What Is Staking in Crypto?

Crypto is a volatile industry, and the growth of blockchain networks like Ethereum ($ETH) has shown how demand can lead to blockchain congestion. This created two simultaneous issues:

• Lack of scalability, and
• Unstable earning potential

Staking cryptocurrencies is a way to resolve both issues with one simple solution. Like a traditional bank account, you can earn interest based on holding your money in the account long term. Banks offer this incentive so they can more easily predict cash on hand and more efficiently invest it.

This is no different in crypto. Staking acts much like interest in a savings account or a dividend on an investment. But because it’s on the blockchain, there’s much more involved than that. Here’s how it works.

The Point of Staking Crypto

If a cryptocurrency can be staked, it uses a Proof-of-Stake (PoS) consensus mechanism. This typically happens through a staking pool, which verifies and secures all transactions on the blockchain.

In a blockchain like Bitcoin ($BTC), consensus is typically done through Proof-of-Work (PoW). It involves solving increasingly complicated math problems to create blocks.

In some projects, staked crypto also acts as on-chain governance. Think of it like a homeowner’s association (HOA) but for the blockchain. Governance tokens are issued to staking participants to give them voting rights on upgrades or changes to the protocol.

Staking replaces mining to create a much more energy-efficient solution. And it fixes the bottleneck problems Ethereum experienced in scaling its initial platform. Unlike Bitcoin, there are a lot of complicated processes running on the smart contract network, and that requires a sleeker solution.

With PoS, the more tokens you stake, the more power you have to verify transactions. This is a great option for long-term crypto hodlers who want a return for their investment. However, those returns can vary greatly and do come with risk.

Is Crypto Staking Profitable?

Staking can be profitable. Instead of leaving your crypto assets in a stale wallet, you’ll put them to work just like you would with their fiat equivalents. Staking rewards go as high as 25 percent or more annually in newer projects like Polygon seeking to scale a strong network.

Meanwhile, high-yield savings accounts offer 0.50 to 0.60 percent interest rates. The average annual return rate of the S&P 500 is about 10 percent.

An enticing part of staking crypto is that rewards are generally compounded daily. This ensures the maximum possible profit, although you’re still subject to the exchange rate between your chosen crypto and fiat currency to liquidate and reap the profits.

Most projects have a minimum balance and lockup period during which you must keep your crypto staked. This makes it closer to an IRA in its financial rewards, so how do you get started with staking?

How to Stake Crypto

Staking is generally public and available to anybody who meets minimum balance requirements. Of course, there can be a high bar for that minimum, and there are sometimes other requirements to meet. Many investors are unlikely to meet a high minimum, so staking pools at exchanges like Coinbase (COIN) or wallets like Metamask make it more accessible.

Be sure to fully understand what you’re doing when staking. When you do, simply buy the required amount of crypto and hold it in a compatible wallet. Each exchange or wallet will explain which assets it permits for staking rewards.

Keep a close eye on the fine print when performing your due diligence to ensure you are investing in the right crypto in the right place. Once you own the crypto and hold it in an approved wallet, staking can be automatic.

Now that you know how, here are some cryptos to consider staking.

5 Cryptos to Consider Staking

Not every cryptocurrency supports staking. And the staking rewards and compatibility will be different for each project. Here are five crypto assets to consider staking.

1. Ethereum 2.0 ($ETH)

Ethereum was initially built as a Proof-of-Work (PoW) network, but it caused sky-high gas fees as the price of ether grew to over $4,000. The Ethereum Foundation hopes to resolve these issues with a shift to Proof-of-Stake (PoS) in Ethereum 2.0.

Staking takes place on the Beacon Chain, and it costs 32 ETH to become an Ethereum validator, which qualifies you for staking Ether.

Staking pools also exist, and the annual percentage rate is estimated at between 6 and 15 percent. You’ll need to deposit your balance in a custodial staking node, like Nimbus, Prysm, or Lodestar.

You can also stake Ethereum on Coinbase and other exchanges. You’ll likely need to join the waitlist to do so though.

2. Tezos ($XTZ)

Tezos is one of the easiest and most widely available staking cryptos. You can earn about five to six percent APY. Staking is available on exchanges like Coinbase and wallets like Ledger.

It’s worth noting, however, that Tezos is a very volatile crypto. The price ranged from under $1.00 to over $10.00 over the past five years, and the extra staking rewards aren’t enough to counter the losses if you buy and sell at the wrong time.

3. Polygon ($MATIC)

Polygon bills itself as the “internet of blockchains,” and it attracted over 3,000 crypto projects as an Ethereum sidechain. The project relieves users of expensive gas fees and attracted partnerships with OpenSea, Unstoppable Domains, and Coinbase (COIN).

Staking MATIC yields between 15 and 17 percent rewards annually, depending on whether you’re delegating or running a validator. It can be staked on Metamask, and those who were lucky enough to buy in 2020 or earlier got a 10x return in just one year.

4. Algorand ($ALGO)

Algorand is another smart-contract network that hopes to be more efficient than Ethereum. It uses a strong PoS consensus and hosts a variety of decentralized apps. Though hosting fewer projects than more mainstream projects on this list, it still includes an impressive ecosystem.

The annual yield for Algorand is between five and six percent. Investors from 2020 enjoyed a ballpark 5x return on their investment outside of that.

5. USD Coin ($USDC)

Circle and Coinbase (COIN) partnered on this stablecoin that’s backed by Bitcoin and pegged to the price of the U.S. Dollar. By staking USDC in Circle Yield, you could generate up to 6 percent APY. Unlike other cryptos on this list, the price should not ever deviate from its value compared to the US dollar.

This makes USDC a great staking option for those hedging against crypto deflation in a bear market. But you won’t get the massive gains other projects on this list provided over the past five years.

Crypto Staking: The Bottom Line

Staking is an effective way to earn passive income from your crypto holdings. It also becomes a more efficient method of processing a scalable smart contract network. This relieves the bottleneck issues that plagued the initial release of Ethereum and leads to faster transactions speeds.

Be sure you understand the risks and rewards before staking your crypto assets. If done correctly, you could outperform standard fiat investments.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.