How To Stake Solana To Earn Passive Income: An Introduction
Solana, the native token of its blockchain powerhouse, seems to be on an inexorable rise with an unprecedented momentum, having risen from its lows of $8 back in November 2022 to outperform many other cryptocurrencies in the market. The Solana blockchain doesn’t just promise rapid transactions and scalability; it also offers a dual benefit of fortifying the network and yielding passive income through staking. With its innovative Proof-of-Stake (PoS) mechanism, augmented by the Proof-Of-History (PoH) protocol, Solana redefines the landscape for crypto enthusiasts, offering quick transaction sequencing and cost efficiency. In this article, we’ll uncover the intriguing world of Solana staking and how to get started.
The SOL Staking Ecosystem: A Quick Overview
Solana’s Delegated Proof-of-Stake (DPoS) approach involves users staking their SOL tokens to participate in the consensus process. Validators, responsible for confirming transactions, prioritize based on their staked SOL. It’s a system that not only secures the network but also rewards active participants.
SOL, the native utility token, is versatile, serving as the currency for transaction fees, network validation, and staking.
Ways To Stake SOL
Apart from HODL-ing SOL and benefiting from its price appreciation, SOL can be staked to generate compounding interests which add up over time. There are many ways of doing so, which can be broadly categorized into staking via hot or cold wallets.
Hot Wallets
Cryptocurrency exchanges and 3rd party custodians offer lucrative returns on your SOL tokens, apart from providing great convenience and liquidity. The intuitive and user-friendly interfaces of these platforms ensure ease of access and usability, facilitating transactions especially for newcomers. However, as the adage goes “not your keys, not your coins”, the risks of third-party custody cannot be overstated, as you are essentially entrusting your assets into the care of a fallible entity.
Among the many hot wallets in the market, few have withstood the test of time and have earned my ‘relative’ trust, such as
Nexo — a centralized finance platform that primarily focuses on crypto borrowing services and offering high-yield savings accounts for a wide range of cryptocurrencies such as Solana
Binance — the largest cryptocurrency exchange in the world, that isn’t devoid of its fair bit of controversies in the realm of cryptocurrencies
HTX — formerly known as Huobi
Nonetheless, it is noteworthy that every one of the above has had its own respectable share of FUD, which is inevitable given the air of distrust brewed by the downfall of one too many a centralized exchanges in the past year such as FTX, Celsius and the likes. As such, it goes without saying that due diligence and caution has to be exercised before investing in any of these platforms. If peace of mind is your priority, cold wallets are the preferable option.
Cold Wallets
Holding your cryptocurrency assets in cold storage is the epitome of digital security — however your coins are only as secure as your keys, for which you are responsible to safeguard.
While there are numerous platforms available, my favourite wallet for staking SOL is Exodus, which runs on desktop/ mobile devices.
Exodus offers the ability of staking SOL at an enticing 7% APY, while keeping your private keys safe. While the keys are stored offline, do note that however any malicious codes or viruses on your device may compromise these keys, hence rendering them vulnerable to interception by adverse parties over the internet. As such, the ‘cold storage’ of such private keys is only as good as it is segregated from the internet, which is often the case difficult to do — that is, unless you have an offline device solely designated for this purpose, for instance.
As such, the true and ultimate form of cold wallets that are absolutely devoid of contact from the internet are hence hardware wallets such as Ledger. For those with substantial holdings, the security of a hardware wallet is strongly recommended.
Earning and Managing Rewards
Earning rewards from your staked SOL is seamless. Rewards are automatically claimed and added to your balance at the conclusion of each epoch, which spans 4 to 8 days. However, it’s essential to remain cautious, as if a validator faces a slashing event, it can impact all those who’ve delegated their stakes to that validator. To mitigate this risk, spreading your stakes across multiple validators is a wise move.
Unstaking SOL: What You Need to Know
Unstaking is the process of withdrawing staked SOL from the network. When SOL is unstaked, it becomes available for transfer or sale, but it is also subject to a cooldown period of to 3 days during which it cannot be used.
Final Thoughts
Solana’s staking mechanism offers both financial rewards and active network involvement. As with any crypto venture, it’s critical to stay informed and maintain a diversified approach to minimize risks. By embracing Solana staking, you’re not just maximizing your passive income but contributing to the vibrant and secure Solana ecosystem. Start your Solana staking journey today and unlock the potential of your crypto holdings!
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This article was originally my Medium blog on 2nd November 2023