Staking Crypto 101 Guide: What Is It and How It Works

Written by Zoran Krdzic Staking Crypto 101 Guide: What Is It and How It Works

There are several different ways in which you can make a profit with cryptocurrencies. You can invest in crypto or mine it, but arguably, the most convenient way is staking. Unlike crypto mining, staking crypto is much less energy-intensive, requires lower upfront investment, and is more “green” and accessible.

In this guide, we will explain the staking crypto meaning and also consider:

  1. concepts and mechanisms behind cryptocurrency staking
  2. benefits, drawbacks, and risks of staking crypto
  3. different types of staking
  4. the best crypto staking platforms.

Here is everything that you need to know about staking.

What Is Staking in Crypto?

Staking crypto involves locking or “vesting” some of your tokens or coins in a designated staking wallet in order to support blockchain operation and security and receive rewards in return. Just like crypto mining, staking is also a method for validating and verifying transactions on the blockchains. 

But, whereas crypto miners solve complex mathematical equations, crypto stakers simply place a certain amount of their assets in the staking wallets in order to support the network. This method requires much less computing power, consumes less energy, and is more friendly toward the environment. 

What Is Proof of Stake?

Proof of Stake (PoS) is a consensus mechanism in which participants stake some of their cryptocurrency in order to validate transactions and create new blocks in the blockchain. PoS represents an alternative to the Proof of Work mechanism. Since validators stake their own cryptocurrency, they benefit from acting in the best interest of the proof-of-stake blockchain and keeping it secure.

Staking crypto helps ensure that only legitimate data and transactions are added to a blockchain. Participants trying to earn a chance to validate new transactions offer to lock up sums of cryptocurrency in staking as a form of insurance.

Validators are selected based on several criteria, including the size of their stake, as well as how long they have been staking their coins. They can also be chosen at random. This keeps the system fair and prevents it from being dominated by a single validator.

⚠️ Note:  Not every cryptocurrency supports staking crypto.

How Does Crypto Staking Work?

To start generating yield with your staked crypto, perform the following steps:

  1. Select a cryptocurrency that offers staking. Since not all use the PoS technology that allows staking, make sure to pick one that is relevant.
  2. Buy the cryptocurrency you want to stake. Use a reputable exchange to do so. Additionally, you may want to check if the crypto exchange supports taking, as well as the minimum staking amount you need to hold.
  3. Pick a staking method. There are several different types of staking crypto, including direct staking, exchange staking, as well as joining a staking pool.
  4. Set up your crypto wallet. Whether you are using a software wallet, hardware wallet, or the one provided by the exchange, make sure that it provides support for the currency you want to stake.
  5. Stake your cryptocurrency. This means that the digital assets in your wallet will be locked to a blockchain for a period of time. Monitor the performance of your staked crypto and earn staking rewards.

Different Ways of Crypto Staking

Staking crypto can be done in numerous different ways, depending on the mechanism, level of participant involvement in the validation, or rewards. Generally speaking, we can distinguish between two different categories:

  1. Active staking – This type of staking involves locking your cryptocurrency to a network with the intent of being an active participant in the transaction validation and the creation of new blocks. It also yields higher rewards.
  2. Passive staking – This involves locking your coins for the purpose of keeping the blockchain secure and in operation. While it’s less time-consuming than active staking, passive staking also yields lower rewards.

However, there are many other types of staking crypto in existence, the chief among which are:

    • Delegated staking – with this form of cryptocurrency staking, you delegate your staking power to a validator node, which validates the transactions and keeps the network secure. The rewards are divided among holders and validators. This approach is great for beginners who don’t want to participate directly in staking, as they might find it too technical or time-consuming.
    • Direct staking – in direct staking, you are actively taking part in the validation of transactions. You lock up your assets in a wallet, run a full node, and are consistently online. This type of staking is ideal for technical users who want to be active contributors toward network security and efficiency.
    • Pool staking – staking cryptocurrencies through pool staking involves joining a group of holders pooling their resources together to increase their chances of earning rewards, and/or to get around the high minimum requirements for staking. The rewards are then shared among the stakers according to their contribution to the pool.
    • Exchange staking – There are exchange platforms that enable staking directly on an exchange, which handles the validation process, as well as the distribution of staking rewards to holders.
    • Liquid staking – with liquid staking, you are able to stake your assets while your liquidity remains intact. Once you stake your tokens, you receive a representative token, which can be traded or used. 
💡 Did You Know: Staking can also be custodial and noncustodial. The former involves transferring assets to a platform, while the latter allows participants to keep their staked assets in their own crypto wallet.

What You Need to Consider Before Staking Crypto

Before staking crypto, it is a good idea to consider several factors which might influence your decision, including:

Minimum staking amount

Depending on the network, you may be required to stake a minimum amount, which can be significant. One way of getting around this, as we have previously explained, is through pool staking. Basically, you pool your assets with others in order to get past the minimum staking amount. However, not every platform allows pool staking.

Locked Tokens

With staking, your assets are locked for a period of time, which prevents you from selling or using them. Make sure that the lock-up period is in line with your needs. Ultimately, you may want to consider liquid staking, which provides you with representative tokens that you can sell or use.

Crypto rewards

When staking crypto, you will need to research factors such as annual percentage yield (APY), which can change based on a number of parameters, including the number of assets you have staked. You should also look into the frequency of staking reward distributions, and learn about crypto as much as you can in general. 

Technical requirements and skills for staking crypto

You may need to fulfill requirements in terms of skills, hardware, internet connection, and online availability if you are interested in running a validator node. If you don’t meet those requirements, delegated staking might be a better option for you.

Regulatory and tax concerns

Depending on where you are in the world, you may face strict regulations regarding staking and the taxation of rewards. Also, keep in mind that the Securities and Exchange Commission (SEC) is especially harsh on staking crypto, as they feel that cryptocurrency exchanges don’t explain the extent of potential risks to customers. 

What Are the Best Crypto Staking Platforms?

Recommending the best staking platforms is complex, because it depends on a lot of factors, including the assets you want to stake, your investment goals and needs, and even your own personal preferences. Also, platform reliability and reputation, ease of use, and the variety oo staking options also play a huge role.

With that in mind, here is the list of platforms you’ll want to check out:

  1. Binance.US – This one may not be the best platform in terms of cryptocurrency selection, as it only has a few options available. However, its strength is the ease with which you can stake your tokens and collect rewards, especially if you pick its own native coin, Binance Coin (BNB).
  2. Coinbase – If you are looking to reap rewards by staking the most popular tokens, this might just be the best option. You don’t need a wallet, because it allows staking crypto directly on the platform. Also, Coinbase is known for its strong and robust security features.
  3. Gemini – In terms of variety, it’s hard to beat Gemini and its Gemini Earn program, which allows you to choose among 40+ cryptocurrencies. It’s different than traditional platforms in the sense that it enables you to lend your cryptocurrency and then receive interest for it.
  4. – This platform offers some of the most competitive Annual Percentage Rates (APRs) for a wide variety of cryptocurrencies. They offer plenty of options in terms of staking duration, including a 1-3 month holding period and flexible staking options.
  5. Aave – If your preferred method of staking crypto involves DeFi, Aave is definitely worthy of consideration, with its support from ERC-20 tokens. It’s also very easy to start receiving yield through landing, as well as to swap to another token and withdraw your rewards.
  6. Kraken – If you are looking for low fees, advanced trading options, and strong security, Kraken should be at the top of your list. You can stake 16 different tokens on the platform, and its yields reach as high as 20%.

Frequently Asked Questions

In this section, you will find answers to the most common questions about staking crypto. 

What are the benefits of staking crypto?

Staking cryptocurrency comes with a variety of benefits:

  1. Passive income in case you decide to stake your token long-term
  2. Improved network security
  3. Potential appreciation of rewards
  4. Better energy efficiency when compared to mining

What are the risks of staking crypto?

Some of the risks of staking your assets include:

  1. Limited or no liquidity for the duration of the lockup period
  2. Staking rewards are not constant due to price fluctuation or validator performance
  3. Your staked assets can be confiscated due to protocol violation
  4. Future regulations could affect staking rewards, introduce new taxes, or the legality of the process
  5. Advanced technical skills may be necessary

Is staking crypto safe?

Yes, staking is relatively safe, especially in comparison to other types of crypto activities. But it does come with its own share of considerations, so in order to make it as safe as possible, take into account the following considerations:

  1. Stake only on reputable and secure blockchain networks
  2. If you are staking through validators, choose those with a good track record
  3. Select platforms and wallets that come with robust security features and strong encryption
  4. Accept that the cryptocurrency market is inherently volatile and there are no guarantees

Is crypto staking worth it?

Staking cryptocurrency can be a worthwhile investment, provided that you do your research, conduct your due diligence, and understand all the risks. It also depends on what your staking goals are, as well as the specificity of each cryptocurrency. If your goals are to earn passive income, contribute to blockchain security, and improve energy efficiency, then yes, staking is worth it. 

What is the best crypto for staking?

It depends on your definition of ‘best”, as well as factors like the Annual Percentage Yield (APY), cryptocurrency stability, blockchain security, as well as ease through you can earn your staking rewards. Some of the best options are:

  1. Green Bitcoin
  2. eTukTuk
  3. Meme Kombat
  4. Bitcoin Minetrix
  5. Ethereum
  6. Cardano
  7. Solana
  8. Tezos
  9. Doge Uprising

Crypto farming vs. staking: What’s the difference?

Both staking and yield farming are methods for earning rewards, but they use different mechanisms and cater to different levels of risk and engagement in the crypto ecosystem. the key differences include:

  1. Risk profile – Because the DeFi market is more prone to fluctuations, yield farming is more risky. Staking risk is lower, with more predictable returns.
  2. Purpose – Yield farming is geared toward earning rewards via DeFi protocols, while staking crypto is focused on supporting the operation and security of the blockchain network.
  3. Complexity – Yield farming requires a great deal of knowledge about DeFi and its protocols, whereas staking can be as simple as locking up your tokens in a wallet.

The Wrap Up

Staking your crypto is an appealing option if you are looking to collect rewards over a longer period of time without having to worry about short-term price fluctuations. However, staking, like all investments in the cryptocurrency world, is risky and comes with its own share of pros and cons. Because your crypto assets are locked for a period of time, staking is not suitable for you if you are looking to access your funds quickly.

If you decide that staking fits your investment goals, make sure to choose secure platforms with a good track record and be wary of interest rates that appear too good to be true. Doing your research and educating yourself on the topic is the only way you can set yourself up for success.