A Beginner’s Guide to Crypto Staking
Learn everything you need to know about earning cryptocurrency by staking your holdings.
Crypto staking provides investors with a way to earn investment income on their digital assets.
In this beginner’s guide to staking, you will learn what it is, how it works, and the risk involved. Finally, you will learn how to stake crypto in a simple and secure manner directly in your Trust Wallet app.
What is Crypto Staking?
Crypto staking refers to the locking up of a blockchain’s native digital asset to receive rewards. Staking is typically done in blockchains that leverage Proof-of-Stake (POS) as a consensus mechanism.
Proof-of-Stake is a consensus mechanism first witnessed in Peercoin (PPC). It was created by a pseudonymous developer by the name of Sunny King in 2012 as an alternative to the growing list of concerns levied against Proof-of-Work (PoW) as a consensus mechanism.
In contrast to PoW, where nodes must solve complex mathematical equations and expend large amounts of energy to validate transactions, POS requires the participants of a network to lock up or stake a predetermined amount of funds in the native token of the underlying blockchain to authenticate transactions and add data to the blocks.
In POS, there are no miners, only validators.
Validators refer to the people or nodes that lock up or stake their token in order to secure the network. In return, these nodes receive rewards from the network.
While there is typically a minimum amount validators must stake to participate in securing the network, there is also an incentive to stake more tokens. This is because the more tokens one locks away, the more they stand to gain in rewards.
It works this way: to add a new block to the network, validators use their stake to bet on the block they think is most likely to meet the underlying requirements. If the block they bet on is added to the chain, they are rewarded with new tokens. However, in most POS blockchains, the reward is directly proportional to the amount staked. In other words, the more you lock up, the more you stand to gain.
There are other forms of POS that have emerged over the years, conferring their networks with novel characteristics. Examples include Delegated Proof-of-Stake (DPOS), which is leveraged in EOS, and Pure Proof-of-Stake (PPOS), as seen in Algorand’s chain. In these networks, it’s also possible to stake your coins in order to secure the network and earn a reward.
The energy expended in PoW blockchains is a security feature that makes it uneconomical to try and double spend or otherwise write fraudulent transactions to the blockchain. PoS-based staking gets around this by punishing bad behavior. For example, by slashing their staking rewards.
Finally, it is important to note there are networks that do not employ POS as a consensus mechanism but still leverage staking principles. In these networks, staking-like features are typically leveraged to add innovative features to the underlying blockchain.
This was first witnessed in the Dash ecosystem, where staking was introduced to allow for private transactions on the network. Though Dash leveraged PoW as a consensus mechanism, its developers introduced masternodes, a highly specialized node on its network. Masternodes allow their owners or operators to have a greater level of responsibility in a network while simultaneously allowing for greater rewards.
Masternodes are network agnostic. Network agnostic refers to a technology that can be added to any blockchain network without considering its underlying consensus mechanism. Any blockchain network can introduce masternodes to support new features. There are currently over 300 networks that allow for staking tokens via masternodes.
The Risks & Rewards of Staking
In this section, we will discuss the risks and rewards that come with crypto staking.
Crypto investors who stake can earn investment income (on top of potential capital gains) on their staked digital assets.
Participating in crypto staking typically does not require specialized equipment. In fact, it is much cheaper to do than PoW mining.
Crypto staking allows users to interact with blockchain technology in a more in-depth manner, which often leads to greater knowledge of the industry. This is especially true of masternodes.
The market may move in a manner adverse to the value of your staked coins. What is worth 1k today may be worth $100 tomorrow. This is true of all cryptocurrencies, however.
The token you stake may be a small one with no liquidity on exchanges. In this case, you will have trouble selling your coins and turning them into BTC or ETH.
You are unable to access your coins in the lock-up period. If you need the money for an emergency, you will be unable to access your assets. Alternatively, you may gain access, but incur a fine, which significantly slashes the value of your original investment.
Some networks also have a rewards duration, meaning you don’t get profits paid out daily, only after a certain amount of time. Mitigating this risk boils down to proper research and choosing coins that pay out daily as well as only investing money you will not need in an emergency.
If your node is not up and running as it should be, you may be liable to fines and penalties. Thus, if you are self-staking, it’s important to ensure your node is always running as it should be to avoid this scenario.
How Does Staking Fit Into a Crypto Investment Strategy?
Staking enables crypto holders to essentially “earn interest” on their digital asset investments.
In a way, holding and staking POS coins is akin to investing in dividend stocks that pay quarterly, semi-annual, or annual dividends. They provide (potential) capital appreciation and investment incomes.
What’s more, APY on staking coins is typically higher than for traditional savings accounts or money market funds (albeit, with a higher level of risk).
However, it’s important to note that APY is variable and typically a reflection of network traffic.
Top Staking Coins
Examples of popular staking coins include Algorand (ALGO), Kava (KAVA), Tezos (XTZ), Cosmos (ATOM), Tron (TRX), and Binance Coin (BNB). All of these assets can be natively staked within the Trust Wallet app.
BNB is the native cryptocurrency of the Binance ecosystem and the company’s two chains: Binance Chain and Binance Smart Chain. With an APY of 20%+, it’s one of the highest-yielding staking coins among the largest digital assets by market capitalization.
Algorand’s ALGO is based on the chain’s unique Pure-Proof-of-Stake (PPOS) algorithm and enables investors to earn around 6% per annum.
The Cosmos network’s ATOM token has become highly popular among stakers because of its broad support among staking service providers and its hefty 7% APY.
Tezos is a next-generation blockchain platform for smart contracts and decentralized applications. The chain’s XTZ token yields around 6% p.a.
Staking in Trust Wallet: The Easiest Way to Stake Crypto
Trust Wallet makes it easy to stake crypto with just a few taps on your smartphone. The mobile wallet allows anyone, from anywhere in the world, to buy and stake cryptocurrency in a secure manner, all from its app.
To start staking on Trust Wallet, download the app, buy the asset you want to stake using a debit or credit card or via the app’s built-in DEX (or transfer them from an exchange or a different wallet), and you are ready to go!
Users can currently earn 23%+ APY for staking Binance Coin (BNB). Other assets available on the TrustWallet app include ATOM, TRX, ALGO, XTZ, and KAVA, which earn between ~6% to ~12% APY.
Finally, delegating funds to validators through Trust Wallet means you can grow your balance without the headache or risk of maintaining a node, making staking as easy as possible, even for newcomers.