How Crypto Staking Works: Stake & Gain Passive Income Beginner Guide

As the world of cryptocurrencies gains popularity, passive income generation models evolve in the decentralized ecosystem of Blockchain. These models have a logic that can simultaneously realize the purpose of providing funds for projects and technologies and the purpose of generating income for investors. Crypto staking, cryptocurrencies, projects developed in blockchain networks, or programs offered by platforms to finance different blockchain networks.

KEY TAKEAWAYS

• In its simplest definition, crypto staking is a way to earn rewards in exchange for locking certain cryptocurrencies.
• Crypto Staking is categorically quite similar to having a time deposit account at traditional banks. Because users gain compound interest income (APY) by promising not to withdraw their money.
• Different platforms may offer different reward rates. But in general, we can say that the parameters that determine the reward rate are the number of coins staked, the duration of staking, and the total amount of coins staked on the network.
• Holders can prefer centralized exchanges, cold/private wallets, staking-as-a-service platforms, or DeFi platforms for locking their crypto.

As CryptoShift, we have prepared a detailed guide for you to better understand the staking programs of decentralized exchanges and to explore the staking processes in terms of working principles. In this guide, you will have the chance to review staking on the Ethereum 2.0 network, staking stablecoins, the programs offered by CEX and DEXs, staking-as-a-service platforms, and much more. If you’re ready, let’s start.

The Definition of Crypto Staking

In its simplest definition, crypto staking is a way to earn rewards in exchange for locking certain cryptocurrencies. Was this simple definition enough for you to imagine the entire process?

Ok, let’s dig a little deeper.

Cryptocurrencies are generated and stored on Blockchain-based networks. In such networks, each newly added block represents a new transaction. In order for these blocks to be added to the chain, a series of validation processes must take place. The validation process is ensured by consensus mechanisms that ensure the blockchain units are trustworthy, unaltered, and maintain the integrity of the network. The main thing that makes consensus mechanisms powerful is to have as many participants as possible in the network.

This is where staking comes in: Holders who lock their coins on a particular network promise a long-term presence. This allows the consensus mechanisms in the relevant network to work securely and powerfully, and validate the new blocks fastly. In return for ensuring the security of the network, platforms offer various rewards to users for each validation they offer with their assets.

So now we know the place of staking in the Blockchain world;

• A method that makes Proof-of-Stake (PoS) work by ensuring the security and sustainability of the network;
• For investors who stake their money, a real source of passive income.

Where are you in this equation?

If you are confused about the difference between Proof-of-Stake (PoS) and crypto staking, go to the relevant article.

How Does Crypto Staking Work?

Crypto staking is categorically quite similar to having a time deposit account at traditional banks. Because users get a monthly interest income by promising not to withdraw their money. If the user wants to withdraw the money early, he pays a certain amount of penalty. If he does not withdraw early, he will have made a real profit at the end of the maturity with interest & compound interest rates.

In order to understand how staking works, let’s first talk about two concepts: Proof-of-stake and Delegated Proof-of-stake. Once you understand the way these two consensus mechanisms work, you will easily realize what staking does technically.

Proof-of-Stake (PoS) Mechanism (And Its Difference From Proof-of-Work)

The concept of the ”consensus mechanism” was already used for transaction verification within the blockchain network. It was called the “Proof-of-Work (PoW)” that everyone is familiar with. However, the way this system worked was based on the speed at which each miner was able to solve complex mathematical problems with powerful computers. The one who solved the problem the fastest among the miners had the chance to add the block to the chain and get the ”block reward” as income. However, solving these problems meant a significant expenditure of energy, and creating a complex competition space may cause accidental forks. That’s how the idea came about to create a consensus mechanism where the high energy of computation and this competition wouldn’t exist.

Proof-of-Stake is a modern way of securing the network without having to solve tricky math problems, which creation can be attributed to Sunny King and Scott Nadal’s work in 2012 with Peercoin. The system works quite simply: Investors lock a certain percentage of their tokens into the network to the extent of their trust in the project. The protocol randomly selects the blocks in its pool and assigns them the right to validate the new block in turn.  

Here is the hint behind it: Network security is ensured without a competitive environment or hardware and software resources to be allocated for complex problem solving.

Here is a brief explanation of the differences between two consensus protocols: Proof-of-Work and Proof-of-Stake.

Delegated Proof of Stake (DPoS) – And What It Changed

Of course, no technology stays as it was originally produced, but is developed. Daniel Larimer working in 2014, developed Delegated Proof-of-Stake (DPoS). This system is actually very popular among developers, because BitShares was the first place where the system was used.

DPoS means that investors have the right to vote and decide on the project in direct proportion to the number of coins they stake. The coin balances give the investors voting rights and without being a shareholder, the investors can express their opinions on the decisions that will guide the relevant project.

The votes are used to appoint delegates to manage the blockchain network. Staking awards are assigned to these delegates, instead of the investors themselves. The rewards are then distributed from the delegates to the investors in direct proportion to the personally staked coins.

Here is the hint behind it: What DPoS does is ensure that the same level of security is achieved by using fewer nodes in the verification process. This maximizes performance by saving energy in the network.

How Crypto Staking Works

The consensus mechanism now only needs participiants who lock their money in the network with staking. The more money you stake as an investor in this type of protocol, the more likely the random system will choose you as the next blog validator.

See what a consensus mechanism powered by the above logic provides:

1. High-performance hardware devices are no longer needed. This means that even individuals who do not have access to such devices can participate in consensus mechanisms using only their money. So, anyone can earn money by participating, without any need for preliminary or technical knowledge.
2. Also, not needing this hardware means that the “energy consumption” for which mining-based coins are blamed is largely avoided.

During the staking process, you choose one of the time options offered to you on the platform you prefer: 3 months, 6 months, 1 year, 5 years, or maybe just flexible. The rewards given in the options offered by the platform vary according to the number of coins you will stake and the duration you choose. Each platform may use a different formula in the reward calculation process.

What is the Difference Between Crypto Staking and Liquidity Providing?

At first glance, liquidity mining and crypto staking may seem like two identical passive income generation models. However, the liquidity mining process has a different logic.

Liquidity mining is the name given to the process of depositing funds to provide liquidity to any decentralized exchange platform. The security level of the platform that has a liquidity pool depends on how professionally the connected smart contract is built. The funds of users who provide liquidity in this type of transaction are available to other individuals subject to the same smart contract. In other words, money can be exchanged by other users within the network and utilized in lending and borrowing processes. For each transaction performed by users in the same smart contract, you earn a certain amount of commission as a liquidity provider

In staking, the earning system is completely different. What happens here is not to fund a DEX for DeFi, but to support a network’s security protocol. Your transaction is more secure than a liquidity provider because what you rely on is the protocol of the blockchain itself, not a smart contract. Your reward rate, on the other hand, is determined not by the transactions of other users, but by the probability of assigning as a validator, which will increase the number of coins you lock.

Crypto Staking Rewards: How Are Rewards Calculated?

The purpose of many people staking crypto is to generate some form of passive income. Platforms may offer investors different APYs, ie annual percentage yields, depending on certain factors. By the way, you can see what APY is from here.

When we make a general review, it is possible to say that staking programs offered by DEX platforms give higher APYs than CEXs. Because decentralized platforms do not spend any resources on services such as providing data security or providing customer service assistance. This allows most of them to process transactions without charging commissions.

There is no clear formulation to say how the rewards are calculated. But in general, we can say that the parameters that determine the reward rate are the following:

1. Number of coins staked
2. The duration of staking
3. Total amount of coins staked in the network (including the tokens other participants staked)
4. Inflation rates
5. And some other factors that depend on the related blockchain

You can calculate rewards that you can get for a spesific coin in a spesific platform by using StakingRewards.com

Benefits and Risks of Staking Cryptocurrencies: Time to Decide

Before getting into cryptocurrency staking, it might make sense to talk about the risks you may encounter and the advantages you can take advantage of. For this, we have prepared detailed tables for you.

Benefits & Advantages of Staking Crypto

Here are the benefits you will get by staking crypto:

Disadvantages & Risks of Crypto Staking

The risks and disadvantages of crypto staking are as follows:

Which Platforms Offer Staking Programs? – Where You Can Stake Crypto

It is possible to examine the platforms that offer users the chance to earn passive income through staking programs in 4 categories: Centralized Exchanges (CEXs), Cold/Private Wallets, Staking-as-a-Service Platforms, and DeFi staking platforms. Let’s take a brief look at each of them!

Centralized Exchanges (CEXs) for Crypto Staking

Many decentralized exchanges, whose names we know very well, offer various staking programs. By joining them, traders can add a new area to their income streams and experience the confidence of staking through prestigious platforms.

Among the most popular CEXs that offer cryptocurrency staking programs are Binance, Gemini, Coinbase, Kraken

Apart from above listed, have a look at eToro’s and Kraken’s CEX staking programs.

Cold / Private Wallets for Crypto Staking (Cold Staking – Private Staking)

Cold staking means staking your coins in a way that they cannot be accessed online, in a wallet that is not connected to the internet. Providers who are afraid of the security risk posed by cyber attacks may choose to offer the cold staking option. Cold staking, which can be done with physically purchased hardware wallets or air-gapped software wallets, carries the risk of loss or damage to the wallet.

Note that if you do not keep the coins in a private wallet and transfer, the lock-up period will be broken and the staking reward will be burned completely. Ledger (cold wallet), Trust Wallet (hot wallet), CoolWallet S (cold wallet), Trezor (cold wallet)are among the wallets that support staking you can choose to benefit from this service.

• Cold Staking with Ledger Wallet – Ledger, which is frequently preferred with its different models in the cold wallet area, supports Tezos (XTZ), Tron (TRX), Cosmos (ATOM), Algorand (ALGO), Polkadot (DOT). The platform allows you to stake 7 cryptocurrencies at the same time. Moreover, you can use the Ledger Live app to track and claim your rewards.
• Cold Staking with CoolWallet S – The easy-to-carry hardware wallet design, which has the form of a credit card, makes Cold Wallet S different from the others. Cool Wallet supports all ERC20 tokens. Besides that, you can also choose CoolWallet Polkadot (DOT), Cosmos (ATOM), and Tron (TRX) staking. The wallet protocol, protected by the EAL6+ Secure Element, gives users extra confidence. Users also go through biometric verifications to access their wallets.
• Cold Staking with Trezor – Trezor One and Trezor Model T are known as the brand’s major innovations in the world of cryptocurrencies. Users can hold and stake almost any cryptocurrency in their Trezor wallet, as Trezor also provides services for certain coins through third-party wallets.
• Trust Wallet Staking– By using this method, you can stake your currencies in your private wallet. Just connect your wallet to your Binance account and hold your currencies in there. The wallet software supports total of 12 different cryptocurrencies, including XTZ, ATOM, VeChain (VET), TRX, IoTeX (IOTX), ALGO, TomoChain (TOMO), and Callisto (CLO).

For more, check out the content we mentioned about the cryptocurrency wallet.

Staking-as-a-Service Platforms for Crypto Staking

In addition to platforms that offer staking as a side service, there are also some platforms established to provide staking services only. They receive a commission at a certain percentage of the income that investors get from staking to cover their own expenses. If you hear the term “soft staking” somewhere, you might think that they are talking about staking on these platforms.

It is possible to say that the most popular staking-as-a-Service Platforms are Stake Capital, My Cointainer, Lido, Dokia Capital, HyperBlocks.

1. Stake Capital – 30 different blockchain networks dominating the industry such as Loom, Livepeer, Cosmos, Tezos, Kusama, Matic, IOV, Polkadot, Edgeware, Solana support Stake Capital. This means staking with cryptocurrencies of 30 different networks on the platform. Note that 20 of them are currently in the testnet stage. But they will be active soon. The platform has also built a peer-to-peer ecosystem they call StakeDAO. This is a decentralized organization that tokenizes the DeFi services performed on the platform, uses staking derivates to add new service portfolios to the ecosystem, and ensures that the revenue generated among the participants is shared. In short, Stake Capital aims to generate income not only from staking, but also from DAO.
2. MyCointainer – MyCointainer, the platform that allows you to do cold staking by defining your wallet, offers a passive income adventure that you can start with only 1 EUR. In the ecosystem where a total of 103 assets are supported, APY rates go up to 43.80%. In a single wallet, you can stake 100 different assets at the same time. Supported cryptocurrencies include Cartesi (CTSI), Polygon (MATIC), NEM (XEM), Synthetix (SNX), and Cardano (ADA).
3. LIDO: Having generated almost 100,000 stakers in its ecosystem, LIDO supports five different networks: Ethereum 2.0, Terra, Solana, Kusama, and Polygon. APR rates can increase up to a maximum of 24.3%. The platform can be advantageous as you can do not only staking but also minting from a single point. Moreover, LIDO DAO can be an additional source of income by enabling you to have a say in the platform with the governance token. Finally, let’s say that the platform has 3 security audits to prove the security of the platform to the investors: Quantstamp, MixBytes(), and Sigmaprime.
4. HyperBlocks: HyperBlocks, which has been a Proof-of-Stake partner since 2013, supports all networks such as Fantom, Cosmos, Oasis, Kyberians, Tezzies, and Elrond Network. Users who have security concerns can generally prefer HyperBlocks. Because there is Hardware Security Module (HSM) key management and sentry node DDoS protection in the ecosystem to be protected from network attacks.
5. Dokia Capital: Aiming to ensure user security with the Tier3 Certified TIA-942 Datacenter, Dokia Capital supports a total of six networks. 5 new networks are currently in the development process. Supported networks are Cosmos, Terra, Irisnet, Near, Polkadot, and Solana. Networks being developed while writing content are Skale, Agoric, Dfinity, Ethereum, Regen, and The Graph.

DeFi Staking: 4 Popular Platforms

DeFi staking allows you to stake coins that finance decentralized technologies on different blockchain networks. Among the most popular DeFi staking platforms are Maker (MKR), Synthetix (SNX), Yearn Finance (YFI), Compound (COMP). Let’s briefly examine each of these.

How to Stake Crypto as a Beginner: In 5 Basic Steps

Want to start crypto staking right away as a beginner? Don’t get confused, you can start staking with five simple steps:

1. Choose a cryptocurrency to stake. The cryptocurrency you choose should be an asset that you trust in the project and that you believe will not lose significant value during the lock-up period. It might make sense to do market research for this. You can have a look at staking reward calculation page to choose the best one for you.
2. There may be different minimum staking requirements for each cryptocurrency. In addition, these rules may vary depending on the platform you will be staking. For example, ETH has a minimum staking requirement of 32 ETH minimum.
3. Decide on the software wallet you will use for staking. Usually, you may need to go to the coin’s own site and download the corresponding wallet. At this stage, make sure that the site you go to is the official site and protect yourself from phishing or scams.
4. Remember how important it is for nodes to run without downtime. So you must have good hardware. Internet connection is also very important at this stage.
5. Stake your crypto. It is possible to start staking with one click on the platform of your choice. Be sure that the platform supports the software wallet you have.

Which Cryptocurrencies Allow Staking?

If any currency is suitable for proof-of-stake consensus, it can also be suitable for staking. But remember, staking can work differently on different blockchains. First of all, let’s answer the question you are probably most curious about: “Can I stake Bitcoin?”

No, you cannot stake Bitcoin because Bitcoin is a mining cryptocurrency that uses proof-of-work as a consensus mechanism.

So, let’s briefly list the most popular cryptocurrencies that can be staked:

1. Ethereum (ETH): You can stake with a minimum of 32 ETH. It is possible to say that the average staking rewards for Ethereum vary between 5 and 7%.
2. Solana (SOL): Decentralized blockchain network Solana, which provides an optimal environment for the development of dApps, can earn 6.01% APY. A total of 75% of the cryptocurrency has been staked.
3. Avalanche (AVAX): Although inflation dominates the market at the time of writing, the current AVAX reward rate is around 9%. Close to 66% of the cryptocurrency has been staked. Avalanche, which is especially popular in the decentralized gaming world, is promising.
4. BNB Chain (BNB): BNB Chain, the blockchain network also supported by Binance, is a platform whose number of stakers is increasing regularly. The smart contract with EVM compatibility offers rewards up to 7.37% as the APY rate.
5. Cardano (ADA): You can take your first step towards staking by acquiring the Official Cardano wallets, Daedalus and Yoroi. Cardano staking reward is 4.5% on average.
6. Tezos (XTZ): The average staking reward value of XTZ, which allows a minimum of 8,000 staking, is around 6%.
7. Polygon (MATIC): This cryptocurrency is an option whose reward can be highly variable based on staking time. But let’s say this: a delegate only needs to stake 2 MATIC to join the network.
8. Theta (THETA): Users can stake a minimum of 1,000 THETA. Average rewards can be quite variable depending on the number of THETA you stake.
9. Algorand (AGO): You can meet the minimum staking requirement with only 1 ALGO. It is possible to say that the average staking reward is 5%.
10. Polkadot (DOT): Polkadot, whose staking reward can increase up to 14%, is a very popular coin.
11. Cosmos (ATOM): Your minimum stake of 0.05 ATOM is enough to meet the minimum requirement. The average staking reward of the cryptocurrency is 9.7%.
12. ICON (ICON): ICON has no minimum requirement, with annual staking rewards reaching up to 16%!

How to Choose a Staking Platform – Factors to Consider

Remember that finding a safe and reliable staking platform for your assets is just as important as examining the reward rates you will earn. Because locking your assets on an unreliable platform can mean giving up on them forever. It may be helpful to examine the following factors when choosing the best staking platform:

1. Never make your choice without examining what is shared on Telegram communities, Reddit, and Twitter about the platform you choose. It’s no surprise that the founders say great things, it’s the user experience that counts.
2. High APYs are great motivators. But the promised numbers are meaningless unless you get them. For this reason, it would be good if the platform you prefer is prestigious, secure and, if possible, a little old.
3. To obtain information on volumes or activities of PoS-based platforms, do research from tertiary sources that share such statistics.
4. Be sure to read the terms and conditions applicable to staking in every detail. For example, if your wallet experiences a downtime, all the details such as what penalties will be and whether there will be a cooling period after staking are important.