Are you looking for a way to make your crypto portfolio work for you? Are you in it for the long haul, not just chasing a quick buck? Are you afraid you’ll sell at the wrong time and end up kicking yourself for your hasty impulses?
If you answered yes, you’ve probably already heard about staking crypto and how it can generate passive income. However, you’re probably already numb to the industry hype, sceptical about the promises, and constantly asking, “what’s the catch?” Good for you!
In this article, Wizardia’s crypto experts explain crypto staking, how it works, and whether it’s a good way to make money.
What is crypto staking?
Investors lock up some cryptos in crypto staking to help the network validate transactions. In exchange, they earn staking rewards.
In staking, your tokens are locked up for a pre-determined vesting period, meaning you can’t access them at will. Your stake constantly earns you staking rewards. Once the vesting period is over, you can withdraw your stake. Whether you get the rewards instantly or at the end of the stake depends on the platform.
Vesting periods vary from a few weeks up to 12 months. As a rule of thumb, the longer the lock-up, the higher the reward. This compensates the investors for potentially missing out on market opportunities while not being able to access their tokens during the stake.
Staking is available only on blockchains that run on a Proof of Stake (PoS) consensus mechanism. Let’s take a closer look.
Proof of Work vs. Proof of Stake
Cryptocurrencies are based on blockchains, where each new block is built on top of the previous one, creating a trusted record of every transaction. Each transaction on the network goes to a specific block and a node then validates that block. Only then does it become part of the blockchain.
In cryptocurrencies, there are two main ways the blocks are created:
- Proof of Work (PoW), e.g., Bitcoin
- Proof of Stake (PoS), e.g., ETH2.0
In the proof of work model, the party that gets to validate a block and earn the associated reward is assigned by a process known as mining. In Proof of Work mining, computers try to solve a math puzzle. Whichever solves it the fastest earns the reward.
However, this consumes a lot of energy and requires dedicated mining rigs. As the equipment gets outdated, this creates heaps of electronic waste.
The proof of stake model eliminates both of these problems. Instead of wasting resources on determining the validator and the receiver of the rewards, a Proof of Stake network assigns the next validator randomly. The exact rules vary between networks, but usually, the more tokens you stake, the likelier you’ll also reap the staking reward.
In theory, you can run your own node and earn the associated staking rewards on your own. However, there are barriers to entry:
- Minimum stake. For example, you need 32 ETH to run an ETH2.0 validator node. This is roughly USD 56K at the time of writing.
- Technical know-how. You must be able to set up the hardware and software.
- No downtime allowed. You must commit to running the node. Extended downtime may be penalised by not winning blocks or even losing your stake.
As we discussed, the exact conditions vary between blockchains. As a rule of thumb, though, doing things on your own takes commitment and capital. It’s well and good for large-scale investors but doesn’t really suit people with smaller stacks.
However, this isn’t your only staking option.
What are staking pools?
Staking pools are services that let you stake your crypto together with other investors and earn the associated rewards. In exchange, the staking pool operator collects a service fee.
When staking crypto via a staking pool, you get more flexibility and peace of mind:
- You don’t have to stake just one token
- The staking times can be shorter in a staking pool
- The risks and rewards are pooled
Staking via exchange vs. dedicated staking platforms
Most leading crypto exchanges offer ways to make your crypto work for you. You can choose from a wide range of tokens and lock your crypto up for a vesting period suitable for your investment goals.
As the crypto exchanges are household names, they already enjoy an existing customer base. This means their significant advantage is the no-hassle side of staking. You can use your existing account and the tokens that are already in the exchange. In addition, exchanges are large, regulated operators and must carefully pay attention to their reputation.
However, the exchanges often offer much lower yields than you’d get when staking crypto on your own or via a dedicated staking platform.
Many projects, including play-to-earn games, also run their own staking pools. In these pools, you can usually stake just the native token. On the flip side, the yields tend to be even higher. We’ll look at one example closer in a moment.
Pros & cons of staking crypto
Staking is one of the easiest ways to earn money in crypto. At the same time, you can support the project you love: staking helps the network validate transactions and offers a buffer against price swings. However, even staking has its shortcomings.
Here are the major pros and cons of staking:
- No need to time the market and risk buying high and selling low
- Letting your money work for you
- Perfect for long-term HODLers who don’t want to sell their crypto at all
- Earn governance tokens that let you vote on future changes in the network
- Your funds are locked up for a set period of time
- Service fees when using staking pools
- Some pools feature waiting periods after a withdrawal request
- Risk of hacks and bad actors
Which cryptos to stake?
Only tokens that run on a proof of stake blockchain can be staked. That’s why there is a limited number of cryptos available.
Out of the top-tier cryptocurrencies, the following tokens support staking:
- Ethereum – ETH
- Cardano – ADA
- Solana – SOL
- Avalanche – AVAX
- Polkadot – DOT
- Cronos – CRO
As these are some of the biggest projects measured by the market cap, they are among the household names in crypto. As such, the yields they offer tend to be fairly modest by industry standards. They usually hover between 3 and 15 per cent APY (annual percentage yield).
Although such a yield is great compared to savings accounts and many other traditional finance tools, some projects offer even more. These are often tokens with much smaller market caps. However, they have more room to grow and may offer very lucrative staking rewards.
One project offering high staking rewards is Wizardia. It’s a turn-based NFT arena fighting game with its native WZRD token. You can buy it at Gate.io (as a WZRD/USDT pair) and at PancakeSwap (as a WZRD/BUSD pair).
You can stake WZRD directly on Wizardia’s staking pool for 4, 8, or 12 months and earn up to 114% APY. In other words, you can more than double your WZRD stake when you lock it up for an entire year.
In addition to the staking rewards, you can win extra prizes when staking. These include Wizardia Arena Genesis and Wizard NFTS.
The Arena Genesis NFTs can be staked before the actual game is launched for additional rewards, plus they earn you royalties for each battle on that arena.
The Wizard NFTs are the characters you use to play the game. As you advance in the game, your character NFT also gains abilities, potentially becoming more valuable.
Find more info at staking.wizardia.io.
How to make the best out of staking?
Staking is a great way to make your crypto go the extra mile and earn you passive income. However, you should DO YOUR OWN RESEARCH and figure out how staking fits into your short- and long-term investment goals.
Here are some insights and tips you should take into account:
Effort. Do you want to set up your very own validator node? How about decent yields on dedicated staking-as-a-service platforms or the project’s own staking pool? Or do you stake your tokens in an exchange where you already have an existing account?
Short- vs. long-term. Do you see crypto as a way to make additional income now or as a nest egg for the future? Depending on your time horizon, you should decide how much you’re willing to lock up in a staking scheme where you can’t instantly withdraw your funds. Consider having a buffer you can quickly realise instead of staking your whole capital.
Volatility. Crypto is a volatile asset class, and double-digit daily swings are frequent. This creates opportunities for people who can buy low and sell high. However, timing the market is really hard, and nothing happens in a vacuum. If you decide to stake, remember that a bad price swing can erase your annual gains in a matter of hours, especially if you’re forced to sell at a loss.
Pick your projects. Don’t invest in stuff you don’t understand. Learn more about the tokens, networks, communities, and staking pools before buying or staking your tokens. Read the Terms and Conditions carefully before putting your money on the table.___________________
Disclaimer: Opinions expressed here are of the writer’s and do not necessarily reflect the views of Wizardia. Nothing in this article should be considered as a piece of investment advice. Always do your own research.