What is Cryptocurrency Staking? How It Works

Crypto staking is a technique that allows crypto investors to earn passive income. Staking is agreeing not to sell or trade your crypto tokens. In more ways than one, crypto staking is similar to a savings account. 

Typically, financial institutions give out your funds, and you get to earn rewards through interest on your account balance. Today, blockchain giants like Ethereum have over $63.4 billion in staking value and this number keeps growing by the day. 

With such huge numbers, crypto staking has quickly become one of the most sought-after forms of passive income. Fortunately, this article will delve into the fine print of crypto staking and how to make money from it.

Understanding Cryptocurrency Staking

As mentioned earlier, crypto staking allows holders to earn passive income for holding cryptocurrencies and securing the blockchain network. 

Staking cryptocurrency has two main functions: preservation of the already existing data and verification of new entries into the system. It also utilizes a range of incentives as well as punishments to ensure that it works effectively.

The staking protocols reward stakers for their help in maintaining the decentralized network. On the other hand, those who are dishonest are identified and penalized. And that’s thanks to the transparency of the blockchain network. 

Any fraudulent attempt by users results in their staked cryptos being taken away. The staking protocol executes this extreme penalty through an automated process known as slashing. Meanwhile, stakers who conduct themselves diligently are rewarded with additional coins in their wallets. 

Proof of Stake (PoS) Consensus

The staking consensus system is how cryptocurrencies that use POS cultivate a functional ecosystem without ever needing a central bank to do the work for them. Under the POS consensus system, network participants who are in full support of the blockchain network validate new transactions through first 'staking' their coins. 

The staking system ensures only legitimate transactions and data are added to the blockchain network. If the stakers provide flawed information, they risk losing their staked coins as a penalty. On the other hand, stakers get handsomely rewarded for the addition of legit new data. 

Types of Staking

Solo Staking

Solo staking involves independently participating in the PoS consensus without joining a staking pool. Here, as an individual, you get to lock up a certain amount of coins, for instance, ETH, in a smart contract. 

This technique gives you full access to technical resources and greater autonomy over your staked assets compared to staking through delegation service or a pool. However, you are solely responsible for ensuring network connectivity, maintaining your staking setup, and protecting your funds from potential security threats.

The advantage of solo staking is your rewards are more than someone participating in pool staking. But, it's important to remember that for you to get involved in solo staking, you need to have sufficient technical knowledge and investment (approximately 32ETH). 

Staking Pool

As the name suggests, the staking pool is a group of cryptocurrency holders who've combined their resources to boost their chances of successfully validating transactions and earning a greater reward on the PoS network. 

Through pooling their resources together, participants are able to collectively increase their chances of being chosen to validate transactions and earn rewards. That's because the combined stake is more prominent, which boosts the pool's chances of getting selected by the network's consensus algorithm. 

The rewards earned through the staking pool are distributed proportionally among the participants depending on their contribution to the collective pool. Some of the benefits you get by participating in a pool include reducing the barrier to entry for individual stakers who may not have enough cryptocurrency to stake independently. 

Cold Staking

Cold staking is a technique that ensures users can store their funds offline. You delegate your rights to a trusted designated staking address or third party, who holds your cryptos securely in a cold wallet disconnected from the internet. 

Cold staking provides an extra layer of protection for your funds since the cryptos never leave your control, but you still get to participate in the validation process. This method is beneficial for long-term traders who prioritize security and are willing to trade a bit of liquidity for peace of mind. 

Liquid Staking

Liquid staking allows you to stake your coins while still being able to convert your staked tokens into liquid form that can be traded. This process ensures you still maintain your stake in the network. 

Typically, liquid staking involves tokenization of the staked assets. That creates a representation of your stake in the form of tradeable assets. These assets can be freely traded on exchanges and DeFi applications. 

The advantage behind this sort of staking is that it provides increased liquidity to the staked assets, enabling users to enjoy the worthiness of their investments without giving up their participation in the network. Additionally, liquid staking presents an opportunity for additional rewards.

Benefits of Staking Crypto

• Source of passive income: The most obvious benefit of staking crypto, and also a motivation to stakers, is that you are able to earn passive income from your assets. When you stake your cryptos, you receive rewards in the form of coins. 
• Improved network safety: aside from passive income, staking helps secure the network and all the transactions carried out. Through staking, you can boost the network's resistance against unauthorized access and attacks from hackers. 
• Energy efficiency: Compared to the PoW (Proof of Work) alternative, PoS is considerably more energy efficient and environmentally friendly. What's more, PoS requires significantly less computing energy to add new blocks to the network and verify transactions. 
• Network governance: PoS networks typically grant stakers voting rights to help in the governing process. That gives stakeholders a chance to voice out their concerns and provide input on network upgrades, changes, and improvements.  

Potential Risks of Staking Crypto

• Volatility risk: the cryptocurrency market is known for its highly volatile nature. Typically, staked cryptos can decrease in value rapidly, leading to significant losses. 
• Centralization risk: In the PoS network, specific staking pools may hold a large portion of the staked coins. That will give this group of individuals more power over the rest of the validators, which could lead to centralization risks. That's because these staking pool members could influence the network's governance proceedings. 
• Lockup periods: in case of a potential sellout, you are unable to mobilize your staked coins simply because these coins are locked up. That could potentially expose you to price fluctuations, which could wipe out your profits. 

Getting Started With Staking

Getting into staking is relatively straightforward. More importantly, staking is typically open to anyone who'd like to participate in the network validation. However, you have to put some 'skin-in-the-game' to earn passive income on this consensus mechanism. That said, here are the steps that you have to follow to start earning staking income:

Get a PoS crypto

Go ahead and purchase a PoS (Proof of Stake) crypto, for instance, Solana (SOL), Ethereum (ETH), Polkadot (DOT) and Cardano (ADA). These cryptos are built on a PoS consensus network, which means you can use them to stake on their individual networks.

Transfer Your Crypto to a Wallet

Most crypto exchanges offer wallets on several blockchains, including the Solana, Ethereum, and Polygon networks. That means you can store your cryptocurrencies on stake-worthy blockchains, which allows you to earn from your staked coins. 

Join a Staking Pool

With a staking pool, you have better prospects of earning staking rewards. Typically, a staking pool allows participants to join their individual staking abilities to increase their chances of being chosen as a validator. 

The rewards are then shared among the pool members, depending on their individual contributions. But there's a catch! Staking pools levy a service fee that's extracted from individual member's rewards. 

Solo Staking

Alternatively, you can choose to go with the solo staking option. The beauty of this technique is you don't have to share your rewards with anyone. Aside from that, staking your cryptocurrencies on the suitable exchange exposes you to benefits such as instant withdrawal at any moment, including your rewards. 

Where to Stake Cryptocurrency

A quick and straightforward platform to get into staking is Unizen Earn. Within a few steps, you can start minting passive income off of your staked tokens. 

1. Start by connecting Unizen.io to your wallet of choice. 
2. Ensure you have ZCX coins in your wallet, or you can swap them in the Unizen's trade section. 
3. Next, transfer the coins to the Polygon network if they are on any other blockchain network. 
4. Unizen allows for the seamless bridging of cryptos from one blockchain to the next. That means you can quickly transfer your ZCX coins to Polygon's network. 
5. Once all your ZCX coins are on Polygon, click the 'stake' button, and you can start making passive income from the tokens you have staked. Remember, your reward will depend on the number of ZCX you've placed under this program. 

Best Exchange for Staking

Picking the best exchange is crucial if you are interested in staking cryptos. It ensures you get the best rewards in the market and access significantly low staking fees. Therefore, to help you find the best exchange for staking, we assessed different platforms based on their supported assets, fees, staking rewards, security and user experience. 

Coinbase 

Coinbase is one of the biggest and most reputable digital currency exchanges. It has a simple and user-friendly process for staking which enables users to earn rewards without having to handle their own nodes or get involved in the complex staking process. 

No technical knowledge is required to begin your stake journey. Supported assets can generate users up to 10% Annual Percentage Yield (APY). Presently, Coinbase provides Ethereum (ETH), Cardano (ADA), Solana (SOL), Tezos (XTZ), Cosmos (ATOM) as well as Polkadot (DOT) for staking.

Pros 

• Coinbase has a robust security system to protect users' funds from cyber criminals 
• The platform has a strong reputation in the crypto community due to its transparency 
• Rewards are automatically distributed to user’s accounts 

Cons 

• Restricted in some US states 
• It has a limited selection of coins available for staking 
• Unstaking takes time so you may not be able to cut your losses 

Unizen

Unizen Earn is a staking application built on the Polygon blockchain and the Unizen platform. It offers a flexible and profitable way to earn rewards in a variety of cryptocurrencies. Instead of limiting rewards to one cryptocurrency as others do, users stake their ZCX and receive rewards in several other cryptocurrencies. 

Unizen Earn also offers stakeholder rewards in various cryptocurrencies from vetted up-and-coming projects with high growth potential. ZenX Labs, Unizen's research and incubation arm, carefully selects and vets these projects to ensure their quality and growth potential.

Pros 

• Unizen has a simple and intuitive interface that allows users to stake and track their rewards easily 
• It doesn’t lock up your staked funds so you can withdraw at any time without penalties
• Unizen offers highly competitive APR rates 
• The platform provides users with analytic tool0073 that allows them to optimize their performance

Cons 

• The platform is still relatively new to the marketplace 

Kraken

Kraken is another good choice for new and existing crypto traders looking for an exchange with low trading fees and a wide range of supported coins. Most users love this platform because it offers some of the lowest trading fees compared to other exchanges. 

Also, it supports many different coins. In total, you can currently stake about 21 coins on the Kraken platform, including, Algorand (ALGO), Cardano (ADA), Cosmos (ATOM), Ethereum (ETH), Mina (MINA) Polygon (MATCI) and Tron (TRX) among others. 

Click here to see the full list. 

Pros 

• High earning potential- Stakers can earn up to 28% APY
• Staking rewards are distributed twice a week 
• Instant unstaking with no penalties gives users a lot of flexibility 
• Kraken makes staking accessible even to those with limited technical knowledge 

Cons 

• Kraken doesn’t offer its staking program in the US 
• Most users on Trustpilot complain about the platform’s poor customer service 

Gemini

Gemini is a New York trust company regulated by the New York State Department of Financial Services (NYDFS). That makes it one of the safest crypto exchanges for buying, selling and earning staking rewards on cryptocurrencies. 

Customers can currently stake Ether (ETH), Solana (SOL), and Matic (MATIC). Users can earn up to 8.05% APY with the program depending on the cryptocurrency staked. 

Pros 

• There’s no minimum amount required to stake on Gemini 
• Staking transfer fees are removed from your rewards 
• Users can transfer their staked currencies at any time 
• Has one of the best staking interfaces 

Cons 

• Gemini has a limited selection of assets. It only supports staking for SOL, ETH and MATIC 
• Slow response times from customer support 

Binance 

Binance is the biggest trading platform in terms of volume and hence also comes with the best security in the crypto market. Binance DeFi's staking feature allows you to stake in more than 60 cryptocurrencies, including BTC, ETH, BNB, USDC, DAI, XVS, and USDT. 

The APR varies depending on your chosen asset, typically ranging from 0.2% to 6%. Each asset also has a minimum staking amount but users can opt for flexible, lock-in or fixed lock-in periods. 

 The APY is definitely not the best, but this platform offers lets users enjoy three types of staking: locked staking, DeFi staking and ETH 2.0 staking. 

Pros 

• Binance staking is token level risk-free, i.e. the total number of your tokens stays the same throughout the investment.
• You can trade Bitcoin at zero fees
• Binance supports yield farming and interest accounts 

Cons 

• Binance regulatory future is unclear 
• Rewards keep on fluctuating based on current market conditions

Why is Staking Limited to Certain Cryptocurrencies?

Not all cryptocurrencies support staking because it requires a specific blockchain network architecture that supports the Proof-of-Stake (PoS) consensus mechanism. PoS enables users to participate in the network by staking their coins rather than mining with computational power, as in Proof-of-Work (PoW) systems. 

Staking-enabled cryptocurrencies typically prioritize network security, energy efficiency, and scalability, which PoS consensus can provide. It is a design choice made by cryptocurrency developers and communities to encourage participation and incentivize coin ownership for network support. 

Furthermore, not all cryptocurrencies require staking because their particular use cases or goals may not be compatible with this mechanism. 

Best Practices for Crypto Staking Beginners 

You are more likely to succeed with cryptocurrency staking if follow the best practices listed below. These tips will help you stake crypto safely and profitably. 

Only Stake Coins You Can Confidently Hold Long Term

There's absolutely no point in staking a coin if the moment the market slumps, you panic and sell all your positions. Not all cryptocurrencies are suitable for staking. If you're not confident enough to hold the asset long, don't make it illiquid through staking. 

You may end up spending way more on fees than you'll earn on the rewards. So, before staking any coin, make sure you do your homework. Do extensive research and learn everything there is about the crypto project. 

Only stake coins that have a strong project, active development team, and a clear staking mechanism. Also, consider the coin's staking rewards and its overall potential in the long term. 

Understand the Crypto Staking Process and DeFi 

Before you start staking, take this chance to truly understand how staking works- from a technological standpoint. That's the best way to understand what's happening with the crypto coins you've locked up and how the entire process works behind the scenes. 

Understand the staking process for the specific coin you are interested in. Familiarize yourself with;

• The requirements
• The minimum staking amount
• The staking duration 
• How rewards are distributed

But keep in mind that some coins may require you to lock up your funds for a specific period. Before you commit, make sure you're comfortable with the terms.

Choose a Secure Crypto Wallet to Keep Your Keys Safe

Staking basically involves locking up coins in a wallet over a specific period. So, the next important thing should be securing your keys. Choose a reputable wallet that supports the cryptos you plan on staking. 

Trezor and Ledger are some of the most popular hardware wallets, also known as cold storage wallets. These cold storage options allow you to store and stake your coins offline minimizing the chances that someone else will access them. 

Another couple of software wallets with robust security features include Coinbase Wallet, Exodus and MetaMask. 

Stay Informed About Market Updates 

Cryptocurrency projects often release updates of their staking protocols. Such changes can impact the staking rewards or may require technical updates. 

Therefore, you should keep yourself updated about these upgrades, especially since some of them may affect the staking mechanism, reward rates, or any potential upgrades to the coin's network. That can help you make more informed decisions and avoid surprises.

Diversify Your Portfolio and Manage Your Risk Properly 

While staking can offer consistent rewards, it's essential to diversify your crypto portfolio. Avoid putting all your funds into a single staking coin. That helps to mitigate risks and enhance potential rewards. 

Diversify your staked coins across multiple crypto projects and protect your portfolio from adverse market movements. A more balanced portfolio will shield you from overexposure when one asset's price keeps fluctuating. 

Participate in Community Governance 

Many networks have community governance systems that allow token holders to participate in decision-making. Take advantage of these systems to have a say in the network's development and direction.

Actively participate not only in the network's community but also in the governance decisions. Engaging with other stakeholders and voicing your opinions can maximize your influence in the community and potential rewards.

Frequently Asked Questions

Can You Actually Make Money From Staking Crypto?

Yes! Staking is a great way to earn passive income. However, how much you make depends on the amount of your stake and the staking period. 

How Much Does Crypto Staking Pay?

For most cryptos, the APY ranges from 2% to 10% depending on factors such as the cryptocurrency being staked, the staking rewards rate (APR), and market conditions

Is staking risky? 

Staking often requires a lock-up period. Therefore, you need to research the coins you stake because you may not be able to access them for some time. 

Will my staking rewards be taxed? 

The taxation depends on the jurisdiction and local tax laws. In many countries, crypto products are subject to taxation as either regular income or capital gain

Conclusion

Crypto staking is undoubtedly the most lucrative way to make money on crypto with little to no upfront investment. You lock your funds and in turn, earn rewards. It’s similar to bond investments; the only difference is that, in this case, you're using cryptocurrencies.

While all that sounds incredible, remember, you need to do enough research before diving head-first into this space. Be keen on the platform you use as that will determine your Returns on Investment.