What is crypto staking and what are the benefits?

Crypto staking is the activity of locking up a set amount of crypto tokens on a blockchain via a smart contract as collateral to validate transactions. By adding liquidity to the network and aiding in the blockchain's ability to service transactions, all crypto staking investors are rewarded with an average rate of return (APY) on specific blockchains. Not all crypto tokens can be staked and earn rewards, but the ones that are designed to be staked have different rules and rewards baked into the blockchain's source code which cannot be changed or broken by any third party. 

You can stake your crypto through a hardware wallet such as a Ledger Nano, a mobile app wallet or use an exchange to stake your tokens for you. Numerous cryptocurrencies can be staked, like Cardano (ADA), Ethereum (ETH), Avalanche (AVAX), and Solana (SOL) with a growing ecosystem of tokens adding the ability to stake and gain crypto rewards.

In any case, think of crypto staking as locking up the crypto that can work for you like a savings account.

The longer the lockup period, and the more funds you invest, often the higher returns you can expect. One such strategy crypto staking investors employ is compounding their crypto staking rewards into additional deposits, growing their crypto portfolio significantly over time. 

What is Proof-of-Stake (PoS) and how does it work?

Proof-of-Stake (PoS) is a consensus mechanism that countless crypto ecosystems use to ensure security and integrity. PoS is regarded as one of the most optimal currently available consensus mechanisms by many, mainly thanks to its scalability, cost efficiency, and environmentally friendly nature.

Contrary to Proof-of-Work (PoW) algorithms, where consensus is backed by substantial amounts of special computational work, Proof-of-Stake systems utilise locked-up crypto holdings as disincentives against malicious behaviour. In PoS, nodes need to put up a predetermined amount of crypto tokens to verify transactions and collect rewards, and if the network detects that they attempt malicious actions, it permanently seizes their stake. This way, nodes will likely not tamper with transactions, as their stakes are too significant to lose.

How can you stake your crypto assets?

Staking your crypto assets can sound like an intimidating experience, but can be an easy and rewarding experience when using the best set of tools and platforms. Firstly, you need to choose which crypto token you’d like to stake, connect your wallet to a specialised application, enter the amount and the lock period you’d prefer and then agree to stake terms and conditions.

While this might sound like a labour-intensive process, many exchanges have built this process into a single-click operation with an optional choice for the amount of time you wish to lock in your staking investment. One thing that you definitely should keep in mind is that during the lock period, you will not be able to sell or move your crypto assets to another wallet unless specified.

What returns can you expect from crypto staking?

Just like savings interest rates, staking returns can also vary per blockchain and down to supply and demand. Staking Ethereum might have a high reward yield than Cardano or Solana but might require a much longer lockup period. The potential rewards on offer through staking could be 2-4% all the way up to 12-15% per annum depending on the token, its liquidity, and the supply and demand of the blockchains use to name a few factors.

Many investors enjoy staking returns over simply HODL'ing their investment, as they would have not traded these tokens anyway and now gain a financial benefit from staking their tokens and adding liquidity to the blockchain.

What's the difference between Crypto Staking and Crypto Lending

Crypto staking and Crypto Lending are two very different activities with similar outcomes. 
Crypto Staking locks up tokens "on-chain" in a decentralized manner in full view of the public distributed ledger, on a predetermined rewards schedule for adding liquidity and securing the network. 

Crypto Lending, on the other hand, is creating an unsecured loan to a centralised counter-party with an advertised rate of return (APY). This counter-party or business can now do whatever they want with the crypto deposited by their users to generate revenue and share in the profits back to their users. This loan and repayment structure can also be applied to non-stackable tokens such as Bitcoin, Litecoin and XRP to enable investors to get a return on their assets. 

However, many businesses in the Crypto Lending space in 2022 have collapsed after crypto prices reduced significantly and these businesses we're not able to repay their users the rate of return advertised. Much of the problem started from the activities these companies engaged in to generate high rates of return on crypto investments. 

Some of these activities included: 
- Trading Strategies
- Market Making
- Decentralised Finance 
- Loaning Capital to Other Businesses <- This is the main problem. 

Much of the time these lending businesses would lend out their client assets to other counterparties at a higher rate and simply sit in the middle to generate revenue. When these borrowers were unable to repay the loans and defaulted, many users have now lost their life savings. 

All investments and deposits are opaque and hidden from the general public as opposed to staking which will show all staking transactions and wallet balances on a Decentralised Ledger Technology (DLT). 

Ending Remarks

Overall, crypto staking is popular for good reasons, namely solid returns, easy accessibility, and underlying utility. With coinpass, staking your crypto assets is easier than ever—stake crypto, and take a step towards the life you dream of today.