What is Staking?
Staking offers a way to generate passive income, without the need to sell one's crypto when the prices are continuously dropping. It is by far the most popular way to earn passive income in crypto. Beside staking, crypto holders can earn passive income by providing liquidity to Liquidity Pools.
What is Staking?
In Staking, the user volunteers to lock their crypto assets to help support the operations on blockchain. In exchange for staking your coins, user is rewarded with a portion of cryptocurrency collected in form of fees from the blockchain. The APR can vary depending on the crypto asset selected for staking. Once assets are locked, no further action is required from the user, making it one of the best ways to earn passive income in crypto.
Can I Stake any Crypto Asset?
Short answer is No. Only crypto currencies that support Proof of Stake (PoS) mechanism, can be staked. Popular crypto currencies to stake are Ethereum (ETH), Pancakeswap (CAKE), Cosmos (ATOM), Cardano (ADA) and others.
What is Proof of Stake?
Proof of Stake (PoS) is a consensus protocol in blockchain. It is a way to decide which node in the network validates new blocks and earn reward on the blockchain. In PoS, validators are chosen based on the number of coins staked by them.
Types of Staking?
There are two types of staking available i.e., Fixed term & Flexible term staking.
In Fixed term staking, the crypto is locked for a fixed duration. The longer the locked duration, higher the APR. Fixed term staking is tailor made for crypto users who hold for long term and don't worry about price fluctuation. In Fixed term staking, the crypto asset staked will not be available for withdrawal till the locked duration is expired.
In Flexible term staking, crypto is not locked and is readily available for withdrawal. As the crypto is not locked for any duration, the APR offered is quiet low as compared to Fixed staking. This type of staking favor users that are holding crypto for short duration and intend to sell when price fluctuates.
Risk of Staking Crypto?
Every investment has some sort of risk associated with it, especially in crypto. Cryptocurrencies are very volatile and any speculation can cause huge price fluctuations. If you bought crypto and put it in fixed term staking for a year, to gain maximum yield, sudden drop in price can easily outweigh the rewards you will earn via staking. It might take multiple years for the price to recover and till then you will be stuck as price will be too low to sell. Long term staking is only feasible when you are not concerned about the price in short term and believe that in long term it will reach new highs.
As crypto is staked with a validator, there is a risk that the validator might not do the job properly and, in the process, gets penalized and you might miss out on staking rewards. To mitigate this, it’s best to stake with reputable platforms only.
Staking pools can be compromised and funds can be hacked, resulting in total loss of staked funds. In crypto there is no insurance that will cover the loss. DYOR before trusting anyone with your crypto.
Where to Stake Crypto?
There are two popular ways to stake crypto. For non-tech savvy people one can stake on central exchanges like Binance, KuCoin, CEXIO & others.
Tech savvy people can stake on DeFi platforms using DeFi wallets. Popular DeFi platforms are Uniswap & Pancakeswap. In DeFi the user is responsible for managing the crypto wallet themselves.
How much can I earn with Staking?
Earnings depends on the crypto that is being staked and some times, the platform it is being staked on. At the time of writing this article, Ethereum (ETH) staking on Binance yields around 4% APR. Pancakeswap (CAKE) yields 18% APR for 1-year Fixed term staking on Pancakeswap platform. If you stake CAKE on Pancakeswap for 1-year Flexible term, staking yield drops to 0.86% APR.
Conclusion
Staking is a very good way to passively earn crypto. It can generate good yields for long term investors that are not bothered by short term price fluctuation. Always review terms of staking and invest in sound projects with high security standards.
There are some risks associated with it, as are with any other investment. Type of staking shall be considered based on the risk tolerance of your portfolio. Always diversify your portfolio to mitigate the loss of funds due to any reason. Don’t stake funds that you can’t afford to lose. Always DYOR.
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