Betting your cryptocurrency is very similar to earning interest on your deposits in a bank account. Although there are some differences between the two, the analogy works quite well to gain an understanding of this aspect of cryptocurrency.
Cryptocurrency projects that offer staking allow you to earn up to 20% per year on your holdings. While 20% is a fairly high return, an average return is about 5%.
To put that into perspective, let’s say a cryptocurrency offers 10% APY for staking. You can bet $10,000 of that cryptocurrency, and you’ll be paid $1,000 in free cryptocurrencies over the course of a year. Just to essentially hold that resource.
Staking is a great addition to the cryptocurrency space for a number of reasons. Cryptocurrency staking adds aspects of familiarity, engagement, and reward into the ecosystem, making investing even more worthwhile.
How does staking work?
So, what’s at stake in the first place?
Staking is a fundamental aspect of proof-of-stake cryptocurrencies (such as Ethereum 2.0, Cardano or Polkadot). These cryptocurrencies protect their networks by having users block or “stake” their cryptocurrency to secure the network. This is contrary to proof-of-work cryptocurrencies like Bitcoin that use extremely powerful computers running 24/7 to secure their networks.
People who bet their cryptocurrency are rewarded in an annual percentage return (or APY) that could be anywhere from 4% up to 20% on certain coins.
The idea behind staking is that it is a democratic way to secure a crypto network and gives users incentives to keep their cryptocurrency locked in order to earn wagering rewards.
Two types of staking
In general, there are two ways to bet: you can delegate or you can validate.
Delegated staking is much easier for the average cryptocurrency user and this is generally what people are referring to when they talk about stakeout. Being a validator requires highly technical knowledge of cryptography, specialized equipment, a large amount of cryptography, and the rock-solid internet that you might find in a data center. Therefore it is usually the institutions that act as validators.
Meanwhile, when you delegate, you are simply blocking your crypto funds with a recognized validator and reaping the rewards with very little effort (in return validators will take a small percentage of your return).
With both forms of stakeover, you earn the return on investment in the same asset you bet. So, if you have bet Cardano, then you earn your reward in Cardano.
Which cryptocurrencies can be wagered?
Proof-of-stake has become the go-to consensus method for cryptocurrencies, and almost every project launched after 2017 offers some form of picketing.
It’s almost easier to list cryptocurrencies that do NOT offer stakeout. This would include all old-school proof-of-work coins such as Bitcoin, Litecoin, Bitcoin Cash, and Dogecoin. This also includes stablecoins, which can earn yield in some circumstances, but not through staking.
Perhaps the project that is receiving the most attention on the proof of stake front is Ethereum. Ethereum is currently a proof of work blockchain. The blockchain is moving to the betting test, which means that anyone can participate in the production of blocks, simply by blocking some ETH. You can currently bet on ETH, but you won’t be able to withdraw it until ETH 2.0 launches.
What are the benefits of staking?
Do you like to generate passive income on a monthly, weekly or even daily basis?
There are many reasons to bet on cryptocurrency, but for most people stake prizes will always come first.
It is especially useful for investors who only have cryptocurrencies around. It could also earn a return on that encryption.
In addition to rewards, there are other good reasons to bet:
- You’re helping secure your network.
- Staking helps investors take a long-term approach, which generally pays off in crypto.
- You don’t need any equipment.
- It doesn’t even remotely require the energy production of Bitcoin mining.
- Staking is a good way to learn about the crypto ecosystem.
Blocking periods
With staking there is almost always a lockout period that you need to be aware of. It can generally take a few days to regain access to your cryptocurrency or even a month.
In extreme cases (such as Ethereum’s transition to ETH 2.0) you are locking down your coins for months or even years.
This is one of the compromises. It doesn’t matter if the market is plummeting and you want to get rid of the assets you’re picketing. You have to wait for the duration you agreed upon before regaining access to your funds.
Accrual of interest
Some blockchains use the term “vesting” to refer to the blocking period. Vesting is a term borrowed from the corporate and business world. In the context of cryptocurrency, it is typically used in combination with the word period, i.e. “ripening period”.
The maturation period is a period of time that you need to wait to gain access to your funds. Sometimes this is also referred to as a period of “heating” or “cooling”.
Staking services
There are some services that eliminate technical complexity by staking your coins on a proof of stake blockchain. They simply automate the technical process of starting the staking mechanism.
Since the proof of participation is relatively new to the world, it is still a technically involved process that requires some technical expertise to be started. Some projects make the process super easy, adding specialized buttons directly into their main portfolio. Other projects have not created user interfaces to streamline the process, creating the need for staking service providers.
You can also bet using a cryptocurrency exchange such as one of the following:
- kraken
- Coinbase
- Binance
There are also numerous wallets that offer support for staking within the portfolio:
- Exodus Wallet
- Ledger Live
- Phantom.app Wallet
- Polka dots.js
- Crypto.com DeFi Wallet
Earning interest on BlockFi is the same as picketing?
Blockfi and similar services are actually what are called “cryptocurrency lenders”.
The main difference between lending and staking, is that you give up direct access to your funds, often to earn a higher rate of return.
Various lending services such as BlockFi, Nexo or Crypto.com connect lenders with borrowers and earn their margins in between. You deposit your funds into their custody wallet and earn an agreed rate of return. Most of the time, these services make you lock down your cryptocurrency for a predetermined period of time.
With lending, you are not limited by the blockchain that must be proof of the bet. You can lend any activity that loan services want to offer borrowers. This is an important advantage of lending your activities. For example, you may be very bullish on bitcoin and want to earn interest on the base amount of bitcoin you own. You won’t be able to do this in a decentralized way, as bitcoin is not a proof of wagering. However, you can choose to revoke access to bitcoin from a lender, who will give you a guaranteed rate of return. Be careful though, if a rate sounds too good to be true, it probably is. Be sure to check the lender’s legitimacy and reputation before depositing your goods on their services. For example, Crypto.com has insurance in case of loss of funds or a hack. Therefore, they could be a sensible choice for a loan provider.
What are the risks of picketing?
Staking is actually extremely safe, provided you choose a reliable service to help you bet your cryptocurrency.
There are many stories of new crypto users going to the wrong website, entering their recovery phrase and getting scammed by their encryption. You should always double-check the URL of the website you are visiting.
There are also many fake crypto apps on both Apple and Android, so watch out for numerous reviews and make sure the correct company is behind the service.
Once you’re actually staking it’s very safe. You still keep your private keys. Occasionally crypto validators get hit with penalties when they fail to validate a certain block, but this would only affect your rewards, not your main amount.
Of course one of the biggest criticisms of staking is that crypto is notoriously volatile and if a cryptocurrency goes up 40% or falls 30% it can make a 4% APY look pretty irrelevant.
Summary of staking
Staking is very similar to having a savings account with your bank. Banks allow you to earn a percentage of your holdings in a typical savings account. This is because banks are actually lending your money behind the scenes. The interest rate they give you is their way of compensating you for keeping your money in their bank.
The concepts of staking are therefore not so foreign to ordinary individuals. The cryptocurrency world tends to create new terms for old concepts. Here at CryptoVantage, we like to make sure you understand that the world of cryptocurrencies is only updating the world of finance. In a nutshell: staking is saving.