What is crypto staking and what are the typical returns to expect

What is crypto staking and what are the typical returns to expect

Whenever we think of earning cryptocurrencies from validating transactions on the blockchain, we think of crypto mining, mostly Bitcoin mining. But mining is not the only option available for doing so. Crypto staking is another form of validating transactions for crypto rewards, and it's even easier and more environmentally friendly than mining. Unlike mining, which can be used only on proof-of-work tokens, staking is done only on tokens that use proof-of-stake protocols.

When you stake your crypto, you lock it up and receive interest. The recent crypto market crash has left many people scratching their heads and wondering if staking their cryptocurrencies is worth the potential rewards. Here we will discuss crypto staking and whether it is worth it.

Things to Know About Crypto Staking

  • You can only stake cryptocurrencies that use the Proof-of-Stake (PoS) protocol
  • There are two common ways we can stake our crypto. Using an exchange or joining a staking pool
  • There are risks associated with staking, such as tokens devaluing, your tokens being locked up for a certain period of time without being able to access them, and so on
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What Is Crypto Staking

Crypto staking is a process where you lock up your crypto tokens in a pool of validators. Staking is done only using tokens that use proof-of-stake protocols, such as Ethereum, Solana, Cardano, and others. 

When a new block gets added to the blockchain, it must be validated. Here is when staking pools come in. Whenever a new block gets validated, validators receive tokens as rewards. Usually, those tokens are the same as the ones we validated, but some blockchains and cryptos give out different tokens as rewards.

How much you stake will have an effect on the amount of reward you receive. Whenever a new block needs to be verified, the blockchain chooses validators and gives them rewards for their work. Because of this, the more you stake, the higher the chances of receiving these rewards.

Also, there is one misconception about staking. People think that when they stake crypto it is not in their possession anymore. But this is not true. When you stake crypto you are still in possession of them and have the ability to unstake them whenever you want. Keep in mind that in most case scenarios this unstaking process is not instantaneous, and you might have to wait a few days to be able to trade with that crypto.

Which Tokens Can You Stake

As we mentioned before, you are not able to stake just any crypto you want. Cryptos need to use a proof-of-stake protocol in order to be eligible for staking. But also not every crypto that uses a proof-of-stake protocol can be staked. Because of this, we need to individually check if the crypto we want to stake is eligible for staking.

The biggest crypto that can be staked is Ethereum. ETH is the native token of the Ethereum blockchain and the second-biggest crypto by market capitalization. What makes Ethereum interesting is that you can both stake and mine it.

Other notable cryptos that we are able to stake are Solana, Cardano, Avalanche, Polkadot, and many others.

When it comes to the father of cryptos, Bitcoin, it uses a proof-of-work protocol which makes it impossible to stake it. Proof-of-work is an energy-intensive process that needs powerful hardware to validate transactions and receive mining rewards.

If you want to invest your Bitcoin and earn interest, there are some exchanges that let users lend out their Bitcoin and receive interest on them.

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What Is Proof-of-Stake

As we mentioned, you can only stake crypto that uses proof-of-stake protocols. You might be asking what this proof-of-stake protocol is and what difference it has from the proof-of-work protocol.

Well, just like the proof-of-work protocol, proof-of-stake is a mechanism that processes transactions and creates new blocks on the blockchain. What makes it different from proof-of-work is that here validators are not racing each other by completing complicated mathematical problems. In proof-of-stake, nodes create these new blocks by setting aside some of their assets. When there is a need to create a new block, validators are somewhat randomly chosen from those who have staked the minimum amount needed and get the right to create a new block while other validators validate it. When the validator creates a new block it receives rewards in the form of a native token, and in some cases, a different token.

This is a faster and less energy-consuming process than proof-of-work. It does not require a lot of computing power and electricity as they don’t have to race each other and complete complicated mathematical problems. The way the validator is chosen will depend on the amount of time they have had their tokens staked, the number of tokens they staked, and some randomization.

How Can We Stake Crypto?

There are a few options that we have when it comes to staking our cryptos and the option we choose will depend on the amount of crypto we want to stake, how deep our understanding of the blockchain is, and how much time we want to dedicate to this process.

The first decision we have to make is whether we want to operate the staking process ourselves or use third-party services and let them do the hard work.

Exchanges

If you don’t have any experience with blockchain and want to stake your crypto, the easiest option available is to use services provided by different crypto exchanges. There are many different crypto exchanges that give traders the option to stake their tokens for small fees.

If we look at this from a regular trader's perspective, this might be the best option available. Setting up the staking process is not easy and requires a lot of knowledge and expensive infrastructure. Exchanges have the capital and capabilities to set up these systems really efficiently. Also, you don't need to follow any complex route as exchanges make it really easy for you to stake your tokens.

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Staking Pools

Not every crypto is supported by exchanges for staking, or someone might not want to trust exchanges with their assets. Here is when staking pools come into play.

Staking pools are big pools of users who put up their assets together in order to validate transactions. They work in the same way as mining pools. These staking pools are operated by some users who set up the pool.

If we want to join a staking pool, we need to conduct some kind of research. Who operates the staking pool, what kind of fees there are, and did the operator have any past problems, or was he penalized for any mistakes? Most blockchain official websites provide us with different information as to how we can do this research and how to choose the best pool and validator.

Also, joining a really big pool might be a bad idea. Blockchain was created as a decentralized system. Because of this, there are ideas flowing around to prevent huge staking and mining pools from accumulating too big of an influence.

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Becoming a validator

If you want to have full control over the staking process, there is always the possibility of becoming a validator yourself. But this is not an easy and cheap process to undertake. You would need some deep knowledge of blockchain. You will also need strong hardware and software, and need to download the whole blockchain transaction history, which has already reached terabytes of data. If you plan on becoming a validator, be ready to spend large amounts of money.

What Are Average Returns

One of the most asked questions about staking is, what are the returns? The answer to this question is not as simple as you might think. The first thing to ask is, where are we staking our tokens? If we are joining staking pools to stake Ethereum, average yearly returns are around 4-5%.

When using exchanges for staking, cryptos that are available for staking change from time to time. Each crypto has a different % of returns, different minimum and maximum staking amounts, and durations of staking. At the time of writing this article, Binance offers the staking of ADA with 23.7% APY, DOT with 36.79% APY, and some other tokens. So first find which crypto you want to stake and then check what each exchange and staking pool offers for that specific crypto.

Pros & Cons of Crypto Staking

Pros

One of the biggest advantages that staking has is that you can generate passive income. When staking crypto we earn interest on them and these rates can go really high. Some exchanges offer 30% yearly interest rate returns on some tokens. Staking also helps blockchains to operate and is less energy-consuming than proof-of-work.

Cons

One of the biggest risks that come with staking your crypto is that the crypto market is volatile. When we stake our crypto, yes we can unstake it, but it is not an instantaneous process. So if we see that the crypto we staked is losing value really fast, we are not able to sell our tokens fast in order to avoid losses. 

ProsCons
Generates passive incomeCrypto is volatile and your staked crypto might lose value really fast.
Does not require any hardware and is environmentally friendlyWhen staking you are locking up your cryptos and can not access them until you unstake them
It helps blockchain to operate safely and efficientlyThe unstaking process might take a few days.

FAQs About Crypto Staking

For how much of a return should I wait for when staking crypto?

Returns on staked crypto will depend on the crypto you staked and where you staked it. Each staking pool and exchange has different fees and interest rates for each crypto. It is our job to find the best one. But in general, if we stake Ethereum we should expect a 4-5% yearly return.

Is crypto staking taxable?

The IRS made it clear that cryptos you receive from staking will be considered income and will be subject to income taxes. The Fair Price value will be calculated based on the price of crypto when you received it and will be calculated in your taxes.

Do you have to claim staking rewards?

Yes. For example, when you stake crypto on Binance, you receive daily returns and those returns are deposited into your spot account. Some traders claim those rewards and stake them back in, in order to increase the returns.