The oldest and the largest blockchain Bitcoin uses a PoW (proof-of-work) consensus mechanism, meaning it is secured by mining. However, the newest blockchains have adopted an alternative mechanism called PoS (proof-of-stake). This one requires users to stake their crypto on the network in order to validate transactions.
It is worth highlighting that staking benefits not only the blockchain but also the stakers. People who commit their crypto assets to a network usually receive rewards. That said, here is how you can start staking to earn.
Blockchains can be described as databases of transactions without any central authority to manage them. So to validate these transactions securely, PoW blockchains, such as Bitcoin, rely on mining, which involves solving cryptographic puzzles using powerful computers. But mining is considerably expensive, making it inaccessible for most individuals.
PoS networks like Ethereum and Cardano have replaced all that with what’s called staking. Users can choose to stake their crypto directly on the blockchain, making them validators or delegate it to another validator. The first option allows the users to retain all the rewards, while the second one involves sharing the rewards with the validator, depending on the amount of crypto they have delegated.
Staking is particularly financially attractive to investors who prefer to hold than day trade crypto. The upside of staking is that it requires very minimal technical knowledge.
Which Crypto Can You Stake?
Here are the leading cryptocurrencies you can stake and their expected yield rates. They include Ethereum (4.2%), Cardano (3.35%), Solana (6.5%), and Polygon (6.5%). Note that the yield rates vary from platform to platform and change based on the number of active validators in a network.
Ways of Staking
You can stake crypto in two ways. Firstly, you can stake as a validator, meaning you have to run your own node, which requires expertise. This method of staking can be expensive for alot of people. For example, to be an Ethereum validator, you must commit 32 ETH or above to the blockchain.
That being said, the affordable way to stake is through delegation. As mentioned earlier, this method involves delegating your crypto assets to a validator and letting them run the node for you. It’s worth highlighting that delegating does not mean transferring custody of your crypto to the validator. You will still have control over your assets.
Staking Through Crypto Exchanges
Several crypto exchanges are now running their own nodes, letting their clients stake with them. They include Binance, Kraken, Bitfinex, Kucoin, Okcoin, OKEx and Coinbase. These trading platforms support staking for different cryptocurrencies and charge varying fees.
Staking and Tax
Many Tax authorities worldwide have yet to establish a framework for taxing staking rewards. Some tax professionals have argued that these rewards should be taxed as income since they have a known market value when they are created.
However, the biggest issue is that some rewards get created by the second, such as those in the Cosmos blockchain. This would lead to thousands of taxable events.
The Future of Staking
Crypto exchanges have made staking convenient for people with little capital or less technical skills.
With many crypto enthusiasts criticizing proof-of-work blockchains due to their high energy consumption and leaning towards proof-of-stake networks, there is a likelihood that staking will see significant adoption in the future.