A Beginner’s Guide to Crypto Staking
How token holders can earn rewards on their assets
Newcomers to the crypto space often think about investing in two ways: mining or purchasing assets from an exchange. In recent years, however, staking has become a popular mode of investing for token holders looking to grow their assets and generate passive income. While staking has become a mainstay for various crypto projects and Web3 stalwarts, those outside of the space often have trouble wrapping their heads around the concept, and for good reason. Given the financial terms, tokenomics, and tech jargon associated with staking, the concept can be confusing when first learning about it.
We’ve created an introductory guide to help you grasp staking and start earning. Read more below.
What is crypto staking?
To put it generally, staking is a financial activity that provides token holders a way to earn passive income simply by storing tokens in a crypto wallet. Consider traditional savings accounts held in banks. You deposit funds into a savings account and banks use that deposited money to balance their own books, meet cash reserves, and manage operations. In return for keeping your money in the bank, you earn a percentage of interest that is ultimately deposited into your account. In these traditional banking systems, the yield percentages are very low, something like 2.5%.
How does it work?
Crypto staking follows the same logic as traditional savings accounts but ups the ante on yield percentages and uses more innovative technology to generate better earnings. Holders lock their tokens in a crypto wallet for a fixed amount of time, and the coins are used to help run the blockchain and ensure security. In return, holders earn percentage yields that often run between 5% and 20%. We know what you’re probably thinking at this point. How does it all work? Well, it’s all done through a process called proof-of stake (PoS).
What is proof-of-stake?
Proof-of-stake (PoS) is a consensus mechanism that randomly selects token holders (called validators in PoS) within a blockchain to verify transactions and ensure the functionality of the blockchain itself. You’re probably scratching your head in confusion at this point, so let’s take a look at proof-of-stake’s predecessor, proof-of-work (PoW), to make things crystal clear.
When Web3 and crypto initially took off, most blockchains used proof-of-work (PoW) to carry out operations, verify transactions, and add new blocks to the chain. This mechanism essentially relies on developing competition between miners to solve cryptographic puzzles that can generate what are called block rewards, i.e. money. You may have seen pictures of Bitcoin farms — warehouses filled with computers working autonomously (a process called mining) to solve cryptographic puzzles. This is proof-of-work. The problem with PoW is that 1) the computers use excessive amounts of energy when solving the puzzle and 2) it gives top miners too much authority over the staking process.
Proof-of-stake works to solve the issues of PoW by relying more on internal participation and less on external computational power. Here’s how it works: a software protocol uses an algorithm to randomly select blocks within the networks for a validator node to review. From here, the validator verifies the transaction, adds the block to the chain, and receives rewards and earnings. So, participants in the blockchain are incentivized to actually maintain the blockchain itself — no high energy usage or centralized authorities involved.
What chains allow staking?
There are many large, popular blockchains and small, developing projects that offer staking features within their networks. Here are a few big names:
To explore more projects that offer staking, check out StakingRewards, the leading data provider for staking and crypto-growth tools. We also recommend heading over to Coinbase, CoinMarketCap, or other crypto indexes to discover Web3 projects and learn more about their staking features.
How do I get started with staking?
If you’re eager to begin staking, you first must purchase assets that contain staking capabilities. (Many coins carry staking capabilities; just check your tokens’ websites to find out if they can be staked.) From there, you must move the coins from wherever you purchased them into a wallet that contains staking features. Again, many wallets offer this service — just check their websites to learn more. Many of the popular exchanges like Binance or Coinbase already allow staking as well.
If you’re looking to place staking at the center of your financial goals, then we recommend exploring staking-as-a-service providers, infrastructure service providers that run nodes for proof-of-stake protocols geared towards investors.
Here are some of the big names:
Can I stake Cardstack?
Yes, we recently announced staking for our CARD.CPXD tokens. Users can stake their CARD.CPXD tokens starting August 1, 2022. The staking of CARD.CPXD tokens is supported on layer 2, and users can stake without handing over ownership of the tokens. The staking rewards will be calculated through our off-chain analytics. Users will receive a reward equivalent to approximately 6% APR (0.48% per 518400 blocks) on a monthly basis for CARD.CPXD held in a depot.
Read more about our staking feature here.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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