In this competitive world who doesn’t want an alternative source of income ? Something that can make money passively. For a Crypto freak, one such method is staking where you can use the crypto lying in your wallets to earn you some extra bucks.
Staking which is a consensus mechanism where you lock the tokens to secure the blockchain network and help verify transactions. In most cases the token is the native one of the blockchain.
Talking about all the criticism that Proof of Work gets for its energy consumption and environment degradation, Staking has turned out to be one of the game changers in the crypto industry as it is an energy-efficient model of verifying transactions.
How does Staking work ?
Staking is a method of verifying and adding new transactions to the blockchain. To start with you need to have cryptocurrency which use the proof of stake model. If you do not have, you can buy it from any popular crypto exchange. Next you have to decide how much amount of the tokens you wish to lock on the network for staking. The blockchain protocol will then pick validators from these to verify the transactions and add a block. Now obviously the more coins you stake, the more likely it is that you will be picked up as a validator.
When a block joins the chain, a new crypto token comes into existence and is distributed to the verifier of the transaction as a reward. In maximum cases, you will get the same token of the blockchain however in some blockchains, you might even get a different token.
A simple question might come into your mint, when I stake my crypto, do I still own it ?
Yes you are still the rightful owner of your tokens and in possession of them. You are just simply putting your tokens to use while you hodl them, you are free to unlock them and liquidate them later. But yes there is one catch to it, some crypto tokens have a minimum staking or lock-in period and you cannot withdraw them until the time has elapsed.
Let’s take an example to understand the process better.
A popular crypto which uses POS is Solana. First you can buy the native token SOL from any leading exchange. Some exchanges have their own staking platform where you can directly stake your tokens. I not, you can transfer the tokens to a crypto wallet. Decentralized wallets are even a more safer place to store your tokens than a centralized exchange. Make sure you select a wallet which supports the token. In our case of SOL its the Phantom wallet. Copy the SOL deposit address and paste it in the exchange SOL withdrawal tab.
Next you have to enter a staking pool. Research the available staking pools thoroughly for the following-
1) Reliability– Pick a pool which has an uptime almost close to 100%. If the server of the pool is unreliable and it keeps going down, you will lose out on rewards.
2) Reasonable Fees- In the real world, nothing comes for free. Each Staking pool charges a fee which is deducted from your staking rewards. A 2-5% is considered as a reasonable figure.
3) Size of the Pool- Bigger pools will validate and add more blocks but the fund division is greater. In smaller pools, there will be lesser rewards but there will also be lesser division. But at the same time you wouldn’t want a pool that is too small and has higher chances of failing.
Advantages of Crypto Staking
- Super easy way to earn passive income on your crypto tokens.
- No need of complex computers or hardware GPU requirements as in the case of Mining.
- You are helping the network of your favorite crypto by securing and validating transactions.
- An environment friendly consensus mechanism.
Disadvantages of Crypto Staking
- Crypto is a highly volatile asset, a significant drop in the price of your crypto token can overpower the returns you earn on them.
- You have to lock-in your crypto tokens for a certain specified time. You cannot do anything with your assets during this time.
- In some cases, there is even an unstaking period where you may have to wait for 7 days or even more.
Before Getting Started you should know two important terms and difference between them.
APY vs APR
APR stands for Annual Percentage Rate and can be understood as simple interest. It helps DeFi users by providing a figure for easy comparison with other platforms.
APY stands for Annual Percentage yield. It is a sum of the interest on the initial amount and the interest accrued on the initial amount. Simply one earns interest on interest.
APY takes into consideration compounding while APR does not.
Lets say you have 10000 USDT and you want to invest it in a DeFi protocol. You have 2 options that make weekly payouts.
Option A- 10% APR for staking USDT for 1 year
Option B- 10% APY for staking USDT for 1 year.
Lets calculate how much you earn after year 1
Option A- 11000 USDT
Option B-11050.65 USDT
Option B makes you more money since it calculates interest on the interest paid in previous periods as well and as we all are aware of how beautifully the compounding effect works with a longer time duration.
Some Key points to note-
1) Some DeFi protocols have their rates dynamic and can change with demand or use.
2) Be very careful when you see unrealistic figures, something like APY 2000%. I mean you yourself should understand that this won’t be sustainable at all.
If you hodl crypto and plan to not sell them for a long period, then you should definitely opt in for staking. Without any extra efforts, you will earn some tokens.
But in case if you do not hodl any POS tokens then you need to research and calculate the risk-reward ratio considering the volatility of the project. You need to come to a proper conclusion to decide whether the project is a good investment. Pro-Tip it is only a good investment to buy a crypto for staking if you think that it is good enough to hold for long term.
The Proof of Stake Mechanism is like a win-win for both the crypto network as well as the investor. The network gets to verify transactions at a lower cost and faster pace and the investor gets an opportunity to earn passive income from their tokens.
Now that we have learned about Staking, its time to get started.