- April 20, 2021
- Posted by: Anita Iyer
- Category: Blog
What you need to know before staking your cryptocurrencies
As Decentralized Finance (DeFi) continues to be the buzzword in 2021, it is crucial to dwell on the role cryptocurrency staking plays in maintaining the liquidity of crypto assets. For those in the crypto space, staking is a new investment opportunity allowing them to earn passive income from the currencies lying idle in their wallet.
What is Crypto Staking?
Staking is the act of lending (locking or holding) cryptocurrencies in a wallet to participate in maintaining the operations of a proof-of-stake (PoS) based blockchain system. The lending enables blockchains to achieve a variety of outcomes from validating transactions, earning interest or pocketing more cryptocurrencies as rewards. Crypto Staking is most commonly used by Ethereum and its DeFi protocols and allows investors to earn passive income, akin to traditional financial investment.
Why is Crypto Staking becoming popular?
Since 2020, the popularity of DeFi is leading to more people considering DeFi staking. Factors leading to the rise of crypto staking are:
Growth of DeFi
The popularity of decentralized finance has allowed users to invest their funds without the need for centralized intermediaries and earn lucrative interest on it. In De-Fi lending, lenders deposit fiat or issue a loan in return for interest through a distributed system.
Rise of Proof-of-Stake
The growing cryptocurrency space cannot operate with Proof-of-work based protocols due to lack of flexibility, the looming overhead costs and slow speed. PoW blockchains were not designed to scale according to the mass adoption of cryptocurrency networks. Hence, networks like Ethereum are moving to stake PoS protocols from blockchain’s mining with specialized equipment.
Long term gains
While most investors were only interested in short term profits a couple of years ago, today people are investing in cryptocurrencies for the long haul. Holding on to their currencies over a longer period allows users to stake and earn passive income.
Considering the ongoing Bitcoin bull run, most investors prefer to HODL rather than liquidate their asset holdings, allowing them an opportunity to earn interest via staking.
Do your research before staking
For anybody who is a cryptocurrency HODLer, staking is the wisest thing to do. If you plan to stay invested in digital currencies, it makes sense to earn extra returns on your investment.
Having idle assets in your wallet, in case you aren’t trading actively, is a waste of potential income you can earn. And unlike Proof-of-Work, you don’t need any special equipment and can become a crypto staker without any investment.
Points to note before staking:
- Be aware of the scams and hacks as smart contracts are vulnerable to hacker exploits
- Analyze your risk appetite before staking
- Stake in reputable crypto projects
- Make sure the project’s smart contracts are audited
- Stake only through trustworthy platforms.
What can I stake?
Investors who wish to stake can choose from tons of options to earn money from their idle crypto assets. Any cryptocurrency that can be positioned as collateral through a smart contract can be staked.
Staking was launched on Ethereum in December 2020 and a user needs 32 ETH coins to run a node. As part of ETH 2.0 Test Net, ETH holders with less than 32 ETH can use platforms like Binance, Coinbase or Kraken to stake.
Ethereum-based iOWN Token will be available for staking in the future. The utility token’s core use will be to enable users to participate in equity crowdfunding campaigns on the iOWNX platform.
Sometimes staking cryptocurrencies like Ethereum and Bitcoin involves the risk of devaluation of the assets you have staked. To stay free of price volatility, investors can consider staking of stablecoins and earn passive income.
How can you stake your cryptocurrency?
Proof of Stake
While blockchains on Proof of Work rely on mining to add new blocks, Proof of Stake uses the process of staking to produce and validate new blocks.
Users lock up their coins and can be part of different staking pools to facilitate transactions. Validators are randomly selected by the protocol in regular intervals to create a block. Participants who stake larger amounts generally have a higher chance to become the next validator.
Stake and Earn
On a few ‘Stake and Earn’ platforms, users get rewarded for both, creating liquidity and lending their cryptocurrencies. These platforms put your crypto assets to work and pay users interest that compounds. At the end of the staking period, users get back all their staked crypto along with profits. Two examples of these platforms are:
- Crypto.com allows participants to choose the period of staking from flexible, one month or three months. The entry barrier is reduced as users can invest a nominal amount and get paid on a weekly basis. The platform offers interest of up to 8.5% p.a. on cryptos and up to 14% p.a. on stable coins.
- BlockFi.com allows the investors to withdraw their funds at any time – one free crypto withdrawal and one free stablecoin withdrawal per calendar month are offered currently. The interest payable is listed on their website and paid out at the beginning of every month. The interest earned by account holders’ compounds, increasing the annual yield.
Staking is economically beneficial and scalable than PoW-based mining. In the current bull run as the interest around cryptocurrencies is booming, staking is gaining momentum.
As DeFi staking continues to grow, the popularity of both decentralized and centralized staking seems to be at an all-time high. Users need to tread carefully as some platforms promise too-good-to-believe returns for crypto depositors. Thorough research is recommended before investing.