Amid reports of massive energy consumption in bitcoin mining, staking cryptocurrencies is starting to become a popular and greener option for rewarding passive crypto income.
But what the hell is staking? And how does it bring you money?
We’ve put together a quick guide to staking cryptocurrency, including how it works, why it’s important, and how you can profit from it.
But first, a little disclaimer: keep in mind that cryptocurrencies are a speculative asset class that comes with the risk of loss, including the complete loss of capital. So invest (and bet) wisely.
What is cryptocurrency staking?
Cryptocurrency staking is the process of locking up a large amount of cryptocurrencies in order to become a validator on a Proof of Stake (PoS) blockchain network.
Instead of “mining” cryptocurrencies on a power-hungry proof-of-work (PoW) blockchain (such as Bitcoin), staking cryptocurrencies allows node operators to participate in verifying network transactions to secure the network and in turn earn rewards in cryptocurrencies.
Read more: How to mine cryptocurrency: an interview with a crypto miner
Cryptocurrency staking can be a little tricky, but the bottom line is that it helps secure the blockchain network by paying rewards to users.
While a straight stake requires depositing a significant amount of cryptocurrency into the network, participation in the stake reward is not required. In fact, many crypto exchanges and platforms allow users to deposit small amounts into “staking pools” in order to participate in crypto rewards.
What is Proof-of-Stake (PoS)?
Proof-of-Stake (PoS) is a consensus mechanism that is used by the cryptocurrency blockchain network to process and verify transactions. This requires network members to stake (or lock) a large amount of cryptocurrencies in order to be able to participate in the network.
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This staked crypto acts as collateral, proving that the node operator has skin in the game and will lose his crypto if he does not honor his agreement with the network. It also protects the network as you have less incentive to maliciously act as a validator on the network if it causes the price of the cryptocurrency to plummet resulting in a huge loss to the staked funds.
All of this results in a more efficient network than proof-of-work (PoW) blockchains and helps create a secure environment for blockchain applications and transactions.
PoS node operators are eligible for block rewards, but reward eligibility is determined randomly, with higher odds given to users who wager the highest amount of cryptocurrency.
Some examples of popular PoS cryptocurrencies are Ethereum 2.0 (ETH), Tezos (XTZ), Cosmos (ATOM), and Cardano (ADA).
Read more: 8 Alternatives to Bitcoin – Which Cryptocurrency Will Be the Next Bitcoin?
How does cryptocurrency staking work?
Cryptocurrency staking is the process of depositing cryptocurrencies as collateral in a proof-of-stake blockchain smart contract to become a network validator.
The amount of crypto required to become a network validator varies by project, but is typically a significant amount, indicating that the user is heavily invested in the network and can be trusted. For example, Ethereum 2.0 requires staking 32 Ether (ETH) to become a validator, which at today’s prices (July 2022) is over $30,000.
For regular investors, betting usually takes place on a cryptocurrency exchange or platform that allows you to deposit small amounts of cryptocurrencies into a “staking pool” with other investors. These funds are used by the validator to make a deposit to the blockchain smart contract and increase its chances of receiving a block reward.
Then the reward is evenly distributed among you (the investor) depending on how much you deposited.
Can you make money by betting cryptocurrency?
Yes.
Staking allows you to earn rewards based on the amount you wager and the rewards distributed across the staking pool you have joined. Most cryptocurrency exchanges and platforms that offer staking rewards typically distribute payments on a regular schedule, resulting in APRs ranging from 3% to 7% (or more).
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As a validator on a proof-of-stake blockchain, you can earn rewards directly by investing more cryptocurrency as your eligibility to add blocks increases.
These rewards are usually given out per block and new blocks are added regularly.
The reward can be up to several thousand dollars per block, depending on the asset.
What are the best cryptocurrencies to use for betting?
Staking is available on proof-of-stake blockchains that many new crypto projects are implementing. The most popular is the upcoming release of Ethereum 2.0, which contains the most DApps (Decentralized Applications) of any blockchain. As mentioned, staking directly as a validator requires 32 ETH, but many crypto exchanges offer staking pools that allow investors to deposit much smaller amounts.
Note. The Ethereum 2.0 network upgrade will take several years, and staking ETH will lock up user funds during that time.
Read more: What is Web 3.0 and why should you care?
Here is a list of other popular staking cryptocurrencies and the minimum requirements required to become a validator on the network:
- Ethereum 2.0 (ETH). The minimum stake is 32 ETH tokens.
- Polkadot (DOT). The minimum stake is 350 DOT tokens.
- Tezos (XTZ). The minimum stake is 8000 XTZ tokens.
- Polygon (MATIC). There is no minimum stake required, but validator slots are given to the players with the highest stakes.
- Pancake exchange (CAKE). There is no direct minimum staking, but Pancake Swap does offer staking pools.
While there are a limited number of validator slots available for each crypto network, you can still earn staking rewards without becoming a validator by joining a staking pool. These pools are available on both centralized and decentralized finance (DeFi) exchanges.
This allows you to deposit small amounts into a pool that is locked for a specific period of time to be used by the validator. You will then earn a percentage of the block reward based on your contribution.
Where to bet on cryptocurrency
Centralized exchanges
There are several places where you can stake your cryptocurrency, with centralized exchanges being the most popular (and easiest) option available.
Exchanges like Binance.us and Coinbase offer access to staking pools that allow you to deposit smaller amounts into staking contracts and receive a fixed reward. You can purchase cryptocurrencies directly from the exchange, choose which coin to stake, and lock your funds on the exchange to earn interest.
Decentralized Applications (DApps)
Some DApps offer staking of the platform’s own cryptocurrency to earn interest.
One example is Sushi.com, which allows users to stake their own SUSHI token to earn interest as well as earn additional commissions. To do this, you can connect your digital wallet to the Sushi platform, select the amount of SUSHI tokens you want to stake, and deposit your SUSHI tokens into the smart contract.
Using DApps like Sushi is a more advanced staking strategy and comes with more risks than a centralized exchange.
Proof-of-Stake blockchain network
Finally, if you want to run your own validator node and receive block rewards directly, you can apply to join the proof-of-stake blockchain network that has free slots.
You will need to buy and stake the minimum amount of cryptocurrency required to run a node, which is usually much higher than joining a staking pool.
Each blockchain has different requirements for running a node, and this may require purchasing special hardware or running a virtual machine in the cloud.
Pros and cons of staking cryptocurrency
Pros:
- You can earn passive income rewards for deposited cryptocurrencies.
- Helps secure the blockchain network.
- Easy to do on centralized exchanges.
- When joining a betting pool, no equipment is required.
- Proof of Stake is less energy intensive than Proof of Work.
Minuses:
- Cryptocurrency is volatile, and locking crypto into a staking contract means you won’t be able to sell it if the price starts to drop.
- Staking contracts can be vulnerable to cyberattacks.
- Withdrawals from staking pools can take up to a week (or more).
Bottom line on staking cryptocurrencies
If you believe in the future of crypto, staking can be a great way to earn additional crypto rewards, rather than just letting your crypto balance sit idle. There are several ways to earn staking rewards, with some more lucrative than others.
Staking also comes with some risks, including the risk that your cryptocurrency will be locked in a smart contract, preventing you from accessing it for a certain period of time (sometimes years!). The rate should be considered as a long-term investment, but speculative.
In general, staking through a crypto exchange is the easiest (and most flexible) way to earn crypto rewards through staking, but as always, be sure to read the terms and conditions before entering into a staking contract.
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