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Guide to Crypto Staking: What It Is, How It Works, and How to Get Started

By Samuel Becker · September 20, 2022 · 8 minute read

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Guide to Crypto Staking: What It Is, How It Works, and How to Get Started

Generally, when investors contemplate investing in cryptocurrencies, they think about either mining crypto or purchasing it outright on a crypto exchange. But crypto staking—or staking coins, as it’s often called—is another viable alternative for the crypto-curious to get assets in their crypto wallets.

While “staking” may be a relatively new addition to the financial lexicon, it’s important for those interested in crypto investing to understand what it is, how it works, and what cryptocurrencies it can be used to obtain.

Crypto staking may feel like it’s a step beyond simply learning how to buy Bitcoin or how a crypto exchange works, but learning about cryptocurrency staking can broaden your knowledge, making you a more informed investor.

This article will run through it all, from staking basics to the platforms investors can use for staking coins.

What Is Staking in Crypto?

Crypto staking is the process of locking up crypto holdings in order to obtain rewards or earn interest. Cryptocurrencies are built with blockchain technology, in which crypto transactions are verified, and the resulting data is stored on the blockchain. Staking is another way to describe validating those transactions on a blockchain.

Depending on the types of cryptocurrency you’re working with and its supporting technologies, these validation processes are called “proof-of-stake” or “proof-of-work.” Each of these processes help crypto networks achieve consensus, or confirmation that all of the transaction data adds up to what it should.

But achieving that consensus requires participants. That’s what staking is—investors who actively hold onto, or lock up their crypto holdings in their crypto wallet are participating in these networks’ consensus-taking processes. Stakers are, in essence, approving and verifying transactions on the blockchain.

For doing so, the networks reward those investors. The specific rewards will depend on the network.

It may be helpful to think of crypto staking as similar to depositing cash in a savings account. The depositor earns interest on their money while it’s in the bank, as a reward from the bank, who uses the money for other purposes (lending, etc.). Staking coins is, then, similar to earning interest.

Recommended: Proof of Stake, Explained

How Crypto Staking Works

For the investor, crypto staking is a passive activity. When a crypto investor stakes their holdings (in other words, leaves them in their crypto wallet), the network can use those holdings to forge new blocks on the blockchain. The more crypto you’re staking, the better the odds are that your holdings will be selected.

Information is “written” into the new block, and the investor’s holdings are used to validate it. Since coins already have “baked in” data from the blockchain, they can be used as validators. Then, for allowing those holdings to be used as validators, the network rewards the staker.

How Crypto Staking Works

Crypto Staking: Advantages and Disadvantages

Here are some pros and cons of staking crypto.

Advantages

•   Less energy-intensive. PoS networks use much less energy than PoW platforms. Each mining machine requires a constant supply of electricity and consumes much more power than a regular computer. But you can also run validator nodes on an average computer.

•   Easier to earn rewards. Crypto staking and mining rewards can be much different. Almost anyone can stake a small amount of crypto on a crypto exchange and earn some kind of yield. To become a miner, however, often requires a much bigger commitment. First, you’d need to acquire the proper computer, which can be costly; then you’d need to learn to use it, which can be time-consuming.

•   No special equipment required. Anyone can become a validator using a regular computer, assuming they have enough money and can keep the node running constantly. By contrast, mining requires specialized hardware.

Disadvantages

•   Questionable security. PoS is relatively new compared to PoW. Developers and users have had less time to test it, and its security capabilities are not totally proven. While a high hash rate provides a wall of encrypted energy to protect PoW networks, it’s not clear exactly how PoS networks are similarly secured. In theory, an adversary with the right amount of resources could take control of a PoS network rather easily.

•   Potential for takeover. PoS networks can be controlled by those who hold the most tokens. While attacking a PoW network would involve acquiring large amounts of computing power, attacking a PoS network requires only one thing: money. Moreover, PoS coins are pre-mined, meaning that the entire supply is created at once by a few people. Users need to trust that the core developers didn’t keep many coins for themselves, or that an outside third-party won’t acquire enough coins to take control of the network. Further, it is common knowledge in the industry that founders of crypto projects regularly give many pre-mined coins to insiders.

•   Increased centralization. The creator(s) of blockchain technology intended for blockchains to be decentralized. But in some cases, PoS networks can wind up becoming more centralized because becoming a validator can be more expensive than becoming a miner. Ethereum (ETH), for example, plans to change from PoW to PoS. To become an ETH validator would require 32 ETH, or about $51,000 as of July 2022. Many centralized exchanges have chosen to become validators of PoS coins to share staking rewards with their customers.

Crypto Staking Advantages

Crypto Staking Disadvantages

Low energy usage Uncertain security
Easier to earn rewards Potential for takeover
No special hardware needed Increased centralization

Just a few years ago, the entire concept of proof-of-stake consensus was still relatively new, and options for staking coins were few and far between.

A growing number of projects are utilizing PoS and some exchanges are making it easier than ever for users to earn crypto by staking their coins.

Here is a list of common proof-of-stake coins, along with annual average yield, expressed as a percentage of the amount of cryptocurrency staked.

1. Ethereum (ETH)

Ethereum (ETH) has become one of the most popular cryptocurrencies on the market—although it is not exactly a cryptocurrency itself. Staking Ethereum on your own will require a minimum of 32 ETH. Rewards vary, but it’s expected that the rate of return on Ethereum staking is 5-17% per year.

2. EOS

EOS is similar to Ethereum in that it’s used to support decentralized programs. EOS tokens are native to the EOS blockchain, and like other cryptos, can be staked to earn rewards. The expected rate of return for EOS staking is about 3%.

3. Tezos (XTZ)

Like EOS and Ethereum, Tezos (XTZ) is an open-source blockchain network with its own native currency, with a symbol of XTZ. And it, too, can be staked on certain platforms and networks. The current expected rate of return for Tezos staking is around 6%.

4. Cosmos (ATOM)

Cosmos (ATOM) calls itself the “internet of blockchains.” The team behind the project hopes to bring different blockchains together, allowing them to transact with one another. This idea is known as “interoperability.”

Coinbase, Binance, and Kraken support ATOM staking.

ATOM staking yields about 21% annually.

5. Cardano (ADA)

Cardano is a smart-contract platform much like Ethereum. But Cardano is a multi-layered platform, with one layer for the transaction of the ADA coin (the digital currency that fuels the Cardano proof-of-stake network) and another layer for the development of decentralized applications (dApps).

Cardano prides itself on using scientifically tested theories based on peer-reviewed research for its development.

ADA staking has had yields of up to 4%.

6. Polkadot (DOT)

Polkadot is a newer cryptocurrency, created in August 2020. Similar to Cosmos, Polkadot hopes to provide interoperability, and is designed to support “parachains,” or different blockchains created by different developers.

The Kraken crypto exchange supports staking for DOT.

DOT staking yields about 15% annually.

Investors would do well to remember that while these above yields may sound high when compared to traditional financial markets, the risk is also quite high, as the coins could quickly lose value.

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How to Stake Crypto in 5 Steps

To start crypto staking, an investor needs to decide where and what they want to stake. Here are five simple steps to get started.

Step 1: Choose a crypto or coin to stake

To begin staking cryptocurrency independently, a user would have to decide which coin they want to stake and buy their cryptocurrency of choice.

Step 2: Learn the minimum staking requirements

ETH, for example, requires a minimum of 32 ETH (worth about $47,000 at the time of writing) for users to begin staking.

Step 3: Download the software wallet for the desired coin

Choose and download a crypto wallet in which to store your coins for staking. That may mean going directly to the specific crypto’s main website and downloading its corresponding wallet.

Step 4: Figure out what hardware to use

To stake crypto, users need a constant, uninterrupted internet connection. A standard desktop computer will likely do the job, although a Raspberry Pi might save on electrical costs.

Step 5: Begin staking

Once the hardware has been chosen and the software wallet downloaded, a user can get started staking cryptocurrency.

Tip:The native tokens of the Tezos and Cosmos networks can be staked automatically when a user holds those coins in a wallet hosted by Coinbase, for example.

For those holding the appropriate crypto in an exchange-hosted crypto wallet, the exchange handles all the staking on the backend, and users simply have to hold the crypto in their wallets.

Where to Stake Crypto

There are numerous platforms that allow users to start staking coins, and quickly.

There are big-name platforms that most crypto investors are probably familiar with, including Coinbase and Kraken, which allow users to stake coins. On exchanges like these, investors must opt in to staking in order to benefit from rewards.

Enterprising stakers could also look at “staking-as-a-service” providers—which specialize in staking, rather than exchanging. Examples of those platforms include MyContainer, Stake Capital, and Staked.

It’s important to note that each of these platforms will have different offerings, rules, and fees. It’s worth the time spent researching a few to make sure your goals align with a certain platform before you jump in.

Is Crypto Staking Profitable?

Anyone can earn crypto by staking cryptocurrency. But unless someone is sitting on a huge stash of proof-of-stake coins, they’re not likely to get rich from staking.

Staking rewards are similar to stock dividend payouts, in that both are a form of passive income. They don’t require a user to do anything other than holding the right assets in the right place for a given length of time. The longer a user stakes their coins, the greater profit potential there will be in general, thanks to compound interest.

But unlike dividends, there are a few variables particular to proof-of-stake coins that influence how much of a staking reward users are likely to receive. Users would do well to research these factors and more when searching for the most profitable staking coins:

•   How big the block reward is

•   The size of the staking pool

•   The amount of supply locked

Additionally, the fiat currency value of the coin being staked must also be taken into account. Assuming this value remains steady or rises, staking could potentially be profitable. But if the price of the coin falls, profits could diminish quickly.

The Takeaway

Staking is a way to use your crypto holdings or coins to earn additional rewards. It can be helpful to think of it as along the lines of generating interest on cash savings, or earning dividends on stock holdings.

Essentially, coin holders allow their crypto to be used as a part of the blockchain validation process, and are rewarded by the network for the use of their assets. For crypto investors, staking can open up another potential avenue to generating returns.

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