How to stake your cryptocurrencies
Want to earn passive income with crypto through staking? Here’s how that works.
By Anna B Kiwanuka
While the Bitcoin network is secured by mining, many newer cryptocurrencies use an alternative consensus mechanism known as proof of stake (PoS). This involves users staking their cryptocurrency, and pledging their crypto assets to the network to help the blockchain validate transactions.
But staking isn’t just an altruistic act to benefit the network. In exchange for staking, you get rewards, often in the form of the cryptocurrency you have staked.
Here is how you can get started as a crypto staker.
Blockchains are basically databases of transactions with no central authority to maintain them.
To solve the problem of securely validating transactions, proof of work (PoW) blockchains like Bitcoin rely on mining, powerful computers competing to solve cryptographic puzzles. But mining requires expensive hardware and high consumption of electricity, so it’s not accessible for most people.
Proof of stake networks like Cardano and Ethereum replace all that with a mechanism of funds commitment known as staking.
Essentially, proof of stake involves selecting validators based on how much cryptocurrency they hold in their node. This crypto can either be staked by the validator themselves or delegated with their node by other users.
Just like miners are rewarded with crypto for the work they have performed, the validator gets rewarded with crypto when they stake crypto. Anyone who delegates crypto to the validator also gets a portion of the rewards, based on how much they’ve staked.
Staking can be a financially attractive option for crypto investors who hold rather than day-trade assets, however small they might be. The great thing about staking is, while it might be underpinned by complex mathematics, actually staking requires very little technical knowledge.
Which cryptocurrencies can you stake?
Here are the top five ranked by market cap, with their average yield rates.
- Ethereum (ETH): 4.1%
- Cardano (ADA): 3.24%
- Solana (SOL): 6.5%
- Polygon (MATIC): 6.5%
Yield rates vary across platforms and may change depending on the number of validators active in the network.
Ways of staking
Broadly speaking, there are two ways of staking.
The first is as a validator, running your own node. This method requires a bit of bootstrapping. You need to have a secure and stable technical infrastructure and the expertise to run a validator node yourself. The minimum amount of coins required to stake is often relatively high, too. To become an Ethereum validator, you need to have a minimum of 32 ETH.
But more commonly, staking is done via delegation, that is to say, you delegate your coins to a validator that has the appropriate set-up. Validators will do the hard work of maintaining a node for you, in exchange for a commission taken off your staking rewards.
The second is called staking-as-a-service (SaaS).
Some of the major SaaS companies include:
- Figment Network
- Stake Capital
It’s important to note that delegating coins doesn’t mean you’re transferring custody of them to a validator. You keep custody of your assets at all times.
Typically, you don’t have to do anything about your rewards because they are automatically reinvested. Some staking platforms allow you to opt out of that if you somehow don’t like the idea of your rewards compounding.
The future of staking
The convenience of not having to leave cryptocurrency exchanges to participate in staking has made it a popular choice for less technically savvy crypto users, or those with sufficient holdings.
One reason is a general trend in crypto toward proof of stake, fuelled by criticism of proof of work for its impact on the environment. It’s also easier to bootstrap and scale a new network on proof of stake.