Staking FAQs

Staking is an activity where a user locks or holds his funds in a cryptocurrency wallet to participate in maintaining the operations of a proof-of-stake (PoS)-based blockchain system. It is similar to crypto mining in the sense that it helps a network achieve consensus while rewarding users who participate.

In staking, the right to validate transactions is baked into how many coins are “locked” inside a wallet. However, just like mining on a PoW platform, stakers are incentivized to find a new block or add a transaction on a blockchain. Apart from incentives, PoS blockchain platforms are scalable and have high transaction speeds.

The proof-of-stake (PoS) consensus mechanism utilizes validators to verify transactions and maintain consensus in a blockchain network. The network incentivizes users to run validator nodes and stake their coins, which helps secure the network in return for earning interest on their stake.

There are some variations as to how PoS systems work depending on which protocol, but generally, the algorithm chooses blocks at random and assigns them to a validator node for review. The validator then checks the legitimacy of the transactions. If everything is accurate, the validator adds the block to the ledger and receives the block rewards and transaction fees. However, if a validator adds a block with the wrong data, its staked holdings will be penalized.

PoS is known for its superior energy efficiency, lower barriers to entry, and better scalability to PoW. In fact, the Ethereum PoS model also offers stronger support for shard chains, one of the most promising scaling solutions to date.

The main difference between mining and staking is the underlying blockchain consensus mechanism used to validate transactions. Mining is used for Proof-of-Work (PoW), most notably in BTC. Meanwhile, staking is mainly used for Proof-of-Stake (PoS), such as in Ethereum 2.0 – Ethereum’s shift from PoW to PoS consensus mechanism.

The following are some of the differences between mining and staking:

• Mining – miners solve complicated mathematical puzzles vs Staking – nodes in the network engage in validating new blocks by locking up their funds.

• Mining – the first miner to solve the mathematical puzzle adds a block to the blockchain vs Staking – nodes validate a new block by locking up native tokens in a smart contract.

• Mining – requires specialised mining hardware (e.g. GPU) which consumes a lot of energy vs Staking – widely considered to be more environmentally sustainable, saving over 99% of energy consumption according to Vitalik Buterin.

• Mining – more computational power (work), higher chance of solving the block and getting rewarded vs Staking – more native tokens staked (stored value), more likely to get selected to validate new blocks.
  

In 2022, there is a smorgasbord of staking opportunities both on crypto exchanges like Binance, Coinbase and FTX, as well as directly on specific blockchains’ native wallets or dedicated hardware wallets. Here are a few of the best. However, there are many others to consider, such as Fantom, Avalanche and Solana.

Before hurrying to stake your coins, your choice of staking platform is as important as the rewards. Making the wrong choice may see you lose your rewards and staked coins all together. Here are some best practices when choosing a staking platform:

• When it comes to new DeFi platforms, never take a founder’s or team’s word for whatever protocol they are trying to introduce, especially if you are a non-tech person. Go over to Reddit and Twitter and see what others are saying about the protocol. Dev users can usually spot the possibility of a rug pull and will usually alert the community for any signs of foul play or code vulnerability they can find.

• Don’t get too caught up in annualized rewards or APYs. There are many other crucial factors to consider such as the reputation and age of the platform.

• As much as possible, stick with reputable platforms like Maker, Cool Wallet, etc., instead of risking your crypto wealth on fishy-looking platforms that promise extremely high staking yields.

• Use reliable analytics such as CoinMarketCap to check information on a PoS-based platform. This also applies to staking-as-a-service platforms and third party staking services.

• Before staking, read the terms and conditions or rules governing the staking process. The rules take care of things like whether the wallet needs to be connected to the internet 24/7, staked crypto has to go through a cooling period before being unstaked and a minimum staking amount, among other factors.
  

The process of staking digital currencies depends on your staking option. For example, cold staking is different from directly being a validator on a PoS platform. Moreover, using staking-as-a-service platforms follow a different route from third party or exchange-based staking.

Here we shall look at how to stake crypto using an exchange. Let’s use Binance as our platform of choice and Ethereum as our cryptocurrency.

• First, you need to have a Binance account and some ETH coins. Luckily being an exchange, you can exchange your other coins to ETH.

• When logged in, access Finance>Binance Earn>ETH 2.0 staking.

• Note that staked ETH coins have a lock-up period of up to 24 months. Binance tokenizes the staked ETH and distributes rewards in the form of BETH.

• Hit “Stake Now” and specify the amount of ETH you wish to allocate to staking.

• Click “Confirm.” On the second window that pops up, review the terms and conditions before clicking “Confirm” again.
  

As of March 2022, here are some of the top exchanges where you can earn the highest staking rewards:  

• Binance: 8.19% for BTC, 25.12% for dYdX, 6.49% for AAVE, 5.23% for BNB (Higher yields and more crypto assets available on locked staking)

• Coinbase: 4.5% for ETH, 5% for ATOM, 4.63% for XTZ and 0.45% for XTZ

• Kraken: 4-7% for ETH, 12% for DOT, 4-6% for ADA, 12% for ATOM and more

• ByBit: 20% for UST, 5% for LUNA, 5% for SHIB, 3% for MATIC, 2% for SOL, AVAX and FTM
  

The process of staking crypto on a hardware wallet like Ledger is similarly straight forward. 

• The first step is to install the coin’s (e.g., ALGO) app on Ledger.

• Create a new account on Ledger Live and migrate the coins you wish to stake using Ledger Live.

• And you’re done!

But that’s not all. You can use coins stored in your Ledger wallet, but manage the crypto using other wallet applications. Staking using this formula follows the same steps as the above procedure, but after step one, you select a third party crypto storage.

After that, you need to send funds from the wallet to Ledger and start staking. Note that the third party wallet manages your crypto.

As of March 2022, here are two of the top hardware wallet where you can earn the highest staking rewards: 

• Ledger: 6% for XTZ, 7% for TRX, 8-10% for ATOM, 5-6% for ALGO and 10% for DOT (yields are an estimate and have not taken into account validator’s fees or commissions)

• Trezor: Trezor wallet does not support direct staking on its UI. However, you can connect to wallet apps like Exodus. Yields are 8.98% for ATOM, 4.91% for ADA, 5.46% for XTZ and more.
  

From the attractive yields above, it is clear why staking has grown so popular among crypto holders, as it gives them additional income from the crypto sitting in their accounts. Furthermore, with eye-popping hundred percent yields in some protocols, staking has properly cemented its place in the world of crypto. However, before you leap into the world of staking, here are some upsides and potential disadvantages you should consider.

Some of the benefits of staking crypto:

• Passive income generation – yields can range from attractive to outright outrageous, and can provide passive income catering to people with different risk appetites.

• Low entry – staking is easy and can be done in a few simple clicks, especially with major exchanges now offering staking services. Users do not need a huge amount to get started and staking is also energy efficient.

However, you might ask: is staking crypto safe? Here are some of the risks of staking crypto:

• Possibility of hacking/cyber attacks on the protocol or exchange – this is the main reason some crypto investors stake on hardware wallets.

• Possibility of fall in value of the coin, especially in volatile market conditions. When locked up in the staking period, you are unable to liquidate your holdings when downturn in price happens.

• Validator nodes holding your staked tokens may be penalised if it does not uphold 100% uptime in processing transactions.