How to start cryptocurrency staking

Cryptocurrency staking is a great way to increase your wealth because it gives you the opportunity to earn interest or rewards on the coins or tokens you already hold in your wallet. It’s much more accessible than cryptocurrency mining since it does not require a powerful computer or any specialized hardware, and it’s significantly more environmentally friendly.

So, what exactly is cryptocurrency staking, how do you take part, and what are the benefits and risks? Find out in this AAG Academy guide.

What is cryptocurrency staking?

Cryptocurrency staking gives holders of certain coins and tokens the opportunity to earn interest and rewards on their assets by putting them to work. Rather than leaving all your tokens sitting in your wallet in the hope that their value will rise over time, you can contribute them to a staking system so that they can be temporarily used to validate transactions.

Some cryptocurrencies, including Ethereum, the second-biggest cryptocurrency on the planet in terms of value, use staking as part of the proof-of-stake (PoS) consensus mechanism. This is an alternative to proof-of-work (PoW), which was previously used by Ethereum until September 2022, that negates the need for powerful, pricey, and energy-hungry computers.

When you stake cryptocurrency coins or tokens for PoS, you don’t give them up for good. They remain yours as far as ownership is concerned, and they stay in your wallet so that you can still use them if you need to, assuming any lockup period you initially agreed to has passed. All you have to do is leave them there to continue earning interest and rewards.

It is also possible to stake tokens into decentralized finance (DeFi) applications that offer loans, insurance, and other financial products. In this scenario, you are lending the cryptocurrency you own to other people, so it does leave your wallet. However, in return, you get back that cryptocurrency plus a certain amount of interest.

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How does cryptocurrency staking work?

The proof-of-stake system allows you to invest some or all of the coins or tokens you hold into a pot that can be used to verify cryptocurrency transactions. Cryptocurrency, rather than computing power, is used to validate these transactions, and those who contribute to the PoS system are rewarded every time their cryptocurrency is used.

In some PoS systems, the greater the number of tokens you invest, the greater your chances of earning a reward. You can also take part in the validation process by becoming a validator, which requires a capable computer that is always online and connected to the requisite blockchain network so that it is ready to process transactions when it is needed.

If you don’t hold enough coins or tokens to join the staking system, you may be able to join a staking pool instead. A pool is made up of multiple contributors who all put their tokens into the same pot to increase their stake and their chances of being selected as validators. Rewards are then shared among all pool participants, depending on how much they put in.

If you invest into a DeFi application, you offer up your cryptocurrency to others, usually so that they can borrow it for their own needs. This is riskier than investing in a PoS system since there is a chance you may not get back what you lend, but as a result, interest rates are typically a lot higher, so you can earn considerably more cryptocurrency this way.

Staking is what we call a “passive” investment method since it requires no input from the cryptocurrency holder, other than opting into the staking system to begin with. Anyone can take part, as long as they hold the minimum number of coins or tokens required. You can then sit back and leave your cryptocurrency to do the work while you collect the rewards.

What cryptocurrencies can you stake?

There are currently hundreds of cryptocurrencies that support staking of some kind, whether it be as part of a PoS system or for a DeFi application. Some of the biggest and most popular include:

• Ethereum (ETH)
• Cardano (ADA)
• Chainlink (LINK)
• Cosmos (ATOM)
• Polkadot (DOT)

You can also stake your AAG (1AAG) tokens into a unique staking program that lets you earn rewards with a potential 170.16% APR. What’s more, if you also own AAG Genesis NFTs, which are available now from NFT Key, you can boost your capital by as much as $105%.

What are the benefits of staking?

Staking is a great way to increase your cryptocurrency holdings, and therefore increase your wealth, while you are holding onto coins and tokens. Because it is a passive investment method, it requires minimal time and effort, and very little technical know-how — especially compared to cryptocurrency mining. You don’t need expensive hardware, either.

Some exchanges enable staking by default, so all you have to do is leave your cryptocurrency coins or tokens in your wallet to earn interest and rewards. And by contributing to proof-of-stake systems, you are helping to validate cryptocurrency transactions using a much greener, more efficient consensus method than proof-of-work.

If you hope to earn even more interest on your cryptocurrency, you can lend your coins and tokens through a decentralized finance application, though you should be aware beforehand that this is riskier than investing into a PoS system.

What are the risks of staking?

While staking may be a great way to increase your cryptocurrency holdings with very little effort, you should be aware that it’s not completely foolproof. There are risks involved with every staking method, and there’s always a possibility that you may not get back the cryptocurrency you have invested.

The biggest risks with the PoS system are “slashing” and penalties that can be incurred when things don’t go as planned. If cryptocurrency transactions cannot be validated, perhaps because of a system failure or just human error, then the network penalizes contributors by taking away a portion of their staked cryptocurrency.

These penalties are designed to help keep PoS systems secure. They are imposed as a deterrent to prevent bad actors from attempting to manipulate or sabotage cryptocurrency transactions by ensuring that they lose out every time a transaction cannot be validated. Without this risk, there would be nothing to stop them from continually attacking a network.

With DeFi staking, there is a possibility that any cryptocurrency you invest, and therefore lend to others, will not be paid back — that’s why the rates of interest are typically much higher.

What is NFT staking?

NFT staking uses a similar concept as cryptocurrency staking in that you deposit NFTs into the staking system, usually for a certain period of time, to earn rewards and interest on them. It is important to note, however, that not all NFTs can be staked, so it is worth checking the requirements of the staking platform you wish to use before you acquire any new NFTs.

Rewards for staking NFTs typically include additional NFTs or utility tokens issued by the DeFi platform. Reward values depend on the NFT being staked, and in many cases, the rarer and more valuable the NFT, the greater the reward. Some of the most popular NFT staking platforms currently include:

• NFTX
• LooksRare
• Only1
• Kira

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How to start staking

Although the process can differ depending on which staking method you choose, these are the steps you will typically need to take to begin with:

• Research
  Find out all you need to know about the staking method you hope you use, including the minimum number of coins or tokens required, and how long your cryptocurrency may be locked in for.
• Buy some cryptocurrency:
  Once you’ve chosen the staking method you want to use, you’ll need to acquire the necessary cryptocurrency. You’ll need a wallet for this. If you’re buying from a centralized exchange, you’ll get one as standard, but if you’re buying from a decentralized exchange, you’ll need a decentralized wallet first.

• Figure out if you need any hardware:
  If you plan to be a validator, you’ll need a computer that’s always online and connected to the right blockchain network. Find out what the hardware requirements are and ensure your machine is fit for the task.

• Start staking:
  When you’re ready to start staking, you’ll need to follow the official steps depending on the method you’ve chosen. This may be as simple as opting into a staking system, or you may need to sign up as a lender through a DeFi application.

References

• Passive income through crypto
• Proof stake
• What is staking
• Crypto staking
• Nft staking