You may have heard of people who make money by trading cryptocurrency. But there is a different way to grow your crypto holdings without having to buy more.
This practice, called “staking,” is a method of using certain cryptocurrencies to help verify transactions on the blockchain network. Investors who participate in staking can earn returns that exceed what is available from a typical savings account.
Although the terminology of staking crypto seems complicated, the principles are straightforward. There are a growing number of online exchanges that aim to make the process of storing cryptocurrency simpler for ordinary users.
If you are deciding whether to use your holdings in order to store cryptocurrency, it can be helpful to understand how the process works, what cryptocurrencies you can share and some of the risks involved.
What is Crypto Staking?
Staking Crypto is an important part of the technology behind some cryptocurrencies. To understand it, it is helpful to have a basic understanding of What Blockchain Networks Do. Here are some details you need to know.
The blockchain is “decentralized,” meaning that there is no intermediary – such as a bank – to validate new activity and ensure that it is consistent with the historical record that computers across the network keep. Instead, users collect “blocks” of recent transactions and submit them for inclusion in an immutable historical record. Users whose blocks are accepted will receive a transaction fee paid in cryptocurrency.
Staking is a way to prevent fraud and errors in the process. Users proposing a new block – or voting to accept a proposed block – put some of their cryptocurrency to the test, incentivizing play by the rules.
Generally, the more at stake, the better the chance of the user to earn transaction fee rewards. But when a user’s proposed block turns out to contain inaccurate information, he may lose some of his stake – in a process known as slashing.
What cryptocurrencies allow storage?
A number of popular cryptocurrencies now include staking. If the cryptocurrency is linked to a “Proof of Stake” blockchain, which uses the incentive mechanism mentioned above, it may be eligible for installation.
However, staking works differently from blockchain to blockchain, and it is likely that some crypto assets are backed by staking features on popular cryptocurrency exchanges, making the process easier to navigate.
Currently, Coinbase, the largest crypto exchange in the United States, is automatically staking most people who hold algo (the Algorand blockchain’s original currency) on its platform. Coinbase says this can earn users a return of 4% annually.
Some of the other major cryptocurrency networks that support staking . include: Solana And Cardano.
There are many cryptocurrencies that do not support staking.
Bitcoin, by far the most valuable cryptocurrency, uses a different method to validate transactions. It’s called “proof of work,” and it’s a very energy-intensive process that requires users to put in a massive computational effort before they can send a new block — and reap the potential rewards.
However, some exchanges and other financial companies offer customers the ability to lend their cryptocurrency, allowing participants to earn interest on bitcoin and other digital assets without betting.
How do you bet cryptocurrencies?
There are several ways to start earning cryptocurrency, depending on the amount of technical, financial and research commitment you are willing to make.
Your first decision will be whether to actually validate transactions using your computer or “delegate” your cryptocurrency to someone who does this legal work on your behalf.
Networks that support encrypted storage typically allow the people who own the tokens to supply them to other users to post to verify transactions, thus earning a share of the rewards.
The simplest option is to use an online service to share your codes for you. Some of the popular cryptocurrency exchanges offer staking for a commission.
The best way to serve investors is to use the resources provided by the exchange, says Rob Margolis, head of native crypto at BlockFi, a financial services company focused on cryptocurrency.
“If you look at it from the perspective of the average user, many major centralized platforms offer staking, and they do so with the best infrastructure providers in the space” as crypto miners, funds, and companies, says Margulis, who oversees relationships with BlockFi clients.
Exchanges that offer staking
Among the cryptocurrency exchanges reviewed by NerdWallet, there are at least three risk offerings for some crypto assets: Binance.US, Coinbase, and eToro. Others offer reward programs that allow users to earn more cryptocurrency in a similar way to hoarding. (See our list of exchanges with Best staking programs and rewards.)
Join the pool
If you don’t want to trust an exchange to make your staking decisions – or if you can’t find one that supports the token you want to participate in – you can join what’s known as a “staking pool” run by someone else’s user.
To do this, you probably know how to use a file crypto wallet In order to connect your tokens to the validator set.
The official websites of many proof-of-stake blockchains include information on how to look for validators, including links to details on how they work. Some potentially useful data on the Ethereum system, for example, is in Lighthouse.
Omkar Bhat, head of data engineering at Boston-based analytics firm Flipside Crypto, suggested looking carefully at a potential auditor’s track record.
Some publicly available information can help you see if a pool operator has been penalized for errors or infractions, and some put in place their policies to protect people who delegate tokens. Other details you can look at include the level of fees or commissions.
It’s a good idea to choose a fixed pool, says Bhatt, although you may not want to choose the absolute largest pool. Blockchains are supposed to be decentralized, so there is an argument to prevent any one group from accumulating too much influence.
“People often delegate auditors with less voting power to further decentralize the ecosystem,” says Bhatt.
become an auditor
Creating your own storage infrastructure can be complex. It requires appropriate computing equipment and software and a download of a copy of the entire blockchain transaction history. It can also have a high cost of entry.
On the Ethereum network, for example, you should start with at least 32 ETH, which on October 21, 2021, will be worth about $136,000. Accumulation through an aggregator or through an online service does not carry such requirements.
What Kind of Returns Does Staking Offer?
Staking rewards vary based on the cryptocurrency, conditions (such as the demand for the respective blockchain network), and the method you use. But the prices offered by the exchanges provide insight into what you can expect.
Binance.US, for example, estimated in late October 2021 that annual rewards for staking algo would range from 8 to 10%. Coinbase had 4% annualized return and Ether at 4.5% per year.
For comparison, the return on Savings Account Review by NerdWallet Generally around 0.5% APY. Average interest for US savings accounts is 0.06% APY, according to Federal Deposit Insurance Corp.
Is staking the right choice?
Staking may not be for everyone. There are some questions to ask before deciding whether to share your cryptocurrency.
Will you need to access your cryptocurrency stack?
Crypto staking can involve committing your assets to a specific period of time during which you may not be able to sell or trade them. If you think you might transfer your cryptocurrency on short notice, be sure to look at the terms carefully before putting them in place.
It is important to remember that cryptocurrency is a volatile asset. While crypto staking can provide a predictability measure for investment returns, if the market value of your cryptocurrency drops by 20% during the time you bet, for example, the rewards you get may not look attractive.
Do you believe in the project?
In the end, deciding to participate in your cryptocurrency may come down to whether you feel confident that it is a good long-term investment.
If you believe in the value of the Ethereum network, for example, the daily fluctuations in prices may not affect your willingness to sell. Margolis says that staking is one thing you can do to get a shorter-term value out of a crypto investment that you want to stick with.
“If you are holding [tokens] In Your Portfolio Because you have a basic fundamental view of the asset, the question is, what do you want to do with that asset while it’s in your portfolio? ” He says.
Betting, and the risks and rewards associated with it, may be the answer for some.
The author owned bitcoin at the time of publication. NerdWallet does not recommend or advise readers to buy or sell bitcoin or any other cryptocurrency.