Staking is a passive income opportunity that involves locking up your crypto for daily rewards.
It is technically defined as the process of actively participating in transaction validation on a proof-of-stake (PoS) blockchain in order to receive rewards.
It is similar to "mining" on a proof-of-work (PoW) blockchain.
However, with staking, instead of using expensive mining machines that require so much electricity to operate, one is only required to buy and lockup the native cryptocurrency of the blockchain network.
Anyone can participate in staking on a PoS blockchain as long as you own and lockup the minimum-required balance of the specific cryptocurrency on the network.
For the purpose of this article, we will go with the following definition.
Staking is the act of locking cryptocurrencies to receive rewards. ~Binance Academy
For more technical details about staking, and how proof-of-stake blockchains work, I recommend you read the referenced Binance Academy article above.
Types of Stakers
There're basically two types of stakers.
Let's call them:
Validators (active stakers)
Delegators (passive stakers)
Both must lockup funds but on different terms and differing responsibilities.
Let's briefly discuss the two below.
Validators
Validators stake directly on the blockchain and actively participate in validating transactions, voting for and proposing network changes, and contributing to all decisions regarding the blockchain network.
Delegators
Delegators are mostly investors looking to enjoy the benefits of staking while avoiding the responsibilities that come with it.
It could also be that they lack the minimum required balance, or lack the technical skills and knowledge to set up and successfully manage a validator node.
For example to become a validator on the Ehereum 2.0 blockchain, one must stake a minimum of 32 ETH and some setting up and managing is involved.
If you don't have the required 32 ETH, or you lack the skills to set up and run a node the only option left is to delegate your coins (voting power) to validators (pools, exchanges, and staking-as-a-service providers, etc) to act on your behalf and you get a share of the rewards they receive.
You will usually be charged a small staking fee for pool administration and security which is deducted from your staking rewards and the balance will be sent to you.
The rest of this article is dedicated to discussing staking as a delegator.
The 5 different ways to stake
Staking with centralized exchanges.
Staking with staking pools
Staking on non-custodial staking wallets
Staking on DeFi and CeFi platforms
1. Staking with exchanges
Nearly all top cryptocurrency exchanges now offer staking solutions.
Just create an account, deposit any of the supported cryptocurrencies you want to stake, stake them, and start earning daily rewards.
2. Staking with staking pools
Staking pools are projects that allow people to pool their funds together for staking in order to increase their chances of enjoying more rewards.
Most staking pools are centralized.
Meaning you have to send your funds to a wallet that only the pool controls.
However, several pools allow you to contribute your staking power while maintaining custody of your coins.
3. Staking on non-custodial staking wallets
Several wallets now allow you to contribute or delegate your staking power to a validator or even stake directly on the blockchain right form the safety and comfort of your wallet.
This removes the need to trust any cryptocurrency exchange, staking pool, or CeFi platforms with your coins.
Remember, not your keys, not your coins.
Click here for a list of the top staking wallets you can start using today
4. Staking on DeFi and CeFi platforms
Another good option for you to employ in staking your crypto is through DeFi and CeFi platforms.
DeFi staking platforms are protocols that allow you to stake the coins in your wallet simply by connecting and interacting with their smart contract.
Your coins never have to leave your wallet and thus is relatively safer than staking with staking pools or on centralized exchanges.
Moreso, there're centralized DeFi platforms such as Nexo, Celsius, Crypto.com, etc that allows you to deposit your funds with them and earn staking rewards.
With more options comes more freedom and opportunity to diversify and protect your investment.
It's not all about the rewards
The mistake most people make is that they think staking is all about the daily rewards and passive income.
Wrong!
Staking is a responsibility to secure the blockchain network by keeping it decentralized and functioning smoothly.
Staking entitles the staker to:
Validate (process) blockchain transactions on a PoS blockchain
Propose and vote on blockchain network changes
When you stake whether you know it or not, your coins are being used for all of the above purposes by the validators, staking pools, exchanges you stake with.
Security concerns
Your coins in the hands of the wrong validator is a threat to the network and your investment.
Too much concentration of staking power in the hands of a few pools, exchanges are a threat to the network and thus your investment as one or two of them can easily collude to make selfish changes as witnessed in the Justin Vs Steemit debacle where Binance, Poloniex, and Huobi used stakers funds to support Justin Sun's selfish and attempted hostile takeover of the Steem blockchain.
Therefore, if you cannot stake as a validator, the responsibility is on you to delegate your staking power validators who will act in the best interest of the community.
Not the criminal minded ones that will rather use your stake to promote and support their own selfish agendas.
Because if you don't, you'll lose more when the network suffers or worse, collapses.
You may also like:
Are you considering or already staking? What staking methods do you use and how's been your experience and returns so far? Share with us in the comments section below.
Great article! Answered almost all my questions 🙏 don’t you mind if I ask you a few ? What is your attitude towards staking Pocket Networks at P2P https://p2p.org/networks/pocket and what do you think about this project in general? Is it worth investing?