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A Beginner's Guide to Staking Crypto

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Michael Caloca / ONE37pm

Any active crypto investor should be familiar with the concept of staking, aka winning bags for HODL. Let’s learn more about what staking is, why you may want to do it, and how staking can help optimize your portfolio.

In web3, there are many opportunities to automate your alpha. When I think of staking, I think of the age-old adage: let your money work as hard for you, as you work for it.

While I wouldn’t consider staking an aggressive investment strategy, it is a relatively safe and easy way to actively earn interest on your hard-earned money.

What is staking?

In crypto, staking is the process of committing assets to a blockchain network. By committing assets, you allow block transactions to be validated. The more staking occurs, the more robust a blockchain becomes.

So by improving their reliability, networks are willing to reward you with more coins for staking, thus earning you interest for basically just hitting a button and walking away.

How does staking work?

Your commitment to an asset is used to confirm transactions and provides stability to a network. When the protocol chooses your commitment to confirm blocks of transactions, you are rewarded with more cryptocurrency as the validator of that transaction.

Proof-of-stake currencies rely on staking as a means for validating transactions. Proof-of-work blockchains, like Bitcoin, do not permit staking and instead rely on mathematical puzzles to reward validators.

The benefits of staking

When it comes to staking, there are many benefits you may discover, such as:

  • Earning interest on your cryptocurrency
  • Low barrier to entry (no hardware, expensive tools, or technical expertise needed)
  • Requires less energy than mining crypto

So if I stake ETH, I don’t have to be a programmer, I don’t have to gobble up carbon, and I earn interest? What’s the catch?

Well, for networks like Ethereum, you need meaningful holdings to be eligible for staking. You couldn’t buy 1 ETH and expect to win rewards as a validator. More on that in a sec.

What cryptocurrencies can I stake?

To stake, a cryptocurrency must support a proof-of-stake model. For example, Bitcoin only allows proof-of-work (here’s the exception to bitcoin staking).

Ethereum, on the other hand, incorporates a hybrid model of proof-of-work and proof-of-stake and plans to go full stake with Ethereum 2.0.

Here are some popular cryptocurrencies you can stake:

Ethereum

The OG programmable blockchain, Ethereum allows staking with returns as high as 17 percent, but you need a minimum of 32 ETH to qualify. With that said, platforms like Aave and Polygon, built on Layer 2 Ethereum, enable staking of their tokens with no minimum required.

Staking MATIC (polygon) and AAVE is an easy but effective way to put ETH-universe dollars to work. These platforms allow you to quickly exchange your ETH for L2 tokens, earn interest, and bring it back to L1 in minutes. Now we just need to lower gas fees.

Tezos

Tezos incorporates a proof-of-stake model, known for its energy efficiency compared to Bitcoin’s proof-of-work. You can stake Tezos with solid returns on platforms like Everstake. Tezos has proven its reliability over the years and there are a lot of new projects launching on their network.

Solana

Solana, Ethereum’s main scalable competitor, has several wallets that support staking such as phantom.app and solflare.com.

Solana rewards as much as 6.35% APR as of September 2021.
You can learn more about staking Solana here.

Cardano

Staking Cardano is comparable to a traditional savings account, whereby holders can stake their assets with the click of a button and expect positive long-term results.

Even after staking, you can move your ADA freely and take it out of staking completely if you'd like.

Polkadot

Staking on Polkadot requires a minimum of 120 DOT and they have a set maximum of nominators at 22,500.

You can not transfer your tokens on Polkadot while they are bonded. The current annual yield on Polkadot is around 10%, according to Ledger.

How to stake crypto:

Using an exchange

Crypto exchanges can be used to stake cryptocurrency. Bear in mind that you do not actually hold the cryptocurrency to earn rewards for staking. Rather, you are providing liquidity for the exchange to stake on your behalf.

Coinbase would be a popular example.

Using a wallet

Some wallets also permit staking. LedgerLive is one of the most popular choices for users looking to stake cryptocurrency directly from their web3 wallet.

Staking-as-a-service

If you are worried about slashing (losing your funds due to price drops), you can employ a staking service provider that will closely monitor your funds around the clock to avoid that doomsday scenario.

DeFi staking

As mentioned, an L2 Ethereum defi protocol like Aave allows you to easily stake cryptocurrency. There are a plethora of defi platforms that enable staking.

Similar to an exchange, when using a defi platform, you are lending your cryptocurrency to the protocol. The most secure way to stake an asset is directly on a cold-chain wallet. Defi protocols, however, are popular because of their ease of use.

Some tools like Binance offer flexible versus locked staking. If you choose flexible staking, you earn lower APYs but can more easily liquidate your funds.

Ultimately, there are many options for staking in the Defi space. It's up to you to decide which option is right for you and understand the risks that are involved in the staking process.

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