Crypto staking is the process of locking up cryptocurrencies to earn rewards. It can be thought of as similar to depositing cash in exchange for interest rewards in a savings account.
The interest rates offered by cryptocurrencies are generally much higher than those provided by traditional banks. Also, the crypto assets still remain in the users’ wallets during the process. Hence, it can be a great and relatively safe way for holders to put their crypto to work and earn passive income.
There are five methods for users to participate in staking within the crypto space:
DeFi protocols – such as Aave, PancakeSwap, and MANTRA – often encourage users to lock their crypto assets into smart contracts for the long term by offering attractive yield rewards. This is known as dApp (Decentralized Application) staking. dApp staking is not as related to the Proof of Stake mechanism, and the rewards are provided by the protocols to encourage users to HODL their tokens. The yield for dApp staking is included in the tokenomics of crypto projects and can be typically seen as ‘ecosystem rewards’. As the tokens generate rewards, the terms of the smart contracts are automatically fulfilled.
The annual percentage yield (APY) users can earn during dApp staking differs, depending on:
At the time of writing, MANTRA’s staking platform allows users to stake almost 20 assets with annual percentage rewards (APR) ranging from 4% to 120%.
Proof of Stake allows any participants with a computer to become validators. As validators, users are required to set up, run, and maintain their own nodes, as well as validate transactions. They are essentially responsible for maintaining chain security on the networks they are staking.
Since participants need to stake a specific amount of tokens before qualifying as validators, the entry costs can be high. The PoS consensus mechanism uses a pseudo-random election process to pick a validator to verify a block, after which the validator can earn transaction fees as rewards. The more tokens they have staked, the higher their chances of being picked. While PoS staking is attractive and offers high yield returns, it also requires technical expertise and higher risk tolerance, as running a node incorrectly can result in loss of staked tokens.
The APY that validators can earn depends on a number of factors, including:
With MANTRA Nodes, MANTRA serves a validator and manages validators nodes on 30+ PoS networks – assuring 99.9% uptime, and institutional-grade network security and scalability.
Users who are interested in running their own validator node can read here.
Users who do not possess the technical knowledge, time, or desire to become a validator but still wish to support blockchains and earn yields can instead opt to become a delegator.
Under this method, participants can delegate their PoS tokens to an existing validator, who can then use them to run their own node and verify transactions. The delegator can then enjoy a portion of the rewards earned by the validator without having to perform any of the operational aspects themselves. However, they are required to join a staking pool and choose a validator they trust with their assets.
Delegators also depend on the same factors as validators when it comes to APY, but with the important distinction that they have to pay commission fees to the validators.
Learn more about delegations and how to delegate to a trusted validator here.
Liquid staking, as the name suggests, is a more flexible form of staking. It allows users to ‘lock up’ their crypto assets to earn yield, while still having access to the staked assets.
When a user deposits their crypto into a liquid staking protocol (e.g., 1 ETH), they will receive a tokenized and value-equivalent version of it in return (e.g., 1 stETH). The user will continue to earn rewards on the staked crypto (1 ETH) while still being able to perform actions with their tokenized version (1 stETH), such as trading and yield farming.
For the user to regain access to their original crypto (1 ETH), they will require the exact amount back in the tokenized version (1 stETH).
Perhaps the simplest form of staking, users can also choose to directly stake their crypto holdings on centralized exchanges (CEXs) where they might have purchased their crypto assets from in the first place. Centralized exchanges – such as Binance, Crypto.com, and Coinbase — often use several of the staking methods above.
Some CEXs might employ a similar method to dApp Staking, while others might either act as a validator or a delegator. When acting as a validator or delegator, CEXs might use the users’ staked crypto to stake/ delegate elsewhere. This way, CEXs essentially enjoy the net difference of rewards between what they are earning as a validator/ delegator and what they are offering to their users.
Users who wish to stake $OM on Binance can check Binance Earn - MANTRA (OM).
Virtually anyone can start staking and earning yields with a moderate amount of tokens on a crypto exchange or wallet.
Users who are planning to keep their tokens long term can decide to stake to grow their tokens that would otherwise stay idle.
No matter which method is being employed, staking consumes far less energy when compared to a different consensus algorithm, such as Proof of Work.
By staking, users become a closer part of the ecosystem or blockchain network, and may also receive voting rights which will deem them more integral to the direction of the project.
By staking their crypto assets, users can support crypto projects they believe in.
Through dApp staking, users can help provide liquidity to the protocol and reduce selling pressure of the tokens.
Through Proof of Stake, staking helps contribute to the efficiency and security of those blockchain projects.
For more staking benefits related specifically to Proof of Stake, read here.
Since the crypto market is volatile, the prices of the staked tokens can drop quickly. If the price drop is large enough, it could outweigh any interest earned on them.
For example, if a user is earning 20% APY but the staked asset drops in value by 50%, they will still suffer loss.
Staking generally requires users to lock up their crypto assets for a minimum amount of time. During that time period, users are unable to interact freely with their tokens, and cannot perform actions such as selling them. While liquid staking helps to solve this, it is still an issue for other staking methods.
Token holders also need to keep the unstaking period in mind, which refers to the time it takes to receive the tokens after choosing to unstake them. The unstaking period can be 7 days or longer, and the price of the tokens can change dramatically during that time.
The act of locking up tokens is generally facilitated by smart contracts on blockchain networks. If a project or network has not audited their smart contract properly or has created a contract that can be potentially exploited, it is at risk of being hacked, which can result in loss of users’ funds.
Crypto staking is a wonderful opportunity that has risen up in the past few years. If you’re still wondering if you should start staking, you can consider the following questions first:
Each cryptocurrency has its own tokenomics and each protocol or blockchain network have their own lock-up periods and yield offerings. As a user, it is best for you to be as aware as possible of all the terms before locking up your tokens.
Yes, the crypto space offers the possibility of extremely attractive rewards, but it is also susceptible to high volatility, which can make users susceptible to huge losses. If your risk tolerance is low, or you have limited financial resources, it would be best for you to not engage in crypto staking.
Since the rewards you receive from staking are typically provided in the projects’ native tokens, it is most preferable to receive more tokens you believe is going to skyrocket in the future.
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