The cryptocurrency world is full of complicated technologies and complex ideas.
Staking is just one small part of the whole puzzle. At its simplest staking is a way to earn rewards just by holding certain cryptocurrencies.
How It Works
Only certain cryptocurrencies allow for staking, namely those are ones that use the Proof of Stake (PoS) consensus mechanism verse instead of the common Proof of Work (PoW) model. In PoW models miners race against each other to solve a complex mathematical equation and are then compensated in new coins. Bitcoin (BTC) famously uses this energy intensive model.
Meanwhile, PoS models have investors “stake” their crypto in order to verify transactions and earn rewards for doing so. The alternative consensus mechanism uses far less energy as well. Ethereum (ETH) is moving toward this model and many of the so-called level two chains that work with Ethereum already use the PoS standard.
When an investor decides to stake crypto it gets put to work on the blockchain and becomes part of the verification process. The staking process allows for a decentralized system where no bank or payment processor is needed as a middle man.
Why Stake?
The reason investors stake their crypto holdings are for the rewards from being part of the process. Typically, the holdings get put into a “staking pool” where investors receive back a portion of the rewards relative to the amount that was staked. For example, if an investor stakes 10 ETH in a pool that totals 100 ETH, then the investor will collect 10% of the collective rewards from staking in that pool. This is the reward structure when staking on platforms such as Coinbase (COIN).
For investors, they get to receive rewards by simply sending some of their coins in the verification process without needing mining equipment as required by PoW models such as Bitcoin. Additionally, the payment structure has investors earn a percentage-rate reward over time and do not require a large amount of capital. The APR is different for each crypto that allows staking and each has it’s own minimum amount of time that a crypto must be staked where investors cannot close their position.
The structure allows for holders of cryptos to earn stable rewards by simply putting them to work. Investors looking for interest returns that are planning on holding the crypto long-term anyway benefit the most as rewards are returned periodically.
Full Validators
While staking a small amount of crypto on Coinbase is the most common method of staking, becoming a full validator offers more upside. In order to become a full validator investors need to hold a tremendous amount of the underlying crypto. For Ethereum that requirement is 32 ETH (roughly $100,000 worth). Staking on this level also requires a computer that can validate transactions throughout the day as it doesn’t use a centralized system like Coinbase that takes care of that for regular stakers.
Conclusion
Staking offers a relatively stable and low-risk investment when compared to the general volatility of crypto markets. Holders receive periodic and stable returns similar to bonds, dividend investing, and interest-bearing savings accounts. The annual return for staking is dependent on the cryptocurrency and how many total coins are being staked as the more that are staked leads to lower percentage returns. Currently, investors can expect to receive a 4.5% APR for staking Ethereum and can start with as little as $1 worth. For those who are holding cryptos long-term and do not intend to sell in the near future, staking is a great way to earn rewards for simply holding coins and putting them to work in the decentralized verification process.