Some years ago, the only way that cryptocurrency users could make money was by buying cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH), holding the cryptocurrencies in their crypto wallets anticipating that the market value would appreciate to sell them at a higher price.
Today, although there are still many crypto investors who still use the same method of buying and holding to invest in cryptocurrencies, there are other investment opportunities that have opened up especially through DeFi protocols.
Besides, holding crypto assets in a wallet results in a negative yield because of the withdrawal costs, off-exchange, and on-exchange risks. The cryptocurrency market is also very volatile, and one could be expecting the value of a crypto asset to appreciate only for it to ends up dropping by a considerable margin.
Through DeFi protocols people can earn passive income through methods like crypto staking, where cryptocurrency holders can lock up their crypto assets for a given duration of time and in return earn some interest.
The locked-up tokens remain in the owner’s custody during the entire time that they are locked. The only thing that happens is that the tokens are put in a different address within the same user’s wallet (either an individual wallet or a cryptocurrency exchange wallet) where they can not be accessed for any other use unless they are first unstacked (unlocked). When the user views his/her trading portfolio they can see the staked (locked) crypto assets and the unstacked crypto assets.
By locking up the crypto assets, the user authorizes a crypto exchange or DeFi protocol (depending on where the user is staking his/her crypto assets) to use the staked tokens. The crypto exchange or DeFi protocol then uses the staked tokens in either lending to borrowers or offering liquidity (in the case of automated market makers) and in return pay crypto user that had staked his/her tokens some interest.
How to start staking crypto
To participate in crypto staking and crypto savings, find a DeFi protocol or a crypto exchange that offers staking and crypto savings functionality and register for an account.
Then go through their various products and find out the most suitable product to invest in.
If you want to invest in crypto staking, select the crypto asset you want to stake and stake your tokens. If you do not have the tokens in your account/wallet, you will need to purchase them to stake them.
Best crypto staking providers
- Figment Networks
- Stake Capital
- Staking Facilities
- P2P Validator
- Dokia Capital
Is it safe? What are the risks?
Though crypto staking is a safe way to earn a passive income from your crypto holdings, several risks are associated with it.
For example, in Binance staking, you must be sure that you shall not need to withdraw the staked token before the agreed period since doing attracts a fine of about 5%. For example, if you choose to stake ETH, you should be ready to wait until the ETH 2.0 upgrade takes place, whose estimated time of arrival (ETA) is unknown.
Besides fines charged for withdrawing staked tokens before the agreed timespan elapses, there are other risks involved that include:
- Liquidity risk
The cryptocurrency market is quite volatile, and the market prices of the crypto asset that you have staked may go up or down in a matter of seconds. For example, in fixed locked staking, once you lock your tokens, there is nothing that you can do other than watch the market prices move up and down.
If the prices drop, the value of your staked tokens will depreciate, meaning the value of your staking reward shall also decrease.
- Validator status risk
The status of the validator node of the network whose token you have staked is also an essential aspect when it comes to staking. There are several things like remaining operational and having collateral that a validator needs to be recognized as an active validator.
If a validator becomes inactive, the staking rewards are halted, or they are subjected to a slashing penalty depending on the network’s staking mechanism, and this may result in some of the staked tokens being deducted from your stacked account.
- Validator commission and reward distribution mode risk
Validators also deduct their commissions, and at times they may change the percentage of the commission without the consent of users, and if you are not careful to adjust your stakes, you may end up receiving lower staking rewards.
Crypto staking is slowly replacing traditional savings accounts, especially since more people are now adopting cryptocurrencies and investing in DeFi protocols.
According to DeFi Pulse, a platform that provides an overview of the DeFi market, there is currently about $76.15 billion worth of crypto assets staked in DeFi platforms.