What is Staking in Crypto & How to Do It [+Examples]

Cryptocurrency is one of the most revolutionary developments in the world of payments and finance, which is something even its detractors are forced to admit. It’s changed a lot how we view money, and every crypto enthusiast has at one point asked the question, “What is staking?”

The answer isn’t all that complicated, but staking still manages to be misunderstood and, sometimes, wilfully misrepresented. However, its importance to the blockchain industry, especially considering most new chains are proof of stake, cannot be understated.

On top of that, the term “staking” is bandied around so much because it often provides a passive income. If you listen to a lot of financial advice, you know all about how passive income is regarded as one of the most attractive features of an investment.

So, let’s look at what staking is, what it isn’t, and how you can get started staking crypto in the safest possible way.

What is Staking?

Staking is often referred to simply as a way to deposit digital assets with a platform and earn a yield. It’s also frequently compared to a high-yield savings or fixed deposit account you could open at a bank or other financial institution.

A high-yield savings account is nothing to sniff at after a decade of near-zero interest rates in the developed world. The thing is, that’s only telling half the story.

The question “what is staking” is better answered by saying that staking means locking up your digital assets using the smart contracts of a given blockchain. Since most people would rather keep full custody of their assets than lock them anywhere, staking is incentivized with a yield.

Different blockchains have different terms. Some require you to lock tokens up for quite a while when staking. Others let you stake and unstake with minimal turnaround time.

So, the first big difference between staking and a financial product like a savings account is the fact that you’re depositing your funds into a smart contract and not a bank. This is important in several ways, including the fact that smart contracts are fully transparent and decentralized and that banks fail all the time.

And when they’re not busy making risky bets, they’re putting your money towards some of the most undesirable activities and organizations imaginable.

How Does Staking Work?

The second major difference between a financial product and staking is the source of the yield you receive. Banks give you a yield for the privilege of turning around and lending your money to someone else at a far higher rate. Depositing for longer with a fixed deposit product often pays more because the bank gets to play with your money for that much longer.

The point of staking, however, is actually to secure a blockchain. Bitcoin is a proof of work network and is secured by miners competing for its vaunted block reward. Proof of stake (PoS) works a little differently.

In PoS, miners are replaced by validators. Essentially, they do the same thing, securing the network by producing and validating blocks, but validators don’t need a bunker stuffed with computers. They have to buy coins and stake them.

The more coins a validator stakes on the network, the greater their chance of being chosen as the block producer and winning the block reward. This forces them to have “skin in the game” rather than load up on lots of hardware.

So, if you wanted to stake a cryptocurrency like ETH, you’d need to have at least 32 ETH (the staking minimum) and set up a server to act as a validator node. Many people do this, but it’s a bit of a tall order if you’re new to crypto or don’t have the required capital and technical expertise.

Many blockchains, therefore, allow delegation. This means that holders with few network coins and no desire to run a validator node can also lock their coins up and take a portion of the block rewards.

Benefits of Staking Crypto

Now that we’ve cleared up exactly what staking is, let’s look at what the various benefits of staking are:

• Network security. If you’ve invested in a particular cryptocurrency, you want the blockchain as a whole and its ecosystem to do well. You can play an active part in decentralizing and securing the blockchain you’re invested in by staking.
• Decentralization. Blockchains are all about decentralization, and by staking coins, you’re making the chain even more decentralized than before. The more people stake, the less power the whales and single entities have over the network.
• Passive income. Despite the other advantages of staking crypto, it’s important not to underestimate the power of passive income. Even better yet, crypto tends to appreciate over time, so why not earn more of a great asset?
• Non-custodial storage. One of the wonderful things about staking is that, in some cases, your funds don’t even have to leave your wallet. Even when it does, it’s locked into smart contracts that you can audit beforehand to ensure nobody else has access.
• Transparency. Most blockchains are extremely transparent. You can trace your funds from your wallet to the smart contract and back, verifying what happens to them at every step. Banks, on the other hand, are like a black hole. Your money goes in, and then who knows what happens to it.

Risks of Staking Crypto

Despite all of the benefits, staking crypto isn’t completely risk-free. Let’s take a look at what, if anything, could go wrong:

• Misrepresentation. Many platforms, including cryptocurrency exchanges, will pay you a yield if you “stake” your crypto with them. These are no better than unregulated bank accounts because you have absolutely no guarantee that your crypto is actually being staked. Even in cases where the platforms are actually staking your crypto, you’ve still sent it to them. This means that they own the crypto, and as a customer, you come last when and if they fail. Just ask anyone who used to use Celsius or FTX.
• Liquidity risk. Many blockchains impose vesting terms when you stake. This means that it may take a certain amount of time before your funds are unlocked from when you decide to stop staking. Not having immediate access to your funds isn’t the nicest feeling.
• Volatility. Tied to the above, you can also find yourself locked in if the market starts to crash and you decide you’d like to liquidate. This sort of mechanism can help to limit the seriousness of crashes, though.
• Regulation. Powerful authorities such as the U.S. Securities and Exchange Commission are taking a serious look at staking. A lot of their attention is on misrepresented “on-exchange staking,” and despite what the power brokers may try to confuse you with, that’s not staking at all. However, regulators may take a look at the minting of tokens in proof of stake cryptos as well, which may become an issue.

Cryptocurrencies That Use Proof of Stake

It’s important to remember that not every cryptocurrency can be staked. A platform offering you the chance to “stake” and earn a yield on Bitcoin, therefore, isn’t doing any staking—it’s lending your BTC to short sellers and letting them bet against you with your own coins.

Currencies that use proof of work as a consensus mechanism for their blockchain can’t be staked, and many tokens that exist on other blockchains can’t be staked either. It is, however, possible to stake tokens in liquidity pools in DeFi, fulfilling the definition of locking digital assets to smart contracts.

Here are some of the most popular cryptocurrencies that can be staked to secure their respective networks:

#1. Ethereum

As mentioned, it’s not particularly easy to stake ETH given the 32 Ether minimum and the need to run a validator node. There’s a further stumbling block in that staked ETH can’t be unstaked, at least until the Shanghai network upgrade is pushed through.

However, if you own a little ETH, there are decentralized ways to stake it. Liquid Staked Ether, for example, is a token you get when you stake ETH with Lido DAO. This means you can effectively unstake if you want to by selling your stETH tokens. You can also stake any amount of ETH or run a validator with half of the 32 ETH minimum with Rocketpool.

Staking Ethereum, therefore, can be quite complicated for the average user, but there are ways to get around its limitations.

#2. Cardano

In contrast to Ethereum, Cardano is extremely easy to stake. You can do so right from the interface of your wallet with no minimum staking requirement, and you can unstake coins with a minimal wait. However, you do need to own a certain threshold of ADA to participate in voting. Cardano also uses staking pools to enable users to earn rewards.

#3. Polkadot

A spiritual successor to Ethereum just as Cardano is (both the DOT and ADA founders were part of the original Ethereum core team), Polkadot is an extremely scalable network thanks to its parachain architecture. Staking isn’t quite as easy as with Cardano, but it still only takes a few minutes to set up.

#4. VeChain

The premier enterprise-grade supply chain blockchain, VeChain, is extremely popular among investors and also really easy to stake.

How to Stake Crypto

Now that you’re well-versed in what staking is and know what the top staking cryptocurrencies are, all that remains is how to do it.

#1. Buy Cryptocurrency

One of the biggest, and perhaps biggest, differences between staking and mining is the first step. If you want to mine crypto, especially an ASIC-based cryptocurrency like Bitcoin, you must spend money on mining hardware.

This can be tricky and even quite risky, since many ASIC manufacturers are obscure and hard to deal with. On the other hand, crypto exchanges tend to be a little higher up on the trustworthiness scale, although FTX may beg to differ.

Even if you don’t trust exchanges, there are infinite ways to buy many of the staking cryptos. Either way, your hard-earned fiat needs to be exchanged for the cryptocurrency you want to stake—and that benefits the coin’s ecosystem directly, not some offshore hardware manufacturer.

#2. Transfer Cryptocurrency to a Wallet

Once you buy the coins, you’re going to need a wallet. Sure, some exchanges will try to tempt you to stay on-platform with good yields, but we’ve already gone over why that’s not a great idea.

Crypto veterans love a good saying, and one of the best is “not your keys, not your crypto.” There’s wisdom in that, even if you just want to “hodl” your coins. To stake, though? You can’t actually pull it off without a wallet of your own.

#3. Stake your Cryptocurrency

Once you have coins in your wallet, you need to figure out what the next step is for your network of choice.

If you’ve got some ADA sitting in your Daedalus wallet, you can stake it in a staking pool without leaving the wallet interface. If you’ve got less than 32 ETH, though, you’re probably heading to Lido or Rocketpool to put your ETH to work. Got 1 DOT? Congrats, you can join a nomination pool with just a few clicks.

If in doubt, visit the official webpage of the network in question for quick, easy answers. Remember, staking benefits the network just as much as it benefits you, so you won’t struggle to find detailed official guides like this one for Polkadot.

When Should You Stake Crypto?

When to stake crypto depends purely on your own ambitions, strategies, and risk tolerance. If you are a true believer in the cryptocurrency or blockchain in question, then the answer is “whenever” or “always.”

Cryptocurrency is a very new technology, let alone an asset class, and is certainly considered by the world of finance at large to be very high risk. If you know what you’re getting into and are happy to hold for years, irrespective of volatility, then there’s no reason not to stake.

In fact, staking is generally designed in such a way that, by not staking, you miss out. Many staking cryptos have an inflationary supply, and this inflation is paid out to stakers. So, if you hold for ages and don’t stake, your share of the coin decreases relative to the supply.

If, on the other hand, you’re only in it for the short run? Then watch out for staking lockups and vesting. Scalpers and day traders don’t stand to gain anything at all from staking—in fact, the fees incurred when staking and unstaking mean that you probably shouldn’t consider it unless your time horizon is long enough.

Key Takeaways

Staking has captured the imagination of finance enthusiasts across the world since it provides attractive rewards on an asset class that tends to outperform. Crypto is seen as a great asset by many, so why not earn a little more of it while you hodl?

Of course, that’s only scratching the surface. Staking is the primary means of securing proof of stake blockchains, which means that you’re helping protect your investment when you choose to stake.

Not every crypto can be staked, but many tokens can. Even a few NFTs can be staked in one way or another. DeFi also offers staking for liquidity pools, but staking generally refers to directly securing the network—or delegating your stake to a validator or staking pool.

Staking does have risks, but the greatest of these is posed by many custodians offering you a yield in exchange for your crypto. As the recent collapses of Voyager, Celsius, FTX, and all others have shown, you’re better off staking your crypto yourself.

What is Staking FAQ

#1. Is crypto staking safe?

Crypto staking is safe as long as you don’t use a custodian. Smart contracts you stake to are auditable, and you can even read them yourself before engaging with them. Custodians, on the other hand, are only too happy to misuse your money.

#2. Does staking make you money?

Staking provides rewards in the form of rewards given to stakers when new network blocks are produced and validated. By staking, you’re taking a share of these rewards, which puts you in a better economic position than holders who aren’t staking. And, since crypto has real-world value, the coins you get as rewards also have a certain worth.

#3. What is staking and how does it work?

Staking is the process of depositing digital assets into a smart contract, generally to secure the network. Validators with more funds staked (or delegated to them) have a greater chance of creating blocks and receiving the block reward.