Staking Masterclass
What Is Staking?
In 2020 we saw the rise of Decentralized Finance (DeFi), a new crypto industry that became prominent after Compound’s token launch in June 2020. Staking came to be through the power of smart-DeFi protocols offering incredible incentives for those willing to stake their assets and lock them into risky smart contracts by providing both interests on investment and governance tokens that shot up dramatically in value. Since then, the DeFi market cap has exploded in size, and the industry continues to evolve. *1 *2
Some will argue the DeFi space primarily took a backseat to NFTs in 2021. New passive income opportunities started to present themselves to savvy investors that offered significant protection against the cooling crypto markets at the end of the year. While the NFT space, Web 3.0, and the Metaverse are evolving, DeFi now has a proven track record of helping investors maximize their crypto earnings. *2
One of the most common ways to earn rewards is to sell your crypto for a profit. If you HODL, staking is a concept you’re familiar with, but if crypto and blockchain are new concepts, you may not be familiar with staking and its benefits and risks. Staking is a way to put your crypto to work and earn rewards by validating transactions. *3
Staking cryptocurrencies is a process that involves locking your crypto up, like insurance, trying to win a chance to validate a new transaction. If they incorrectly validate flawed or fraudulent data, they may lose some or all of their stake as a penalty. But if they validate correct, legitimate transactions and data, they earn more crypto as a reward.
Bitcoin Blockchain requires miners to earn rewards, while Ethereum-based blockchains that have adopted the proof- of-stake model support staking. Staking can be a great way to use your crypto to generate passive income, especially because some cryptocurrencies offer high-interest rates for staking.
How staking in crypto works
Proof-of-Stake
A Proof-of-Stake blockchain (such as Ethereum 2.0, Solana, or Tezos) allows validation based on having tokens staked by the validators. In PoS, the validation responsibility is randomly assigned among validators who have staked assets. Typically, the size of the staked assets will influence their chances of selection. Then, after the transactions and activity is reviewed, a reward is paid to the validators. *4
The requirements to be a validator vary by blockchain. Investors can group or pool their tokens to participate. These groups are known as “staking pools” and are a common way for individual investors to stake crypto and receive rewards over time. *4
PoS has gained momentum for two primary reasons: energy usage and scalability. *4
One significant critique against cryptocurrencies is a large amount of energy used to secure the blockchain. Using the Proof-of-Stake consensus mechanism, the necessary computing power is drastically reduced, and this energy efficiency allows broader adoption of ‘greener’ chains.
Early blockchains were relatively simple compared to today’s chains which run smart contracts powering innovations such as DeFi and NFTs in addition to everyday financial transactions. With Proof-of-Work, fees and validation processing time can grow to create bottlenecks and increased costs or gas prices. Anyone who transacted on Ethereum 1.0 during the recent NFT cycle can attest to high fees and how these limit the growth and adoption of cryptocurrencies. *4
Benefits of Staking
The primary benefit of staking is that you earn more crypto; interest rates can be very generous. Sometimes, you can make more than 10% or 20% per year. It’s potentially a very profitable way to invest your money. And the only thing you need is crypto that uses the proof-of-stake model. *3
Staking is also a way of supporting the blockchain of a cryptocurrency you’re invested in. These cryptocurrencies rely on holders staking to verify transactions and keep everything running smoothly.
How are Staking Rewards Calculated?
As investors consider staking, there will commonly be a rate of return (APR or APY) or reward percentage shown to estimate the returns over time. Values give a sense of the expected rate of return; however, investors should investigate the return time frame, lockup periods, total token supply, reward plans or changes, auto-compounding, and other token- specific plans that may influence returns. The best place to review is the blockchain’s website for a whitepaper or discord group that can answer questions and provide clarity. *4
Keep in mind the fiat value of the token is not considered in most staking reward systems. While a stable or growing value token may offer extremely appealing rewards (token appreciation + staking rewards), losing value in fiat can easily wipe out any gains from staking. As with traditional finance, the largest promised returns often have a higher risk associated with them. A token with a large APY is probably more volatile in fiat value than a more established coin with moderate staking returns. *4
Risks of Staking
While staking can be an excellent way to build up a crypto portfolio, it is not without risks. The primary staking risks are fiat value, lockup or vesting periods, and counterparty risk with the pool operator, the project team, or the chain itself. *4
Fiat Value
Any investor in crypto markets understands the volatile nature of these assets. Crypto prices in USD (or any native currency) can change rapidly, which may increase or wipe out gains from staking. Even a 20% staking return can quickly evaporate in fiat value when the market shifts. On the other hand, upward price movements compound staking gains. *4
Lockup Periods
Lockups or vesting is another option for an investor before choosing to stake tokens. For most coins, when you stake, you are committing to locking up your tokens for a set period. Sometimes, this is as short as a few hours, but more commonly, it’s a week, a month, or longer. *4
If you are actively seeking to trade or would like the freedom to react quickly to market conditions, staking coins that require a lockup may not be the best option. Consider investment time frames. With compounding rewards and petite, regular payments over time, staking is often a better choice for a long-term investor and a personal investment time frame is a crucial consideration. *4
Counterparty Risk
One additional risk consideration with cryptocurrency staking is called “counterparty risk.” Counterparty risk is traditionally defined as the likelihood that the party with which you trust your assets may not uphold their side of the deal. *4
In terms of staking, if you are working through a staking pool that relies upon a pool operator to run the validator, there is a risk of fees or penalties assessed to the pool. These fees are typically assessed if the pool operator has downtime or dishonest actions.
Blockchains are new technologies, and there is always an outside risk of a catastrophic chain failure that could put locked or staked funds at risk. *4
How to Get Started
The process is not as complex or daunting as it may seem. Users can get started with most big crypto exchanges (such as Coinbase) or on the respective project’s website. Keep in mind that the process below is the most straightforward starting point. Becoming a full validator would require additional investment and technical knowledge beyond the scope of anything we’ve learned. *4
A quick overview of the process is as follows:
Identify which token you want to stake Purchase tokens
Commit tokens to a staking pool
According to Forbes in September 2022, these are the best staking platforms:
Quint – Overall Best Crypto Staking Platform
DeFi Swap – Best Crypto Staking Platform for High Interest
ZenGo – Popular Crypto Wallet for Lending, Staking, and Interest Account eToro – Best Crypto Staking Platform in the US
Crypto.com – Best Crypto Staking Platform for Flexible Withdrawals MyCointainer – Some of the Best Crypto Staking Rewards on the Market
Coinbase – Popular Exchange That Also Offers Crypto Staking Services Binance – Great Platform for High Staking Rewards
LooksRare – Earn up to 221% APY for Staking LOOKS
BlockFi – Best Crypto Staking Platform for Stablecoins
Nexo – Earn Upto 8.5% APY on Bitcoin Holdings
Kraken – Top On-Chain Staking Platform with Attractive Yields Gemini – Trusted Platform to Trade and Stake Crypto
Methodology
Forbes assessed the features and options offered by nearly 25 cryptocurrency exchanges, crypto trading apps, and brokerage platforms that provide crypto trading options.
To identify the best exchanges for staking, Forbes looked at eight key variables to assess each platform:
Basic Trading Features. Key metrics included the number of cryptocurrencies available to trade, the number of fiat currencies accepted, the exchange’s overall liquidity, and trading fees. *5
Advanced Trading Features
We looked at the availability of complex trading features like advanced order types and volume discounts for frequent trading.
Platform Availability. While some of the best crypto exchanges are available everywhere, others have varying degrees of accessibility to different features by country and U.S. state. *5
Customer Service. Available types of customer support.
Educational Resources. We evaluated the educational content offered by each platform.
Crypto Rewards Credit Card. A few platforms offer crypto rewards credit cards.
Security and Storage. Types of storage options, safety, and insurance available, plus an assessment of any large-scale hacks of each exchange over its lifetime. *6
Staking and Rewards. Some platforms allow users to stake cryptos and earn interest payments.
Staking is how many cryptocurrencies verify their transactions, allowing participants to earn rewards on their holdings. Staking cryptocurrencies is a process that involves committing your crypto assets to support a blockchain network and confirm transactions. *3
