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Staking: what it is and how to make money from staking

Staking is a way of earning passive income from cryptocurrencies based on the Proof-of-Stake (PoS) consensus algorithm and its variants.

Сrypto staking is the blocking of a certain number of coins or tokens in a wallet for a fee to maintain the blockchain operations (securing the network and validating transactions).

Staking is a rather profitable option compared to simply storing crypto assets in a wallet. It is more like a bank deposit.

As for staking profitability, it depends on the blockchain and can reach 10% or even over 100% per year.

A few words about the PoS algorithm

PoS (Proof-of-Stake) is a consensus mechanism (essentially to validate transactions) in which the right to generate new blocks, verify transactions, and include them in the blockchain according to a certain algorithm is played out between computing nodes (validators) based on how many coins of a given blockchain they have blocked. The more coins locked up, the higher the profit. Many blockchains also take into account the tenure of coins/tokens and other factors.

To put it simply: the bigger the stake blocked by the validator, the higher chance the validator generates a new block and gets a reward for it.

So, staking involves receiving a reward for supporting the operation of the blockchain with the locked-up coins. Crypto holders operating in PoS networks receive passive income by becoming validators or delegating their crypto to a node operator.

One of the most popular variations of PoS is Delegated-proof-of-stake (DPoS).

The main advantage of DPoS is that you, being a coin owner, can participate in staking without creating your own computing node (validator) and without blocking large amounts in your wallet (for example, to become an Ethereum blockchain validator, you need 32 ETH, which is equivalent to roughly $43k).

But you can delegate this work to a validator that already manages a high-performance node and keeps it running smoothly. And invest much less money.

To put it simply: for coins/tokens staking, you just need to find the appropriate DeFi platform and block some of the coins in your wallet.

Staking, as a passive income option, is much more affordable than mining, which requires expensive video cards and other powerful equipment. Especially if you're not going to set up a node yourself and become a validator. When you delegate coins to a staking provider, the entry threshold is minimal or non-existent. 

How to start making money from staking and what are the staking providers 

Staking includes following steps:

  • buying crypto;
  • depositing coins into a wallet, crypto exchange, or other staking platforms;
  • blocking crypto assets for staking;
  • earning passive income.

Different crypto platforms offer staking options via a staking provider's wallet. Such platforms include exchanges, special decentralized platforms (DeFi), and wallets that support staking. Staking providers make the staking as easy as possible for crypto users and charge a small fee for it. 

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Where to stake crypto

  1. Centralized exchanges (CEX): Binance, Coinbase, Kraken, ByBi, etc. Crypto exchanges are staking providers that block crypto assets in your account for a certain period of time for predefined percentage yields (fixed staking).  They can authorize withdrawing the blocked crypto at any time (flexible staking), but this option is much less profitable.
  2. DeFi staking — DEX, special platforms for staking: Lido, Ankr, Marinade Finance, PancakeSwap, etc. This is not exactly a traditional staking as you are not dealing with a blockchain consensus algorithm, but with DeFi smart contracts. When you send crypto on DeFi services to staking, your locked coins can be used to credit other market participants or to provide crypto liquidity (the coin/token blocked for a liquidity pool to ensure that it can be instantly bought/exchanged by other market participants). The security of your blocked funds is ensured by a smart contract.
  3. Cold wallets. Different options exist.  For passive income you can:
  • Store crypto at one address. If you transfer it, the blocking period will be interrupted and the staking reward will be lost.
  • Connect to one of the DeFi platforms using the Wallet Connect protocol and send coins for the staking.

You can also stake coins/tokens directly in Trust Wallet, MetaMask (hot non-custodial wallets supporting staking).

Which coins and tokens you can stake

The coins and tokens for staking are:

  • Ether, BNB, Sol, MATIC, AVAX and other network coins;
  • CAKE, SUSHI, 1INCH and other DeFi tokens;
  • DAI, USDT, USDC and other stablecoins; WBTC and other wrapped coins;
  • ATokens, cTokens, and other money market interest tokens.

Defillama.com shows an extensive list of platforms and the coins/tokens that can be staked.

The main risks of staking

  • Fluctuations of coin/token exchange rates, which can lower staking rewards. For this reason it is not advised to buy and stake crypto at the peak of the cycle.
  • Not high, but still existing hacking risks of the platform staking your crypto. 
  • A high network fee or its sharp increase. Fees are charged for staking or redeeming crypto. It's important to estimate the fee and compare with the amounts of staked coins. Also, increasing network commissions can greatly reduce revenue and increase your ROI if you're investing small amounts. 
  • Non-reliable exchanges. In the cryptocurrency market, there are always scam projects offering generous interests for staking, so you should be very careful about offers with superprofits. 
  • Technical failure of smart contracts. It happens, though rarely.

Staking is a rather easy and profitable way to make passive income, not without risks, of course. The average annual income can reach 11%, though it can be much higher. Diversify your risks to secure your crypto assets as much as possible. Don't put all your eggs in one basket, invest in different coins and tokens and use different platforms.Then, the drop of value of some tokens will be compensated by the increase of others, and you will enjoy stable income.