Earn rewards on your cryptocurrency by putting it to work on the blockchain.
“Staking” is a means of buying crypto in order to keep and hold (or “hodl“) it. The simplest possible explanation for what “staking” your crypto is to compare it directly to keeping your money in a high-interest savings account. You put your staking-compatible crypto in a cryptocurrency wallet that earns you a passive interest rate over time. This might require a bonding period. Once your crypto has successfully bonded, it will be viable for staking under the “Proof of Stake” process.
Still confused? Find out everything you need to know below.
Proof of Stake vs Proof of Work
Proof of Work (PoW) and Proof of Stake (PoS) are both means of verifying cryptocurrency. Because of the decentralised nature of cryptocurrency, it requires a consensus mechanism, such as PoW or PoS, in order to be produced.
A consensus mechanism is something that allows networks of nodes and application servers to successfully and securely work together.
Proof of Work
You might’ve heard of PoW in regards to Bitcoin’s mining process. PoW is a data solving problem that facilitates the mining of cryptocurrency, such as Bitcoin.
PoW is a means of adding new blocks of transactions to a cryptocurrency’s blockchain. This work requires generating a 256-bit number, or a “hash” that matches the current block’s target hash, which identifies it. Miners who succeed in solving these computational maths problems in order to generate this number are rewarded with a block of bitcoins.
PoW is a complex, labour intensive and energy resource consuming process. Mining requires extremely powerful computers that need to run constantly in order to generate a sufficient number of hashes to find the right combination. This uses vast amounts of electricity annually – more than some entire countries produce in the same timeframe.
Proof of Stake
PoS, on the other hand, is different form of consensus mechanism. It is a forging process that involves minting new coins, as opposed to mining them. To mint the new coins, staking compatible coins belonging to various owners are held in wallets on the blockchain. The transactions of the coins are verified when a PoS protocol chooses a validator node to review the block. If the transactions in question are all accurate, they add a block to the blockchain.
Once a new block has been added to the blockchain, the owners of the stakes coins receive crypto rewards for their contribution. The owners of active wallets are rewarded with roughly 10% of the value of the distributed coins. How much each owner receives will depend on the value of their stake and the rewards in question.
PoS is a much more energy efficient means of verifying cryptocurrency. This is because it requires much less electricity than mining. Staking can for instance be run from a simple home desktop or laptop computer.
Which cryptocurrencies are compatible with staking?
Cryptocurrencies that are currently compatible with staking include:
How much can I earn by staking crypto?
How much you can earn from staking crypto is based on a number of factors. These can include how much crypto you have, where you’re staking the crypto, what coins you have and the performance of those coins in a year.
Some of the larger cryptocurrencies, such as ETH, ADA and DOT average an annual return from 5% to around 20%. Some of the smaller cryptocurrencies, however, can make upwards of 20% per year, and sometimes even as high as 100%.
Is there any risk involved with staking?
Staking is generally considered to be a low-risk method of making a passive income on your crypto. That being said, this doesn’t make it completely risk-free. These risks include:
- Validator faults. If the validator node that reviews the block finds inconsistencies with the transactions in the wallet(s) where your staked crypto is being held, you may lose some of your assets (or simply not earn money from them).
- Hacking and breaches. If your wallet gets hacked, you could lose some, or all of your crypto.
- Volatility. Crypto prices are notoriously volatile and can shoot up or down rapidly. If the crypto that you have purchased goes down in value, it will ultimately reduce its worth, losing you money.
How to stake crypto
There are 3 easy steps to staking cryptocurrency:
- Choose a coin. You must first do your research on the best staking crypto for your goals. Once you’ve chosen, you need to then purchase the desired amount. In order to do this, you must first learn the minimum staking requirement for that currency. For example, ETH has a minimum staking requirement of 32 ETH. At the time of writing this article, that equates to about $134,324 AUD.
- Download the wallet for the desired coin. Compare crypto wallets and choose one in which to store your coins for staking. This could require you to go directly to the main website of your specific chosen crypto and downloading its corresponding wallet.
- Choose your hardware. Staking crypto requires you to have a 24/7 uninterrupted internet connection. While your run-of-the-mill desktop computer may be up to the task, this might be a less cost effective and environmentally friendly piece of hardware than others, due to the heavy electrical consumption. Therefore, it’s worth doing your research into what hardware could work best for you.
Once you’ve achieved all of the above, you can start to stake your crypto.