A Simple Introduction to Staking Crypto

What is Staking Crypto?

  • Staking cryptocurrencies is a process that involves committing your crypto assets to support a blockchain network and confirm transactions.
  • It’s available with cryptocurrencies that use the proof-of-stake model to process payments. Learn more about Proof of Stake: Proof of Work vs. Proof of Stake vs. Hybrid: Explained

How are Staking Rewards Calculated?

  • Each blockchain network may use a different way, but here are some common variables
  • How many coins the validator is staking
  • How long the validator has been actively staking
  • How many coins are staked on the network in total
  • The inflation rate

Benefits of Crypto Staking

  • Interest: Easy way to earn interest on your cryptocurrency holdings. The primary benefit of staking is that you earn more crypto, and interest rates can be very generous. In some cases, you can earn more than 10% or 20% per year.
  • No Sunk Cost: You don’t need any equipment for crypto staking like you would for crypto mining

Risk of Crypto Staking

  • Volatility: Crypto prices are volatile and can drop quickly. If your staked assets suffer a large price drop, that could outweigh any interest you earn on them.
  • Lock-up Period: Staking can require that you lock up your coins for a minimum amount of time. During that period, you’re unable to do anything with your staked assets, such as selling them.

How to Stake?

  • 2 ways of staking
  • (1) 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
  • (2) Delegation: 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

Risk of Running Your Own Node

  • Technical expertise of setting up and running your own VPS or dedicated server
  • Running a validator node to stake a cryptocurrency involves technical know-how to ensure that there are no disruptions in the staking process
  • in case a validator node (mistakenly) misbehaves, you could incur penalties that will affect your overall staking returns. In the worst-case scenario, validators could even have their stake “slashed,” at which point a share of the staked tokens would be lost
  • Running your own validator node will incur hardware and electricity costs while staking with a third-party provider typically costs a few percentage points of the staking rewards

Staking Pools

  • Staking pool is when a group of coin holders merge their resources. This consolidation can then allow them to up their chances of validating blocks and receive rewards in return. They essentially pool in their sources and share in the rewards.
  • Binance has the largest pool of digital assets for staking crypto, with hundreds of large and small-cap cryptocurrencies with hundreds spread across the platform’s several staking pools
  • Coinbase allows you to staking rewards with Ethereum 2.0 (ETH2), Tezos (XTZ), Cosmos (ATOM), and more.
  • When deciding which staking pool to go with, go with a staking pool that is secure and the one with the lowest fees
  • Coinbase for example charges a 25 percent commission on any earnings you make with the cryptocurrency vs. most staking pools charge only 10 percent
  • Lido is another alternative that allow users to stake their ETH – without locking assets or maintaining infrastructure
  • When staking Lido you mint staked tokens (stETH) which are pegged 1:1 to your initial stake. The downside however is that for US users only, or any country where crypto to crypto swapping creates a taxable event, using Lido triggers a Taxable Event
  • To learn more about Lido: Lido Staking Pool: Is it Safe?

Staking Beyond Proof of Stake

  • Liquidity pools: collection of funds locked in a smart contract. Liquidity pools are used to facilitate decentralized trading, lending, and many more functions
  • Liquidity pools are the backbone of many decentralized exchanges (DEX), such as Uniswap
  • A liquidity pool is a crowdsourced pool of cryptocurrencies or tokens locked in a smart contract that is used to facilitate trades between the assets on a decentralized exchange (DEX).
  • Instead of traditional markets of buyers and sellers, many decentralized finance (DeFi) platforms use automated market makers (AMMs), which allow digital assets to be traded in an automatic and permissionless manner through the use of liquidity pools.
  • Yield farming: Yield farming is the practice of staking or locking up cryptocurrencies within a blockchain protocol to generate tokenized rewards. The idea of yield farming is to stake or lock up tokens in various DeFi applications in order to generate tokenized rewards that help maximize earnings

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Ricky Young

My belief is that financial freedom cannot be obtained by just a 9-to-5, but a combination of smart investing and passive income. This is my journey to achieve financial freedom.

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