- Cryptocurrency staking consists of placing the funds in a wallet and keeping them for a certain time to earn rewards or earn interest.
- Staking is an ideal choice for those who are confident in the potential of a project and want to support the network while receiving rewards in return.
As the cryptocurrency ecosystem has evolved, different options for making money have emerged and, essentially, thanks to decentralized finance (DeFi).
Within the DeFi, there are cryptocurrencies that offer the option to generate passive income with them. In fact, as the value of DeFi increased in 2021, cryptocurrency staking became one of the most attractive methods of enjoying passive income.
It is important to understand that passive income is activities that generate economic benefits without the need to execute a job, so, yes, it is possible to make money with cryptocurrencies passively.
However, this may sound ‘too good to be true’ and it is so. Nothing is without risk and that is why you have to be careful when investing. That is why, today, Bitcoin Mexico brings you a detailed guide on what staking is, its risks and what are the best cryptocurrencies to earn passive income this 2022.
What is cryptocurrency staking?
Cryptocurrency staking consists of placing the funds in a wallet and keeping them for a certain time to earn rewards or earn interest. Yes, it sounds simple, but the question that needs to be asked is: why do they give rewards for holding a cryptocurrency? Where does the money come from?
Recall that cryptocurrencies are built on a certain blockchain, in which transactions are verified and, subsequently, the resulting data is stored on the blockchain.
Currently, there are different ways in which transactions are recorded and confirmed on a blockchain. The main ones are: Proof of Work (PoW) and Proof of Stake (PoS). Both help the network to achieve consensus but do so in a different way.
Proof of Work is the consensus that uses Bitcoin and other cryptocurrencies, in which the verification process is carried out by the miners with their machinery. Whereas, the Proof of Stake where, to achieve consensus, participants in the network are required.
So, staking is for investors to actively hold or block their holdings in this cryptocurrency found on a Proof of Stake blockchain in a wallet and participate in the consensus process on the network. When the user keeps their cryptocurrency for a certain time in their wallet, they are essentially approving and verifying transactions on the blockchain.
Just as miners receive rewards in Bitcoin, the PoS network gives rewards to investors who participate in it.
Staking allows participants to earn more cryptocurrencies depending on the interest rate that varies by network. It is necessary to emphasize that the rewards are usually in the cryptocurrency that is doing staking. This is important because their rewards will also be associated with the value of the cryptocurrency and are therefore volatile.
One aspect that should be taken into account is that you can not staking with all cryptocurrencies.
- Through a crypto exchange: Some crypto exchanges offer the service of staking their tokens that are in their wallet on their behalf. For example, Binance, Coinbase and eToro. This is the simplest option because all the person has to do is place their tokens on the crypto exchange’s staking service.
- Through a staking pool: Staking through a crypto exchange can be limiting for some investors because they do not necessarily include all the tokens with which you can staking. This is where the option to participate in a pool, usually operated by another user, comes in.
- Be a validator proper: In the above options, the investor did not have to do anything because someone else does the validation process. However, an investor may decide to do the validation on the Blockchain himself. The problem with this option is that it usually involves a high cost of entry. For example, to be a validator in Ethereum 2.0, you must have 32 ETH.
Profitability and risks
Staking a cryptocurrency is, in itself, profitable because the investor will be receiving an interest on their assets from time to time.
However, there is one aspect that cannot be left aside: The rewards are in the cryptocurrency that is doing staking, therefore, the profitability of your share will be associated with the value of the cryptocurrency you own.
So the main risks are as follows:
- The cryptocurrency market is relatively volatile. Therefore, if the price of the cryptocurrency you staking quickly drops, the interest you earn may not be enough to offset the loss. And, consequently, you could lose money.
- In some crypto exchanges and staking pools, although it is possible to stop staking your cryptocurrencies, doing so can take a few days. This is an element to keep in mind. However, there are some other options that offer flexible staking and allow instant withdrawals.
- There are some options where your cryptocurrencies are blocked for a certain time and, if you want to stop staking ahead of time, you don’t get the rewards.
Top 5 Cryptocurrencies to StakingEthereum 2.0 (ETH)
Before we talk about how to stake with ETH, it is important to clarify the following: currently, the Ethereum blockchain runs under a PoW consensus. However, after the rise of DeFi and non-fungible tokens (NFT), it can be said that the network became small. That is why it is working to move Ethereum to a blockchain under PoS consensus.
It is important to clarify that ETH2 or ETH 2.0 is not a different token from ETH, there is only one Ethereum.
Once the previous paragraph is taken into account, Ethereum is in the first place of this position because it is the second largest cryptocurrency by market valuation.
To be a validator of the Ethereum network, it is required to at least block 32 ETH at the official address of the deposit contract which is in the following Tweet published by the official Ethereum account.
An essential piece of #Ethereum’s Serenity upgrade, the Beacon Chain’s deposit contract, is live. This begins a transition to #[email protected] Guide: https://t.co/PkKwLnXKS4
Launchpad: https://t.co/CFgFwAs46f
Deposit Contract Address: 0x00000000219ab540356cBB839Cbe05303d7705Fa— Ethereum (@ethereum) November 4, 2020
One aspect to consider with Ethereum is that, until version 2.0 is released, the tokens will remain on the network.
In the case of Ethereum, the rewards depend on the total amount of ETH doing staking and the number of validators on the network. For example, at the time of writing, ETH2 has 296,635 validators and a total of 9,953,900 ETH in satking, and with it the APR is 4.9%.
However, you can also do ETH staking through crypto exchanges or staking pool. In general, this method is suitable for beginners who do not have the technical knowledge to operate a full node or who do not possess all 32 ETH.
For example, in Binance you can do ETH staking flexibly. To do this you must have your ETH in a Binance wallet, go to ‘Binance Earn’ and select ETH2 Staking. There you can choose the amount with which you want to staking.
Other crypto exchanges where you can do ETH staking are Coinbase, Kraken, Bitfinex, eToro, among others. Stacks (STX)
Stacks is an L1 blockchain that uses Bitcoin as a source of trust and record keeping. Stacks brings Smart Contracts and increased transactional demand to the Bitcoin blockchain and, in return, brings security and stability.
Users can start staking their STX tokens to support the network and in return they receive rewards in Bitcoin. Right now the APY is 7.6% with $676 million locked into STX.
STX staking can be done through a crypto exchange, a staking pool or on your own. In the case of wanting to do it through a crypto exchange, you can do it on OkCoin (50 STX minimum) and Binance (1 STX minimum)
