Many new investors entering the crypto space do so in hopes of making a quick profit, but it’s the long-term investors who often come out on top. Holding on to your crypto allows you to use it in real-life applications or simply wait for the perfect time to sell. However, this approach also opens the door to other potentially profitable opportunities, such as staking.
Staking crypto is profitable, and this can be a great way to put your crypto to work while it’s sitting idle. By staking coins, you’re contributing to the success and security of the blockchain, and the network rewards you for doing so. However, the profits you gain will vary from coin to coin.
The act of staking is pretty simple, but there’s a fundamental purpose behind this, which I’ll explain below. I’ll also look into what kind of profits you might expect and explain a few things you’ll want to consider before staking.
How Staking Crypto Makes You Money
People often compare crypto staking profits to the interest a bank pays you on a savings account, and at a glance, they appear similar.
Actually, crypto-staking yields tend to be much higher than what you’ll get from a bank. The trade-off is that staking is a higher-risk investment.
Let’s take a look at how crypto staking works.
Proof-of-Stake Networks Rely on Crypto Staking
To keep the blockchain decentralized, there must be a community validation system to verify transactions. Staking is a function of the Proof of Stake (PoS) consensus mechanism that helps make this happen.
Individuals, called “validators,” are randomly selected to verify new blocks produced on the network. However, they must first offer up, or “stake,” a portion of their coin holdings. The staking rewards incentivize them to do this.
On the flip side, staked coins may be destroyed if the validator gets sloppy with their work or votes to approve invalid or illegitimate blocks. The risk of losing crypto helps keep validators honest and the network secure.
Crypto Stakers Are Rewarded for Their Contribution
The network rewards stakers for their contribution to the blockchain, typically in the form of more crypto.
Staking rewards are somewhat proportional to the size of your stake. Coin holders with larger stakes are more likely to be selected as validators, which means they’re also more likely to receive higher rewards.
Becoming an active validator often requires a minimum stake and special computer equipment, but you can still stake your coins without any of these.
When you stake your crypto without actively validating, they often go into a staking pool or some other mechanism where a validator essentially does the work on your behalf. This way, you can still get rewards even with a small amount of staked coins.
Staking Reward Systems Are Built Into the Network
The way that staking rewards are paid out is a feature of the system. Rewards typically come from a few key places:
- Inflation: If the supply of a given cryptocurrency is on the rise, it features an inflation rate percentage. Your rewards can come from the newly-created supply.
- Reserve: Some networks have already set aside a certain amount of coins for staking rewards.
- Transaction fees: Transaction fees also come into play, and some rewards come from a percentage of the fees associated with the transactions.
The exact formula used to produce staking rewards varies from coin to coin.
How Much Can You Make Staking Crypto?
Staking cryptocurrency is a legitimate way to earn passive income, but your rewards vary greatly. Rewards are also largely dependent upon the cryptocurrency, the size of your stake, and the network conditions.
You can make 12-18% APY (annual percentage yield) staking crypto, and some estimates go much higher than this. 3-5% APYs are common on the lower end, but this is still a higher rate of return than what a traditional bank would offer for a savings account.
The chart below breaks down some of the most popular cryptocurrencies and their estimated APYs. I also included a few popular exchanges and noted which coins they allow you to stake.
|Binance Coin (BNB)||Solana (SOL)||Algorand (ALGO)||Livepeer (LPT)||Cardano (ADA)||Ether (ETH)||Cosmos (ATOM)|
|APY estimate||6.40%||4 – 6.0%||5.75%||18.0%||2.6 – 6%||4 – 7%||5 – 12%|
The above percentages are merely estimates based on the exchanges’ reward structure, so the platform you use to stake can influence profits greatly.
Factors That Influence Staking Profits
Some of the other factors that will influence your staking profits include:
- Size of stake: The more coins you have staked, the greater your returns will be.
- Length of stake: Due to factors like compound interest, longer stakes generate greater profits.
- Volatility of asset: Staking a highly volatile crypto asset can result in poor earnings. If you earn a lot of rewards but the value of the currency tanks, you could technically lose money.
- Size of staking pool: If you put your crypto into a staking pool, you’ll be splitting your rewards with all of the stakers within that pool. Larger pool sizes increase the reward opportunities, but you’ll also be sharing the rewards with more people.
Rewards are often higher when there is a lower number of stakers. Networks are trying to incentivize staking, so rewards tend to decrease as more people join.
Things To Consider Before Staking Your Coins
Staking is a potential profit path for crypto investors who plan on holding their coins for a while. Rather than let the coins sit in your wallet, you can put them to work and potentially increase your supply. If you are focused on short-term investing, staking wouldn’t be a worthwhile option for you.
While you can generally unstake your coins whenever you want, some platforms require you to “lock away” your coins for a period of time, during which they’ll be inaccessible.
Lastly, don’t forget that you can lose money you invest, and the same is true for crypto. Since the blockchain uses your staked coins to help validate transactions, it can also take away your coins if they’re involved in a transaction that compromises the health of the blockchain.
Staking crypto is profitable in almost every case where it is allowed, although the size of the profits varies greatly. Just keep in mind that when you stake, you are essentially offering up your coins as collateral. Thus, you may lose these coins if the validating node where they are stored approves a bad transaction.
The rate of return on your staking investment will vary from asset to asset, but the staking platform usually provides estimated rates of return. If you own crypto, you can look at each platform to see who offers the highest rates.