Staking Crypto: What It Is & How It Works?

Staking crypto is an intriguing way to earn passive income without selling your tokens.

Like bank interest, you can collect rewards on cryptocurrency and stablecoins with minimal effort and risk.

I show how easy it is to start and how this strategy can boost your portfolio gains.

What is staking?

Crypto staking is when you earn rewards by providing liquidity for a particular blockchain network, such as Ethereum and Solana. 

Staking rewards are similar to earning bank interest on your savings account balance. Your potential yield varies by token, andyou can unstake your assets at any time as your investment strategy changes.

This income-producing strategy isn’t risk-free, although you don’t lend out your crypto.

How does staking crypto work?

Staking requires placing part of your token balance into a liquidity pool to help validate new on-chain transactions.

In exchange for locking up your crypto, you earn recurring rewards from 1% to 18% as you help validate transactions and provide network liquidity. 

Many centralized and decentralized exchanges have dedicated staking platforms that list the current yields for participating coins.

With a few button clicks, I can start earning staking rewards on most assets within my Coinbase trading account. 

If I want to earn more Cardano (ADA), I can simply stake my balance on an exchange and receive rewards.

Or I can start a stake pool with a personal node through the project’s website to receive potentially higher payouts for accepting more responsibility. 

However, you don’t need to be computer-savvy or have a substantial account balance.

It’s possible to start with as little as $1 for certain digital assets.

Crypto staking methods

The staking service you use to earn rewards may offer active and passive staking:

• Active staking: Validating transactions using dedicated hardware nodes in exchange for a higher yield. Your efforts help create new token blocks.
• Passive staking: Involves less effort as you simply provide liquidity for transactions to process quickly. Quick network speeds help produce higher yields.

There are several different active staking methods which determine your level of participation and earning potential.

Exchange staking	Stake your tokens using your crypto exchange. They are usually the easiest to use and have the lowest minimums.
Solo crypto staking	Stake directly from your crypto wallet and home hardware node. This method can require the most effort, but earns more rewards and is truly decentralized.
Pooled staking	Combine your assets with other participants to share high costs and minimums. However, you earn diluted payouts and have less control than solo staking.
Staking as a Service (SaaS)	Stake your crypto while delegating the validating and node hardware maintenance to a third party. This remains less centralized than exchange staking.

Solo and pooled staking can require working directly with the blockchain network by setting up a personal node.

This hardware is usually very affordable and you earn rewards for each validated transaction. 

Most cryptocurrency projects use a “proof-of-stake” (POS) model to generate new token supply.

This is in contrast to proof-of-work (PoW) coins like Bitcoin, which require solving algorithms with special hardware, but only the fastest crypto miner earns rewards.

Which cryptocurrencies can be staked?

Cryptocurrencies offering staking rewards are one of the following coin types:

• Altcoins: These cryptocurrencies can have the highest yields but more price volatility. The most-staked projects have flexible yields between 1% and 5% annually. Smaller projects are likely to yield between 6% and 18%. 
• Stablecoins: These tokens usually earn between 4% and 5% annually, similar to the biggest altcoins by market cap. Examples include USD Coin (USDC), Tether (USDT), and Euro (EUR).

Unfortunately, Bitcoin is ineligible as it’s proof-of-work.

Still, a handful of exchanges may offer “indirect staking” as you pool your assets on an exchange or with a third-party service.

However, the yields are notably lower and you may actually be lending your crypto instead. 

Some of the most popular exchange-staked cryptos include:

Coin	Symbol	Potential Yield
Ethereum	ETH	1% to 7%
Polygon	MATIC	1% to 6%
Solana	SOL	2% to 8%
Polkadot	DOT	5% to 16%
Cardano	ADA	2% to 5%
USD Coin	USD	4% to 5%
USDC	USDC	4% to 5%
Tether	USDT	4% to 5%

Yields and eligible cryptocurrencies differ by exchange and country.

According to Grand View Research, Ethereum is one of the oldest cryptocurrencies and has one of the biggest staking market caps.

However, it’s common to require at least 32 ETH to start validating transactions. A larger balance is necessary to receive more validation requests.

Benefits & Risks

Here are the most noteworthy advantages and disadvantages of crypto staking.

Benefits

• Many participating coins: Staking is available in many countries. You can participate through an exchange or directly through the blockchain network.
• Ongoing passive income: You can earn rewards with minimal effort on holdings you don’t plan on selling in the near future. It’s also possible to generate income even if the coin price is trading sideways or down.
• Not competition-based: Proof-of-stake provides more predictable income than proof-of-work cryptocurrency mining, where only one party earns the reward.  
• Retain control: You keep control of your keys and don’t lend your coins as collateral for loans. Exchange-based pools protect your assets with cold storage wallets.
• Improve network efficiency: Your staked positions help on-chain transactions trouble-free. Active staking protocols let you increase token supply.

Risks

• Variable yields: Reward rates update frequently and can decrease as the staking supply increases. Another lock-in risk is that staking prohibits you from selling or trading your designated assets even if trading prices dip lower than reward rates.  
• Slashing: You can be penalized and lose accrued rewards if your node experiences downtime, improperly validates transactions, or blatantly manipulates signing new blocks. These negative incidents reduce network efficiency. 
• Security breaches: Staking pools and exchanges are targets for bad actors and digital thieves. Your account may not be necessarily insured against theft or loss.

Staking vs. Liquid Staking: What’s the difference?

Experienced crypto stakers may also consider liquid staking. This advanced strategy can provide more flexibility and valuable rewards but also carries risk.

Criteria	Traditional Staking	Liquid Staking
Participating Platforms	Exchanges, solo nodes, shared liquidity pools for proof-of-stake cryptocurrency	Decentralized finance (DeFi) platforms and apps
Liquidity	Staked tokens cannot be traded until unstaking. You won’t receive synthetic coins.	Receive liquid tokens or derivatives pegged to your staked assets. It’s possible to trade, sell, or lend while staked.
Composability	Cannot trade, sell, or lend staked assets.	Can use your liquid tokens on participating DeFi platforms without unstaking.
Rewards	Only earn rewards on staked assets.	Greater earning potential. Can earn rewards on staked assets and liquid tokens.
Unstaking	Minimum bonding and staking durations may apply, requiring a longer time commitment.	DeFi exchanges may require a bonding period, but have minimal staking duration. It’s possible to unstake sooner.
Fees	Typically lower.	Usually higher as you must burn liquid tokens when unstaking.
Minimum Investment	Individual and pooled staking can be higher, but help deter slashing.	Usually lower than traditional staking.
Potential Risks	Must maintain and protect your node with solo and pool staking.	Requires greater trust in other validators to avoid slashing. Moreover, liquid tokens can depeg from its staked asset.
Better For	Traditional cryptocurrency and larger portfolios.	DeFi projects and for those comfortable with more risk.

Best Crypto Staking Platforms

These cryptocurrency exchanges provide the best staking opportunities for most.

Coinbase

Coinbase’s Earn feature offers staking rewards for over 140 tokens. Premium Coinbase One users can earn higher rates on their staked assets, such as 17% instead of 12%.

Depending on the asset, you can start with as little as $1 and unstake within a few minutes or weeks.

Open an account with Coinbase today!

Gemini

Gemini currently offers staking rewards for Ethereum (ETH), Solana (SOL), and Polygon (MATIC), with rates as high as 3%.

Despite relatively few options, these coins have stable market caps, low minimums and fees, and industry-leading account security standards.

Open an account with gemini today

Binance US

Binance US supports over 20 cryptocurrencies with yields as high as 17% and a $1 minimum investment.

You can also stake the BNB stablecoin and earn a small reward. Your assets remain in cold storage and you can anticipate receiving weekly rewards.

How to Get Started

Below is a brief overview at how to stake crypto:

1. Find a staking platform: For many, it’s easiest to stake from your preferred exchange and earn competitive yields. However, you can also operate a personal node or pool your assets with others for higher reward rates.  
2. Compare yields: Your earning potential and minimum bonding duration differ by project. Yields are variable and adjust frequently depending on current staking supply, network activity, protocol changes, and other factors.
3. Stake a position: Decide how much you want to stake. You cannot sell or transfer your staked balance and the platform may require a minimum balance to qualify as a validator. You may be able to commit to a specified bonded duration for better yields.
4. Validate transactions: Networks randomly select validators for transaction requests. Others co-validate each original task to verify accuracy. Smart contracts automate this entire process. 
5. Earn rewards: You usually receive new crypto tokens in designated intervals based on the current yield for your stake size. Rewards are funded by sharing newly-created blocks and network transaction fees paid by other users.
6. Pay taxes: Crypto staking rewards are taxed as ordinary income, similar to bank interest. This treatment is different from capital gains you encounter on sold assets. Your year-end Form 1099 lists your tax-reportable income.
7. Unstake crypto: You can start unstaking your crypto after a minimum waiting period, usually ranging from several days or weeks. You cannot sell, trade, or transfer your crypto until it is fully unstaked.

Is staking crypto worth it?

Crypto staking is a convenient way to earn supplemental income on altcoins and stablecoins you plan on buying and holding.

Decide if the current yields exceed the downside risk or if you can quickly unstake your assets if your goals change.

Unfortunately, staking isn’t available with the best cryptocurrency IRAs. However, you can enjoy tax-advantaged gains on Bitcoin and altcoins to help boost your net worth.

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