is not justifiable in an industry priding itself on the elimination of third parties. Binance is much more flexible and allows the staking of over 100 cryptocurrencies, with an average APY of about 40% and no fee.
Generally, solid coins will allow you a return of
Of course, in the crypto sphere, people are eager to tell you all about gigantic APYs and making large sums of money in a short time frame. Most people have to lose all of their assets before they come to understand what is happening here.
Rule of thumb in crypto staking - Be sensible, not greedy. If it sounds too good to be true, it usually is. Staked coins are not infallible. It is possible to lose a staked investment. This is why you don’t always just want to focus on the highest APY.
The Different Types of Crypto Staking
Crypto staking can be done online or offline. Online is far more common. With an offline wallet, the funds are placed in ‘cold storage’. This means a wallet that is not connected to the internet. It’s a non-custodial solution that needs far fewer resources.
It’s also far safer as the funds are not exposed to potential cyber criminals. However, staking through your wallet is also quite safe, generally speaking.
One huge innovation in DeFi is that of liquid staking, which is offered by Ankr and other providers.
If you hold coins like ETH, FTM, MATIX, or AVAX, you can stake these through Ankr and also use the derivative tokens, along with other products.
Liquid staking is essentially where you can stake your coins but simultaneously receive a derivative token in return, such as aETHb for ETH. This allows for maximized yields and quite a lot of flexibility. You gain the rewards but can also use the token for other purposes, such as trading.
Crypto Staking - The Bottom Line
Crypto staking can sound complex, but the basic premise is quite simple. You are locking in tokens for a reward, with some risk. By doing research into your coins and your staking platform, you can maximize return and minimize risk.
If you do happen to be holding coins on a proof-of-stake blockchain, it makes sense to stake through a reliable ecosystem and gain rewards. Coins like MATIX, ETH, DOT, and XTZ are relatively safe and established, and could easily represent the future of world finance.
Rewards of 4% - 8% will compound year on year and these rewards are simply not available through the legacy financial system.
Innovations like liquid staking add to the mix considerable as you can maximize yields even further, for impressive long-term results. The quicker you start, the better the compound interest, given time.