You might have gotten interested in crypto investing for the capital gains but did you know that you can also earn passive income from holding crypto
in a similar way to earning interest from a deposit by staking cryptocurrency you own and with some potentially impressive yields.
In this video, I’ll go through what staking is, how to choose a coin to stake including the risks associated with staking and whether earning passive income from staking coins is really that easy.
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What is staking?
The simple explanation of staking is that it means you are making your coins available for use in validating transactions on a blockchain
and in return, you automatically earn crypto as payment for supporting the blockchain.
However to truly understand what staking means, you need to have a basic understanding of how cryptocurrency blockchains work.
A key problem that decentralised blockchains have been trying to solve is how can you trust that the transactions that occur on it are genuine.
The way this problem is solved is via what’s known as a consensus protocol
This refers to how the blockchain goes about authenticating transactions by incentivising users to validate transactions.
Bitcoin famously uses a proof of work consensus protocol which relies on computing power to solve complex mathematical problems to validate transactions on the network to earn rewards.
The proof of stake consensus protocol on the other hand relies on the amount of coins you have.
Those who have more coins have a higher chance of getting to validate transactions on the network.
Staking only applies for coins which run on a proof of stake blockchain protocol and we’ll come to which coins run on proof of stake protocols in the next section.
The next thing to note is that you can stake in 2 ways - either as a validator or a delegator.
Validators generally have an active role to play in validating transactions by maintaining the most recent software and ensuring that they keep their computer running at all times to claim the rewards.
Meanwhile delegators are those who hold coins but who want to passively earn crypto so they delegate their crypto to a validator and share in the rewards.
One common question is how staking compares to lending cryptocurrency.
Unlike lending you haven’t lent any coins to anyone so you’re not at risk of them not paying you back and it’s possible to stake without your coins ever leaving your wallet.
However as we’ll go through in the next section, there are still risks involved with staking depending on how you go about it.
So how do you choose a coin to stake?
There are three key things to consider when choosing a coin to stake.
As I mentioned before, you need to have a coin that is run using a ‘proof-of-stake’ blockchain protocol.
There are many coins which use a proof-of-stake protocol including Tezos, Polkadot, Algorand and Cosmos.
Ethereum also recently switched from a proof of work to a proof of stake protocol so staking rewards are now also available on Ethereum 2.0.
You can find this information easily on the internet including from a coin's website, white paper or third party information sites.
The second thing to consider is the staking rules of that particular cryptocurrency.
Some cryptocurrencies require you to lock up your coins for a period of time.
If the coin has a lock up period then you would need to wait out the agreed duration before being able to access your funds again.
This can be a major drawback if you’re not planning on holding long term.
Certain cryptocurrencies also punish validators if they don’t make themselves available or if they make a mistake by burning or confiscating their coins, known as slashing.
Therefore it’s important to make sure you know the rules of the cryptocurrency to avoid being burned or that you trust the validator that is staking on your behalf to abide by the rules.
There are also minimum amounts of cryptocurrency you need in order to start staking.
However if you don’t have enough coins there may be a staking pool you can join which accumulates crypto from multiple users and allows them to share in the staking rewards.
The final thing to consider is the yield offered for that coin. Different platforms offer different yields and yields can also change quickly.
Further because you are paid in crypto as a reward you are also exposed to any price fluctuations in the coin itself which may also impact your yield.
For example, yields are typically represented as APY or annualised percentage yield. If this doesn’t change, means that if you stake 100 coins, and the APY is 5%, you should receive 5 additional coins over a year.
However this doesn’t necessarily mean that you would get $5 from a $100 initial investment.
If your coins were worth $1 each and are now worth 80c each, then it follows that the 5 extra coins you received works out to have only earned you $4 rather than a $5 return.
So how do you stake your coins?
Binance and Coinbase, two of the largest crypto exchanges, both now offer staking solutions.
It is often as simple as pressing a button to offer up any eligible proof of stake coins for staking.
There are also specific staking as a service platforms however watch out for fees charged.
You can even stake directly from a hardware wallet - such as the Ledger. This is often a more complicated process than going through a platform
and is typically for more advanced users rather than for beginners but is more secure as you control your private key.
In summary, if you feel that staking your coins could be a passive income option, it’s incredibly important to choose a reputable staking platform rather than just going for the highest APY.
Staking can be an incredibly easy way to earn some extra income but as with any investment, there are risks involved.
I hope you enjoyed this video. Let me know in the comments below what you think about staking cryptocurrency and whether it’s something you currently do or are thinking about doing in order to earn passive income.
Thanks for watching and until next time