How to Stake Crypto For Passive Income

When Bitcoin was first envisioned over a decade ago, it was designed in such a way that a decentralized consensus mechanism was needed to verify or validate transactions without relying on a centralized authority such as a bank. Proof-of-Work was the mechanism of choice as it could be done using some mathematical calculations on a basic computer.

Move along ten years, and the proof-of-work method is slowly becoming obsolete. This is largely due to the centralization of crypto mining hardware and mining pools, advances in computers, and increasing power consumption as the process gets more difficult over time.

The next evolution in blockchain consensus is Proof-of-Stake which replaces computers doing work with assets being staked to ensure consensus and network security. It is essentially a mechanism that forces all network validators to have ‘skin-in-the-game’, or a ‘stake’ in order to validate transactions.

According to Binance Research, Sunny King and Scott Nadal were likely the first to introduce the concept of Proof of Stake and staking, back in 2012.

How Does Staking Work？

To understand staking there must be a little knowledge of proof-of-work (PoW) and mining which is the most popular consensus mechanism for the majority of blockchains at the moment.

To arrive at consensus and validate the next block on the chain, work must be completed by computer hardware. The reward is some of the currency that is being worked on.

Proof-of-Stake (PoS) replaces this power-hungry, number crunching process with rewards issued for assets staked on the network. This incentivizes coin holders to stake them, as it is in their interest that the network is healthy and transactions can be validated quickly and efficiently.

PoS also helps security by creating a ‘wall of value’ against would-be attackers, with the size and strength of this wall coming from the amount and value of tokens that make it up.

Usually, stakers that pledge larger quantities of coins have a higher chance of being chosen as the next block validator, and receiving the associated rewards. This could cause concerns of centralization as the whales profit more than the average person and have a greater control of the network.

The process of staking can be as simple as just transferring the crypto coin of choice from the exchange to its associated wallet and letting the assets start earning. Many exchanges now offer staking services but caution must be taken as some of them take a hefty cut of the rewards for the privilege.

What is Delegated Proof of Stake？

There is another consensus algorithm called Delegated Proof of Stake (DPoS) which has been considered as a more democratic method of staking. The mechanism works using a voting system whereby stakeholders outsource their work to third parties or vote for a few delegates that will secure the network on their behalf. Block producers are elected using this method, so they will be motivated to be honest and efficient else they get may get voted out.

Advantages and Disadvantages of Staking

There are several benefits to staking but as with anything, there are also disadvantages. The list below shows that the pros outnumber the cons when staking is considered.

Staking Advantages

Uses way less electricity and physical resources than mining

Security is improved as stakeholders have a vested interest in network health

Blockchains using PoS are much faster and can scale quicker

Easier source of passive income without spending a lot on mining equipment

Double earning potential if token prices increase

Staking pools can help coin holders merge resources to increase chances of validating blocks and receiving rewards

No need to have any trading experience or knowledge

Staking Disadvantages

Possible centralization as whales holding a lot of tokens may have more influence over the network

Crypto prices are still volatile so staked assets could depreciate

Staking with some coins may require them to be locked up for set periods

Staking on Exchanges

Not everyone is comfortable with crypto transactions, wallet management, and keeping their own private keys secure, so exchanges can offer these services. The major exchanges listed below offer staking services for various crypto assets, however, some only support their partnered projects, while others have a wider range.

Coinbase

Binance

Kraken

OKEx

Huobi

Poloniex

Bitfinex

All will take a cut of the staking reward for providing the service. This is where shopping around can help as the staking fees range from zero to as much as 25% on Coinbase. Binance currently offers the greatest range with 23 crypto assets available for staking with annual yields ranging from 1% to 16%.

There are also a number of newly launched staking providers that provide similar services to the major exchanges. Stake Capital, Stake.Fish, Staked, and Stakinglab are among them.

Staking Pools

Another option for earning passive income from staking crypto is to join a staking pool. These allow token holders to join together to combine computing resources in order to increase their chances of receiving the block rewards.

The concept is similar to a traditional mining pool which also operates on a shared resource principle. A pool manager will be in charge of the specific pool, and stakers will be able to join to collaborate with others seeking the same goal, a greater chance of winning the reward.

Staking pools often yield smaller and more frequent payouts as the reward must be divided by among the many participants of the pool. Additionally, most pools will charge a fee or cut of the overall staking reward just as the exchanges do but they also remove the technical hurdles that some may not be comfortable with.

Staking Wallets

Most PoS crypto tokens have their own dedicated staking wallet, however, there are a number of options that support multiple coins.

Atomic Wallet supports most of the top stakable tokens including Tezos, Tron, NEO, Cosmos, VeChain, and Cardano. It claims to offer zero-fee decentralized staking.

Alternatively there is Trust Wallet which is a similar platform also offering a range of PoS tokens including Tezos, Tron, Cosmos, VeChain, and Algorand.