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As investors dive deeper into the world of cryptocurrencies, more of them are asking things like, "What is staking crypto?"
It's a very good question, because crypto staking is one more way to add to your crypto profits while taking on scant additional risk.
The returns aren't huge - your returns typically will range anywhere from 1% or 2% up to 10% to 12% or more, although a few are up around 25% to 30% or even higher. Most staking cryptos have annual percentage yields (APYs) that fall between 4% to 10%.
These gains are on top of whatever gains you receive from an increase in the price of the cryptocurrency itself. In that sense, it's similar to a dividend yield on a stock.
That's why staking cryptocurrencies should appeal to investors who covet fresh sources of passive income.
And if you're already investing in crypto, staking rewards is just a way to put your money to work while you wait for the token to reach your target price. You're basically getting paid to park your money.
Also note that staking is separate and distinct from the interest-bearing accounts offered by crypto companies like BlockFi, Nexo, and Celsius.
Below we answer all your questions about staking - what it is, how it works, where you can do it, and more.
What Is Crypto Staking?
Crypto staking involves committing some or all of a particular crypto you hold to help validate transactions on as well as maintain that crypto's blockchain network. Usually your crypto must be "locked" on the network for as long as you keep it staked. The staking reward is an incentive to get as many people as possible to participate in the operation of the network. Having more participants increases decentralization and makes the network harder to attack.
Can You Stake Any Crypto?
No. You can't stake Bitcoin, for example, because it uses a different method of validating its transactions called "proof of work." That method involves miners who use expensive hardware to compete for the right to mine a block and earn the reward. You can only earn staking rewards from cryptocurrencies that use the "proof of stake" method of validating transactions.
What Is Proof of Stake?
Each staking cryptocurrency has slightly different rules, but mostly follow the same general principles. When you stake your crypto, you earn the chance at validating a block and earning the reward. Usually the bigger your stake, the more likely you are to get assigned a block. The "winner" validates the block then sends it out to the network for the other validators for confirmation. Participating validators receive a reward proportional to the size of their stake.
How Does Staking Crypto Work?
Few retail investors will have enough crypto or expertise to be a validator. Instead, you stake your crypto in a "pool" operated by a validator. The act of staking itself is a very simple process. In most cases, you're just clicking on a button or two in a wallet app. However, it often takes several days and in some cases several weeks for the stake to become active and pay rewards. But you don't have to worry about any of the mechanics involved in being a proof of stake validator. The pool operator does all that. Most staking cryptocurrencies pay out at regular intervals, known as epochs, that last several days (the exact interval varies with each crypto). Each pool operator forwards the staking rewards to participants at the end of each epoch. Your share is proportional to the size of your stake.
Where Do My Staking Rewards Go?
Your rewards are paid in the same crypto that you stake. Because of that, most staking rewards are deposited directly into the wallet from which you initiated your stake. In some cases, the rewards are free for you to spend. In others, the reward crypto is added to your locked stake, so that in the next epoch you earn rewards on the higher total, just as you would in a compounded interest account.
What Are Some Examples of Staking Cryptos?
There are more than 200 staking cryptos to choose from, although most should be avoided. Here are some of the top choices, along with recent APYs:
- Algorand (ALGO) - 5.43%
- Cardano (ADA) - 6.22%
- Cosmos (ATOM) - 31%
- Ontology (ONT) - 17.68%
- Polkadot (DOT) - 11.93%
- Solana (SOL) - 6.52%
- Tezos (XTZ) - 10.67%
Can the APY Change?
Yes, the APYs are rather fluid, though they usually don't change too drastically. Each network has different rules that can affect APY. Often the reward you get in each epoch fluctuates depending on how lucky/proficient your mining pool was.
How to Choose a Staking Crypto
Investors looking to buy a staking crypto should use the same criteria they would use when buying any other crypto. Crypto expert Nick Black's "Five T's" method is a great way to figure out if an asset is worth owning. They include Team (the developers who created the token), Technology (whether the token is well-designed and frequently updated), Tokenomics (the total number of tokens as well as how they are created and distributed), Timing (whether the token is going to take too long to fully develop), and "Why Token" (whether the token is actually necessary).
Where Can I Stake Crypto?
You have lots of options here. Some staking cryptos have proprietary wallets you can download. The Cardano wallet, Daedalus, has staking built right in and even ranks the staking pools to make it easier to pick one. Several multi-asset wallets, such as Exodus and Guarda, support most of the top stakable coins. You can also stake crypto through an exchange. Coinbase, Kraken, and Binance.US all allow staking of crypto assets on their sites. Finally, you can stake crypto via some hardware wallets, such as Ledger and Trezor.
How Do I Unstake My Crypto?
Unstaking is just as straightforward as staking. You go to the place where you staked the crypto originally, and with a click or two, your crypto will be unstaked. Be forewarned, however, that some cryptos can take anywhere from several days to several weeks to complete the process - during that time your crypto is still locked and can't be moved or spent. The exact length of time depends on the specific crypto.
What Are the Risks of Staking Crypto?
The risks of staking crypto are pretty much the same as owning crypto. That is, investing in cryptocurrencies at all is inherently riskier than almost any other type of investing. Aside from that, there is a slight risk that your staked crypto could be lost if the network is hacked or suffers some sort of technical failure. The odds of that are low and can be reduced further by choosing high-quality cryptos. One other issue is that you won't be able to sell your staked crypto in the event of a widespread crypto market crash. On the other hand, that could just save you from panic selling an asset that would later rebound.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.