Crypto staking is often a profitable endeavor that can be both simple or complicated. It depends on your understanding of the crypto ecosystem. Regardless, the majority associate staking with rewards. A simple understanding of the term is holding cryptocurrencies for a period to earn rewards. But what does staking mean in crypto? What is staking a coin? We break it down, providing you industry facts and illustrating ways of generating more income.
Let’s start with the basics.
What is staking in crypto?
Staking is a broad term signifying the act of depositing your crypto assets to a cryptocurrency protocol in return for rewards or yield. Through staking, users participate in securing a network by locking up tokens and providing liquidity. Protocols then reward users with their native cryptocurrencies for securing their network. The reward systems in protocols are automatic, with protocols rewarding stakers proportionately to the amount staked.
Crypto staking explained
So, how to define staking in crypto? Remember blockchain consensus mechanisms? Staking is a derivative of the Proof of Stake (PoS) mechanism. Commonly found in PoS (Proof-of-Stake) networks, staking allows the verification of transactions without involving third parties. The process involves nodes ordering the transaction, verifying them, collecting them in a block, and validating them. Networks use the staked cryptocurrencies as incentives for these nodes to perform their processing duty.
When cryptocurrency is staked, the network puts the cryptocurrency to work, usually as loans. Then the cryptocurrency generates rewards which the network distributes to its participants. The rewards arrive from transaction fees and other platform activities involving your cryptocurrency.
Is crypto staking safe?
The short answer is yes. However, similar to all income-generating activities, there are risks in the staking ecosystem. Here are some of the risks to expect:
- Slashing risk – Crypto assets in a PoS network are subject to destruction upon detection of malicious action by other network participants.
- Market risk – Adverse price movements of the cryptocurrency create a potential for loss. For example, if you stake $ROG at 20% APY, but its value drops by 60% by the end of the trading period, you make a loss.
- Liquidity risk – The liquidity of the asset you’re staking is another risk factor. When staking low liquidity altcoins, converting them to stablecoins or converting them to fiat will prove difficult.
- Lock-up periods – Some stakеable assets have lock-up periods where the tokens are inaccessible. You risk realizing losses if the assets depreciate during the lock-up period.
- Reward duration – Limiting reward durations will restrict your freedom to reinvest your rewards.
- Loss or theft – Hackers are getting more intelligent, posing potential risks for assets in smart contracts. Consider the security reputation of the protocol you intend to use before proceeding to stake your crypto.
- Low returns due to bad validator performance – an inept validator affects your returns due to the technical nature of PoS.
You must be wondering, “is staking crypto worth it after all?” Well, it's not all gloom, yet there are several advantages to this income-generating activity.
Benefits of crypto staking
Due to the attractive rewards from specific protocols, the popularity of crypto staking has surged recently. Users can generate passive income with returns of between 5% and 20%. In smaller networks such as PancakeSwap, the APY is as high as 50%. The high APY allows you to double your token holdings within a short period. Other benefits from crypto staking include:
- Diversifying your crypto portfolio, especially through DeFi staking
- A low token entry requirement for staking by protocols
- High level of security for staked tokens
Crypto staking is also environmentally friendly due to the energy-efficient nature of its mechanism. Staking supports the PoS consensus mechanism, which uses less energy per validation than the PoW mechanism.
Define staking crypto important points
With profitability in mind, here’s what to consider:
Crypto staking platform – Each platform has its unique combination of features determining profitability. Select a platform matching your strong suites to optimize profits.
Cryptocurrencies – Digital assets are subject to various market factors affecting their profitability. When staking, consider the stability of the assets as they determine the level of profitability. Stable assets attract lower APY versus unstable assets.
Risks – Consider the risk you are willing to expose your assets to.
Projects – Certain projects display confidence and longevity, while others appear weak in contrast. Assess a project’s viability before committing your assets to their platform. Along with the project’s viability, consider its future. What’s the project’s plan for an evolving market? Can they withstand changing market tides? Platforms like Relite are leading the market into a new era of crypto staking with their cross-chain lending and borrowing capabilities.
Strategy – Before committing to crypto staking, users should have clear goals. Be flexible in your staking strategies as the crypto market is still volatile. Conduct a cost/benefit analysis of every staking opportunity before committing your assets.
Crypto staking platforms are an essential part of crypto staking, employing a crucial role in determining the profitability of staking activities. Some of the best crypto staking platforms include:
- Binance – For beginner stakers, Binance provides a reliable staking option with minimal risks. The platform has a wide selection of PoS coins including USDT, BNB, XEM, ONE, and GXS. Binance offers rewards between 2.8% and 16%. Binance staking supports DeFi staking with an annual 12-25% return for users who desire greater returns with more considerable risk. Given Binance’s size and market position, users enjoy the confidence to stake in their platform.
- Staked.US – The platform offers staking on over 30 PoS coins, including Cardano (ADA), Polkadot (DOT), and Kava (KAVA). With an APY of up to 100%, Staked.US is the chosen platform for investors with substantial risk tolerance. The platform charges a reward fee of between 5% and 10% depending on the token staked.
- Coinbase Custody – Coinbase is the first platform to provide staking and active governance for digital assets in offline storage. The model exposes users to less risk as the crypto assets are in cold storage. Cosmos, Tezos, Maker Protocol, and Algorand are some assets Coinbase Custody supports.
- Figment Networks – Canada’s top blockchain infrastructure allows you to stake and earn from tokens such as Terra (LUNA), Chainlink (LINK), Algorand (ALGO), and Harmony (ONE). The staking rewards range from 5% - 30%, with the reward fees between 0%-15% depending on the staked token. With an in-built calculator for determining rewards and real-time transaction tracking, Figment Networks provides convenience for all levels of investors.
Yield farming vs. Staking
The two terms are similar; however, yield farming and staking differ in their goals. Yield farming aims to provide liquidity to a platform, whereas staking desires to secure a blockchain network by improving its safety. Both achieve their targets through similar means – having users deposit cryptocurrencies to a pool.
When judged upon profitability, yield farming is the superior option, but there’s a catch. The high APY from yield farming is substantially affected when considering high Ethereum gas fees. Also, during sharp market downturns & high volatility, your rate of profitability might drop drastically – a phenomenon known as impermanent loss. Staking provides conservative APYs of between 5% and 20%.
Security. Assets are safer in a staking pool. Unscrupulous yield farming platforms and rug pulls are still prevalent in the DeFi industry. These protocols create projects, list new tokens, and encourage participation through staking. Once they’ve reached their liquidity target, the project creators shut down and disappear with the funds.
Likewise, smart contract flaws and exploits are additional risks when choosing to farm yield. Hackers exploit these weaknesses to drain liquidity pools, leaving protocols insolvent and investors with significant losses.
Flexibility. Yield farming is the superior option. In most protocols, liquidity providers withdraw their assets at their convenience. Conversely, staking restricts security providers through time-lock periods. Stakers cannot remove their assets until the time lock period elapses.
So, how to decide between yield farming and staking? It’s essentially up to individual preferences. If you’re confident in your skills in either of the two and due diligence is strong, there’s also no limiting reason for participating in both passive income-generating activities. With the correct strategy, both methods can optimize your crypto income.
Cryptocurrency staking and tax
Proceeds from staking rewards are taxable in the U.S. When you receive your staking rewards, determine their fair market value (FMV) to calculate your taxable income, which the IRS considers ordinary income. If you decide to sell your staking rewards, you’ll have to report capital gains tax on your gains. Other countries have unclear regulations on crypto tax. Involve a tax consultant in case of any uncertainties.
As taxes eat into your gains, you need a strategy to reduce your tax. Crypto tax software is a practical option. You get an accurate figure of your tax obligation, which helps avoid any underreporting penalties. For capital gains tax, reduce your obligation by holding your cryptocurrency longer. This works only in the U.S.
Taxation rate for short-term (<365 days) capital gains ranges from 10% to 37%, whereas long-term capital gains (1+ years) attract 0%-20% in taxes.
Crypto staking taxes also apply to individuals or organizations running a staking business.
What's the best staking coin?
There’s no straight answer for this. Answers will vary from source to source; nevertheless, we’ll give you the best staking coin based on select categories.
Market Capitalization - $ADA leads other tokens in market capitalization ($88B).
Most Staked - $ETH. Ethereum 2.0 staking contracts holds the most Ether as a result ($21.3B)
Balanced coin - XTZ. Tezos provides a balanced experience that includes a reasonable ROI of over 5%, security, and market appeal.
Other popular staking coins include $ALGO (Algorand), $VET (VeChain), and $NEO (Neo).
Future of Staking
Crypto is gaining popularity as people explore its innovation and practicality. With more market participants, crypto staking will likely move towards an interoperable future. People are joining crypto using different platforms and protocols, expecting seamless interaction within the ecosystem. Expecting rising market demand for interoperable services, platforms such as Relite are embracing an interoperable future. Another trend we expect to see is the ease of fiat/crypto transactions. Demand will grow as more users migrate to a crypto-based economy.
Our Verdict
Staking cryptocurrencies is a profitable endeavor requiring very little input. Through a greater understanding of the benefits and risks of staking and factors to consider before staking, users will earn by letting their assets work for them.
Many at this point will wonder, “where do I sign up?” Relite has published earlier articles that elaborate on some of the best crypto lending platforms and how DeFi yield farming can make you excellent crypto money.
Frequently Asked Questions (FAQs)
How does staking crypto make money? Proceeds from transaction fees and other protocol activities provide tokens for distribution as rewards to stakers.
Can you lose crypto by staking? Yes, through impermanent loss. By selling your crypto at a lower rate than when you staked it, you lose crypto. There is also the danger of protocol hacks and thefts.
Is crypto staking profitable? Yes. Protocols offer APY of between 5% and 30%. Optimize your profitability from crypto staking by using profit-centric strategies.
What is staking in cryptocurrency? Users often stake their crypto assets to improve their crypto holdings and diversify their portfolios. The aim of staking crypto is to earn more crypto.
DISCLAIMER: This article does not constitute financial advice in any form. Readers are expected to be fully aware of any risks involved in crypto staking and should only participate after strong research.
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Note: Please be aware that the only contract address for RELI is that stated above. There will be fraudulent versions of RELI. If in doubt, please ask an admin in the Relite Community.
Note: Please be aware that the only contract address for RELI is that stated above. There will be fraudulent versions of RELI. If in doubt, please ask an admin in the Relite Community.
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