The Beginner’s Guide to Crypto Staking
What is staking and how can you earn crypto through it? Here’s how to get started.
Over the past few years, you may have heard that crypto investors have started staking their cryptocurrency to earn a greater return on their investments. But you may wonder: What is staking, anyway? How does it work? Is it safe, and is it profitable?
If you’ve wondered questions like these, this article is for you. I’m going to cover all the basics of crypto staking, including addressing the above. I’m also going to explain how you can get started staking crypto.
Let’s begin with a basic explanation of what staking is.
What Is Crypto Staking?
Crypto staking is the process of locking up cryptocurrency in a smart contract to help secure a Proof of Stake (PoS) network. If you stake your cryptocurrency, you receive rewards in the form of newly minted coins.
The simplest and easiest way to get started staking cryptocurrency is to delegate your coins to a validator. The other option is to become a validator yourself.
I’ll explain how both of these work. But let’s start with validating.
On a crypto network, there is no company or centralized authority that controls the network. Instead, the network is run by independent operators who set up servers called “validator nodes.”
FYI: Validator nodes are spread all across the world and are in the hands of many different people so that no one company or group controls them all.
On a PoS network, practically anyone can run a validator node. You don’t need a specialized “mining” computer that can guess random numbers thousands of times per second. Instead, you can just use a regular PC to help process transactions.
If you don’t own a good enough computer, you can even run a PoS node on a cloud-computing service like AWS or Microsoft Azure.1
When you run a node, you perform a valuable service for the network’s users, and the network pays you for this job by allowing you to mint new coins for yourself each time you process a set of transactions. These new coins are called your “staking reward.”
There is one big catch though: In order to run a node, you have to own a certain minimum amount of the network’s cryptocurrency. And this crypto has to be put into a special smart contract and locked inside of it until you stop validating.
FYI: This crypto you lock up when you start validating is called your “stake,” and locking it up is called “staking” your crypto.
The reason why you have to provide a stake is to make sure that you’re not trying to commit fraud as a validator.
I’ll talk more about this in the “risks of staking” section in a bit. But if you alter the software to make it process fraudulent transactions, you can lose all of your stake. You can also lose some of your stake if your server goes down for a long time and you’re unable to process transactions.
So that’s why staking exists. It’s essentially collateral that you’re required to provide if you’re a validator, just to make sure you stay honest and reliable.
You need to stake the minimum amount to be a validator, but you may want to stake more than this.
The more you stake, the more you make
If you stake more than the minimum amount of crypto, you get chosen more often to process transactions. This means that you earn more staking rewards. So the staking rewards are a percentage of the amount staked. The more crypto you stake, the more crypto you make.
Pro Tip: Are you just getting started with crypto? You may want to check out my complete guide to investing in crypto safely.
Now let’s talk about delegating.
A lot of crypto investors want to earn staking rewards, but they may not want to go through the trouble of configuring a validator node, or they may not have enough crypto to meet the minimum requirement to be a validator.
This is where delegating comes in. If you don’t want to or can’t run your own validator node, you can delegate your crypto to someone else’s node. The node will charge you a small fee to cover its costs, but the rest of the rewards that your stake generates will go to you.
Aside from running a node yourself, delegating is another way to stake your crypto and earn staking rewards.
I’ve mentioned that staking is done on PoS networks, but I’ve not defined what that means yet. So in the next section, I’ll discuss what PoS is.
What Is Proof of Stake?
Proof of Stake, or PoS for short, is just the term used to describe a crypto network that allows staking.
On a PoS network, validators need to lock up some cryptocurrency to use as collateral to make sure that they don’t break the rules. The more they lock up, the more they get chosen to process transactions.
PoS vs. Proof of Work
PoS is completely different from Proof of Work (PoW). On a PoW network like Bitcoin or Dogecoin, validators have to invest in powerful mining computers that are capable of producing hashes thousands of times per second. The more computers a particular person controls, the more often he or she will be chosen as a validator.
This process of producing hashes is called “mining.” PoS networks don’t allow mining, and they don’t give an advantage to a validator that operates more computers.
Pro Tip: If you would rather mine crypto instead of staking it, we’ve published a guide to crypto mining to help you get started.
So that’s what PoS is. It’s a method of choosing validators based on the sizes of their stakes instead of the power of their computers.
Now let’s talk about the most important question about crypto staking: Is it profitable?
Is Staking Crypto Profitable?
Staking cryptocurrency is almost always more profitable than buying and holding it. When you buy and hold a coin, you only make money if you sell the coin later, at a higher price. But if you stake the coin, you can also make money from the staking rewards you receive.
Most staking coins pay at least 4 percent per year rewards, and some pay up to 14 percent.
Considering that most savings accounts only pay 1 percent or less, staking crypto gives pretty good returns compared to other options.
But there are definitely some risks to staking as well. I’ll go over those next.
FYI: If you receive staking rewards, the IRS expects you to report it as “property received” on your tax return. I’ve written an analysis of crypto regulation in the U.S. to explain this and other crypto regulatory issues.
Risks of Crypto Staking
Crypto staking can give some pretty crazy yields. But before jumping in, you should be aware that it carries some risks as well. Here are a few things that can go wrong when staking.
- You lose all of your stake. The most serious risk is that you could lose all of your stake. If you delegate your coins to an unscrupulous validator node, you could lose everything you’ve invested.
To be fair, losing your stake in this way is a pretty hard feat to pull off. In fact, in all of my research, I’ve never found a single person who has testified that they lost all of their stake from a dishonest node. In general, staking nodes don’t try to commit fraud, since it’s nearly impossible to get away with.
Still, it is possible to lose all of your stake if you delegate it to a malicious node. So this is one of those crypto pitfalls to avoid.
- You lose some of your stake. Another risk to staking is that you could lose some of your crypto, but not all. The most obvious way this can happen is if you delegate to a node that has faulty equipment or poor internet service.
This could also happen if you yourself are a validator with poor service.The easiest way to minimize this risk is to either delegate to nodes that have a reputation for high uptime or run your own node and ensure that you have quality internet.
- The price of your crypto falls. For most stakers, this is the biggest thing to worry about. If your crypto falls in price faster than your staking rewards pay out, you could end up worse off by the time you sell. For example, if you stake Polkadot (DOT) at a 14.5 percent/yr. rate of return, but DOT falls in price by 25 percent over the course of the year, you’ll be worse off by 10.5 percent if you sell at the end of the year.
Still, a falling price is a risk with any crypto investment. So this isn’t a risk that’s peculiar to staking.
Overall, staking is fairly safe compared to just holding crypto in a wallet.
Did You Know: If used correctly, a wallet is an extremely secure way to hold crypto. This is because it doesn’t use usernames or passwords. For a deeper dive on how a wallet works, check out my beginner’s guide to crypto wallets.
At this point, you may be wondering which cryptos can be staked to earn a return. So I’ll list some of the top staking coins in the next section.
The Best PoS Coins
Here is a table with some of the top staking coins, along with the yields they pay out and the minimum stake.
The yields below can vary over time based on the number of people staking and other factors. So these numbers are meant to give only a rough idea of the difference in yields between coins.
|Coin||Staking rewards rate||Minimum stake for a validator|
|Binance Coin (BNB)||8.49% for 30 days, 12.49% for 60 days, or 16.49% for 90 days lockout||10,000 BNB; plus you have to be one of the top 21 stakers|
|Cardano (ADA)||4.6%||No minimum, but you’ll be chosen to validate more often if you stake more|
|Solana (SOL)||1.47%||No minimum, but you’ll be chosen to validate more often if you stake more|
|Polkadot (DOT)||14.66%||10 DOT|
|Avalanche (AVAX)||9.37%||2,000 AVAX|
|NEAR Protocol (NEAR)||5.44%||Must stake more than the seatPrice threshold or 67,000 NEAR, whichever is greater|
|Algorand (ALGO)||2.76%||No minimum, but you’ll be chosen to validate more often if you stake more|
|Flow (FLOW)||9.03%||135,000 FLOW|
|Cosmos (ATOM)||17.83%||Must be one of the top 150 validators in terms of stake size|
|Elrond (EGLD)||13.97%||2,500 EGLD|
|Harmony (ONE)||8.11%||10,000 ONE|
|Fantom (FTM)||4.96%-15.18%, depending on how long you lock up your stake, from 14 to 365 days||500,000 FTM|
FYI: You can find out more about Harmony, Fantom, and Avalanche, and other great cryptos in our list of the best cryptocurrencies.
Once you’ve figured out which coin you want to stake, you’ll need to choose a wallet.
The Top Crypto Wallets for Staking
If you want to stake cryptocurrency, you’ll usually need to withdraw it from your exchange and into your wallet. But not all wallets allow staking with every network. So here are the best staking wallets to use for each network.
In this list, I’ve tried to focus on wallets that allow you to choose your validator and/or have low fees.
- Binance Coin: Trustwallet
- Cardano: Daedalus, Yoroi, CCVault
- Solana: SolFlare, Phantom
- Polkadot: Polkadot.js, Fearless, Ledger Live
- Avalanche: AVAX web wallet
- NEAR: NEAR wallet
- Algorand: MyAlgo wallet, Exodus
- FLOW: Blocto, Ledger Live
- Cosmos: Kepler, Cosmostation
- Elrond: Elrond wallet
- Harmony: Metamask or Ledger Nano, connect at staking.harmony.one
- Fantom: Metamask or Ledger, connect at pwawallet.fantom.network
Staking on an exchange
Some exchanges also allow you to stake your crypto without withdrawing it, including Binance, Coinbase, eToro, and Kraken. In general, staking on an exchange is more risky than using a wallet, since exchange accounts can be hacked more easily. But this is an alternative if you absolutely don’t want to withdraw your crypto.
FYI: Don’t have an exchange yet? I’ve put together a list of my favorite crypto exchanges to help you pick the right one for your needs.
So far, I’ve discussed some of the top crypto coins to stake and wallets to stake with. But what about the world’s second-largest crypto network, Ethereum? Can Ethereum be staked like these other coins can?
I’ll go over that in the next section.
For right now, Ethereum is still a PoW network. Validators on Ethereum have to spend electricity solving hash problems in order to add transactions to the ledger. In other words, Ethereum has to be mined; it can’t be staked.
But in December 2020, a new network was launched called “Ethereum 2.” Ethereum 2 is a PoS network that can run all of the same software that is currently on Ethereum.
Ethereum 2 uses a separate cryptocurrency called “ETH2.”
But ETH2 wasn’t sold in an ICO, and you can’t buy it on an exchange. The only way to get ETH2 is to burn an equivalent amount of ETH. When you do this, it gives you the ability to stake your ETH2 and earn a yield, just like on other PoS networks.
There are no apps running on ETH2. Instead, the plan is to connect the current Ethereum network with Ethereum 2 at some point in the future. When this happens, ETH mining will be eliminated, and Ethereum will become a PoS network. Then there will be no distinction between “ETH1” and “ETH2” coins. There will just be one PoS coin called “Ethereum.”
The current plan is to implement this merge of the two networks in Q3, 2022. But these plans have been delayed multiple times already, so no one knows when the merge will actually happen.
For now, you can stake ETH2 if you want. But if you do, there is no way to convert it back into ETH1 and sell it on an exchange. So you’ll be stuck with your stake until the two networks merge, whenever that finally happens.
FYI: Ethereum 2 staking pays between 4 and 7% per year. To be a validator, you need at least 32 Ethereum, which costs around $64,000 at today’s price.
There is no way to directly delegate your coins to a node on Ethereum 2. So delegating has to be done indirectly, and it’s a little more complicated to pull off on this network than on others. If you don’t have the minimum 32 coins, you’ll need to either join a staking pool or use an exchange to stake.
Rocket Pool is a beginner-friendly staking pool if you want to go that route. Otherwise, you might want to just use Coinbase, Kraken, Crypto.com, or another exchange that allows Ethereum staking.
Crypto networks have come a long way since they first began. In the beginning, crypto investors couldn’t make money except by selling their coins. But this essentially meant that they needed to exit the market to turn a profit.
Unless you were willing to run a mining node, there was no way to get a stream of income from a cryptocurrency network.
But with staking, investors no longer have to wait for their coins to go up in price. Now investors can earn crypto from their crypto, similar to the way cash holders do with a savings account.
Still, staking carries some risks, and it isn’t for everyone. But if you want to get started with it, this article has explained some of the most important info you need to get going on staking crypto.
Avalanche. (2022). Run an Avalanche Node with Microsoft Azure.