Since 2020 is being viewed as the year of decentralized finance (DeFi), it is important to talk about the central role played by cryptocurrency staking in the ascent of this new generation of assets. The industry experienced a steady increase in the number of people staking cryptocurrency for yielding farming rewards or earning fixed interest, while the number of miners began to dwindle on proof-of-work (PoW) blockchains, with the exception of Bitcoin. As a matter of fact, crypto worth more than a billion dollars has already been staked in Kraken’s platform alone, whereas other exchanges like Huobi and Binance are also holding humongous amounts of staked cryptocurrencies.
Meanwhile, January 2021 numbers indicate that the total assets staked in decentralized finance platforms have reached between $21 and $23 billion. This is an indication of the huge demand for staking. But, what exactly is it? Let’s find out:
What is Crypto Staking?
Staking is defined as an activity where users hold or lock their funds in a crypto wallet for participating in maintaining the operations of a blockchain system that’s based on proof-of-stake (PoS). It bears some similarity to crypto mining because it enables a network in reaching consensus while rewarding those who participate. In the case of staking, the right of validating transactions depends on the number of coins that are ‘locked’ within a wallet. However, similar to how you mine on a PoW platform, stakers are given incentive to add a transaction on the blockchain or find a new block. Other than the incentives, the proof-of-stake (PoS) platforms offer high transaction speeds and are scalable.
What Can you Stake?
Due to the increasing popularity of crypto staking, there are various options for users who are interested in earning a passive income with their crypto assets that are lying idle. Some of the biggest cryptocurrencies that are currently offering staking rewards are mentioned as follows:
Ethereum 2.0 is one of the hottest staking options to explore, as it is the second-most popular crypto in the market. If you have invested in Ethereum, then you can become one of the early validators and help the system flourish. If you want to stake Ethereum 2.0, then you need to own a minimum of 32 ETH, along with the Eth1 mainnet client. If you have kept up with the explosion of the decentralized finance (DeFi) industry in 2020, then you are probably aware that most of the growth is due to the staggering potential rewards that are offered by yield farming protocols operating as ERC20 tokens.
Introduced in June 2018, Tezos caused a major storm because it became the biggest initial coin offering (ICO) with nearly $230 million accumulated in investment. A version of PoS is implemented by Tezos, which is referred to as liquid proof-of-stake (LPoS). The native currency of Tezos is known as XTZ and the staking process is referred to as ‘baking’. The native coin is used for rewarding the bakers. In addition, malicious brokers are also penalized as their stake is confiscated.
If you want to become a baker/staker on Tezos, then you have to have around 8,000 XTZ coins and should run a full node. The good news is that some third-party services have been introduced, which allow small coin holders to delegate their small quantities of XTZ and share the baking rewards. The annual percentage yield that people can earn from staking XTZ ranges from 5% to 6%.
The primary aim of Algorand (ALGO) is to drive down the cost of cross-border payments. Since it is a PoS protocol, stakers are required by the network for transaction processing and security. As opposed to Tezos, it makes use of the pure proof-of-stake (PPoS) mechanism. But, stakers are still required to run full nodes.
In addition, you can also find third parties that offer support for ALGO delegation. You can get staking rewards between 5% and 10% annually on these networks, but they will depend on the network you use. For instance, people who are using Binance Staking will benefit from an APY (annual percentage yield) of 8%.
Another platform that allows staking is the complex Korean blockchain project known as Icon (ICX). However, Icon is a bit different from Tezos and Algorand because it makes use of the delegated-proof-of-stake (DPoS) consensus algorithm. This involves a select number of users finding new blocks and verifying transactions, whereas others delegate the coins they have to these entities. The native token of the blockchain is known as ICX and the annual staking rewards that people can earn can be between 6% and 36%.
Where to Stake?
In order to start crypto staking, you first need to figure out where you can stake. There are several options that you can explore in this regard and these are mentioned below:
It was a given that due to the popularity of staking, exchanges were also going to jump on the bandwagon because they have a huge number of users on their platform. Staking gives traders the opportunity to diversify their income stream and also monetize the funds left idle on exchanges. Some of the top crypto exchanges that are supporting staking include:
The largest crypto exchange by trading volume is Binance due to which it is at the top of the list of various investors. Therefore, Binance introduced its Ethereum 2.0 staking service in December 2020. Plus, the exchange also offers support for DeFi staking, where cryptocurrencies like Tether (USDT), DAI, Binance Coin (BNB), BTC, and Binance USD (BUSD) are accommodated.
Another leading crypto exchange where you can stake a number of cryptocurrencies is Coinbase. Other than ETH 2.0 staking, Coinbase also accommodates coins like XTZ and ALGO.
This form of staking is referred to as cold staking. However, the staked coins have to be kept in the same address because moving them to a different one can break the lock-up period, which will cause them to lose the staking rewards.
There are a number of leading private/offline crypto wallets that support staking, which include Ledger, Trezor, CoolWallet S and Trust Wallet.
As opposed to wallets and crypto exchanges that double up as storing and trading avenues, the staking-as-a-service platforms are dedicated to staking. However, a percentage of the rewards is taken by these platforms for covering their fees. Soft staking is the term used to define staking on such platforms. Some of the top options that you will come across include Stake Capital and MyCointainer.
A number of decentralized finance (DeFi) platforms have been established, which support crypto staking. Yearn Finance (YFI) is an excellent example, which was founded in February 2020 as a DeFi aggregator. Rather than facilitating borrowing and lending, it distributes the funds deposited into platforms that have lower risk profiles and the best yields. It is not the only option that you can explore for staking. There are other DeFi protocols that can also be used, such as Maker (MKR), Synthetix (SNX) and Compound (COMP).
You can check out the different methods of staking and give it some thought before you choose a platform for staking your crypto assets.