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In the previous article in this series, we explored how proof of stake (PoS) blockchains are secured by users staking cryptocurrency, and how they receive cryptocurrency in exchange for staking with network validators.
In this article, we’ll explore the mechanics of crypto staking, and how to get started with staking cryptocurrency on proof-of-stake blockchain networks.
Crypto staking: getting started
Crypto miners need specialized hardware and affordable electricity to profitably earn mining rewards, which can be a substantial barrier to entry. For aspiring crypto stakers, on the other hand, all you need to get started is crypto that runs on a PoS blockchain.
As the Bitcoin blockchain uses PoW as its consensus mechanism, you can’t stake BTC. However, there are numerous cryptos that you can stake, including(ETH), (SOL), (ADA), (DOT), (MATIC), (ATOM), and many others.
All you need to get started with staking is some cryptocurrency from a proof of stake network. For most, this is most easily accomplished by signing up for a centralized crypto exchange (CEX) account and purchasing the crypto via credit card, a linked bank account, or other comparable process. Alternatively, some crypto wallets now allow their users to purchase crypto directly within the wallet using the same methods.
Staking Crypto: What you need to know
When it comes to staking crypto, there are a number of different options available. Let’s break down some of them.
Staking through centralized exchanges
Retail crypto users often stake directly through a centralized crypto exchange account. In general, these arrangements will give the user the majority of the staking rewards and are fairly simple (simply opting in by hitting a “stake crypto” button for example). Crypto exchanges that offer staking include Coinbase, Gemini, and several others.
While the process is simpler than staking crypto through a self-custody wallet or a staking node, the staking provider (in this case a crypto exchange) will typically take a portion of the staking rewards as a fee for providing this service. Another trade-off for users who stake crypto through an exchange is that the exchange is the custodian that is both holding, and staking, the user’s crypto, meaning that if something were to happen to the exchange, their funds could be at risk.
Running a staking node
Running your own node comes with some notable benefits. You generally get to keep 100% of your staking rewards. In addition, you are holding your own crypto, which negates the need to trust a centralized exchange (such as FTX). However, running a staking node is a complex technical process, and you need to ensure that your node remains continuously online in order to earn staking rewards.
Beyond this, a blockchain’s node and staking requirements can make this cost prohibitive. While many PoS blockchains allow you to stake one coin (or even a fraction of one), other networks have a minimum staking requirement. Ethereum requires 32 ETH to run your own node, which would cost more than $60,000 USD at time of writing. For these reasons, many choose to outsource staking due to complexity or financial realities.
In-Wallet crypto staking
Those that prefer to self-custody their crypto (in lieu of storing it on a CEX) use a non-custodial crypto wallet that allows them to control their crypto holdings. Some of these wallets offer the option to stake crypto in-wallet via a staking interface. This may allow you to stake your crypto while not opening yourself up to the counterparty risk of using a centralized exchange for staking. These crypto wallets—like CEXs—may take a portion of the staking rewards when you use their staking options.
Staking as a service
With the growth of staking protocols and their associated returns, another option is to use a Staking-as-a-Service (SaaS) provider that will provide the staking infrastructure while typically allowing you to maintain custody of your staked crypto assets. In general, these services are catered to institutional staking participants and may include high-net-worth individuals (HNWIs), crypto funds, major crypto custodians, and related entities; retail investors typically don’t choose this method.
Understanding your crypto staking options
Now that you’ve learned about the most popular staking options, it’s time to get some additional context. In the next article, we’re going to break down some of the risks and rewards of various staking methods, important staking requirement considerations, and how staking needs vary between crypto investors at the retail and institutional level.
- Staking allows you to earn cryptocurrency on proof-of-stake blockchain networks. Rewards typically come in the form of the same asset you stake (staking ETH gives you more ETH, for example).
- You can stake ETH, SOL, ADA, DOT, MATIC, and numerous other cryptos. BTC cannot be staked as Bitcoin uses a proof-of-work consensus mechanism.
- Retail investors often stake through an in-wallet staking option or via their crypto exchange account.
- Running your own node allows you to get 100% of staking rewards but typically comes with some substantial technical and/or financial barriers to entry.
- Institutions may choose to opt for a Staking-as-a-Service (SaaS) offering. SaaS offerings simplify the technical barriers to staking.