Cryptocurrency staking is a way to make money passive incomeand this can be considered the equivalent in the crypto world of receiving interest or dividends while maintaining your underlying assets.
The bet allows you to earn cryptocurrency as a reward for using your existing assets to ensure the accuracy of transactions on the underlying blockchain network. Although it sounds complicated, regular users can often do it directly from their digital wallet or use the services provided by crypto exchanges that will handle the technical details for a part of the product.
Generally speaking, cryptocurrency staking offers higher returns than you can earn from a savings account. However, the bet is not without risk. You will be rewarded in cryptocurrency, a volatile asset. Sometimes you need to lock up your cryptocurrency for a certain period of time. And you can lose part of the cryptocurrency that you staked as a penalty if the system does not work properly.
However, staking can also be a way to grow your crypto portfolio using assets you plan to hold for a while. Staking is also a more energy efficient way to run a crypto network than the mining process used by bitcoin and some others.
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Which cryptocurrencies allow betting?
Cryptocurrency staking is an important part of the technology behind some cryptocurrencies. However, it is important to note that not all crypto networks use staking.
Proof of Stake cryptocurrencies, as they are called, are likely to support staking. Here are some examples:
Ethereum (which has recently moved from proof of work).
proof of work Cryptocurrencies use a process known as mining, which relies on expensive computers and can consume significant amounts of electricity. Proof-of-work cryptocurrencies include:
How does staking work?
To understand staking, it is helpful to have a general understanding of what do blockchain networks do. Here are some details you need to know.
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Blockchains are “decentralized,” which means there is no middleman, such as a bank, to verify new activity and ensure it matches the historical records kept by computers on the network. Instead, users collect “blocks” of recent transactions and submit them to be included in an immutable historical record. Users whose blocks are accepted receive a transaction fee paid in cryptocurrency.
Staking is a way to prevent fraud and errors in the process. Users who propose a new block—or vote to accept a proposed block—put a portion of their own cryptocurrency on the line, creating an incentive to play by the rules.
Generally, the higher the rate, the more likely the user is to be rewarded for the transaction fee. But when a user-suggested block is found to contain inaccurate information, they can lose some of their share—in a process known as pruning.
How to bet on cryptocurrency?
There are several ways to start betting on cryptocurrencies, depending on the technical, financial, and research commitments you are willing to take on.
Your first decision will be whether to actually validate transactions with your own computer or “delegate” your cryptocurrency to someone who will do the work for you.
Networks that support crypto staking typically allow people who own tokens to lend them to other users for deployment after transactions are verified, receiving a share of the reward.
The easiest option is to use an online service to wager your chips for you. Some popular cryptocurrency exchanges offer staking in exchange for a fee.
Exchanges offering staking
Of the crypto exchanges reviewed by NerdWallet, three offer listings for at least some crypto assets: Binance.US, Coinbase, and eToro. Others offer reward programs that allow users to earn additional cryptocurrencies in a similar way to staking. (See our list of exchanges with best betting and reward programs.)
Join the pool
If you don’t want to trust an exchange to make staking decisions for you – or if you can’t find an exchange that supports the token you want to stake – you can join a so-called “staking pool” managed by another user. .
To do this, you will probably need to know how to use crypto wallet to connect your tokens to the validator pool.
The official websites of many proof-of-stake blockchains contain information on how to find validators, including links to detailed information on how they work.
Omkar Bhat, head of data science at Boston-based analytics firm Flipside Crypto, suggested looking closely at a potential validator’s track record.
Some of the public information can help you know if a pool operator has ever been penalized for mistakes or wrongdoing, and some of it describes their policy to protect people delegating tokens. Other details you can view include the level of fees or commissions.
Bhat says it’s best to choose an established pool, though you might not want to choose the biggest one. Blockchains are designed to be decentralized, so there is an argument for preventing one group from becoming overly influential.
“People often delegate to validators with fewer votes to increase the decentralization of the ecosystem,” says Bhat.
Become a validator
Setting up your own staking infrastructure can be tricky. This requires appropriate computer hardware and software, as well as downloading a copy of the full blockchain transaction history. It may also have a high cost of entry.
For example, on the Ethereum network, you must start with at least 32 ETH, which will be worth about $48,000 on September 15, 2022. Staking through a pool or through an online service has no such requirements.
What type of income does staking offer?
Staking rewards vary depending on the cryptocurrency, conditions (such as the demand for the blockchain network in question), and the method you use. But the rates offered by the exchanges give you an idea of what you can expect.
Binance.US, for example, calculated in September 2022 that the top-performing cryptocurrency, ATOM, would have an annual return of 13.5%. Meanwhile, Coinbase offered a stake in Algorand with a 5.75% APR.
For comparison, the yield savings accounts verified by NerdWallet are usually around 0.5% per annum. The average interest rate on savings accounts in the US is 0.13% APY, according to the Federal Deposit Insurance Corporation.
Is betting the right option?
Rates may not be for everyone. There are a few questions to ask yourself before deciding whether or not to stake your cryptocurrency.
Will you need access to your staked cryptocurrency?
Cryptocurrency rate may include the transfer of your assets for a certain period of time, during which you will not be able to sell or exchange them. If you think you can move your cryptocurrency quickly, be sure to read the terms and conditions carefully before depositing it.
It is important to remember that cryptocurrency is a volatile asset. While the cryptocurrency rate can provide a measure of the predictability of investment returns, if the market value of your cryptocurrency falls by, say, 20% during the period you are staking it, the reward you receive may not look as attractive.
Do you believe in the project?
Ultimately, the decision to stake your cryptocurrency may depend on whether you are confident that it is a good long-term investment.
For example, if you believe in the value of the Ethereum network, daily price fluctuations may not affect your desire to sell. Staking is what you can do to get a short-term benefit from a cryptocurrency investment that you want to keep.
Have you explored other forms of passive income?
Cryptocurrency betting is a way to generate passive income that does not require daily effort after the initial investment. And while staking can be a good choice for some cryptocurrency holders, there are plenty of other ways to earn passive income. It might be worth considering some of these options.
Other common forms of passive income include stock dividends, bond interest, and real estate income.
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Disclosure: At the time of publication, the author owned Bitcoin, Ethereum, Shiba Inu, Cardano and Solana. At the time of publication, the publisher owns Ethereum and bitcoin. NerdWallet does not recommend or advise readers to buy or sell Bitcoin or any other cryptocurrency.