Over the past couple of weeks, we’ve discussed generating income from crypto. Previously, we looked at crypto savings accounts.
Today we’ll add another method of generating income from crypto, staking.
But before we dive into staking, you should understand how specific cryptocurrencies like Ethereum work.
How does the blockchain maintain the security and continuity of the network? Through consensus. One of the things I covered in our Crypto-Curious & NFT 101 course is how the blockchain works.
If you’re unfamiliar with the blockchain, it’s just a record of transactions on a peer-to-peer network of computers. Before a group of transactions (i.e., a new block) can be added to the blockchain, it must be verified, validated, and agreed upon, i.e., a consensus must be reached.
There are two main consensus mechanisms (i.e., ways for the data to be verified and added to the blockchain), proof of work and proof of stake.
Proof of work is the process behind cryptocurrencies such as bitcoin. Miners (regular people) conduct complex mathematical equations using computers to verify that the particular data is valid. Then the data is added to the blockchain. When you solve the equation and verify the data, you are rewarded with bitcoin, currently, 6.25 bitcoin, which is about $187,500.
The other primary consensus mechanism is proof of stake.
The underlying technology behind Proof-of-Stake cryptocurrencies like Ethereum, Cardano & Avalanche.
Whereas data is validated by miners on proof of work, in proof of stake, data must be validated by validator nodes before being added to the blockchain.
Validator nodes are rewarded with staking rewards.
WHAT HAPPENS WHEN I STAKE MY CRYPTO?
If you own crypto and holding on to it, don’t overlook earning rewards for your holdings. One way to do this is by staking your crypto.
When you stake your crypto, you pledge your crypto to the protocol, and a validator node is created. Your crypto is then used to validate transactions that will be added to the blockchain. Once validated, new crypto is minted, and you’ll receive them as rewards.
The rewards can be pretty good, from 1% to absurd levels like 300%.
But hold on, there are minimum requirements to be a validator. Meaning sometimes you need thousands or hundreds of thousands of dollars.
For example, you need 350 DOT to be a validator for Polkadot, one of the proof of stake cryptos. 350 DOT is about $3,500 as of today.
So what to do if you don’t have that kind of cash lying around but still want to generate income? You join a staking pool.
When you’re part of a staking pool, you’re pooling your assets with other people to meet the minimum requirements to be a validator.
You may be thinking that sounds like a mutual fund, and you’d be right.
Joining a staking pool will cost you because you’re going to pay a transaction fee – of about 8%
Not all staking pools are created equal. There are plenty of scams around.
Check out the link accompanying this video with a list of staking pools: ETHEREUM STAKING POOL
Joining a staking pool can get quite involved, and more often than not, you need a particular wallet.
There are other options.
The other option is to stake your crypto on one of the major exchanges like Coinbase, Binance, or Kraken. It’s less of a hassle, but the yields may not be as high as if you’ve joined a staking pool.
SOMETHINGS TO REMEMBER
There are a couple of things you should keep in mind when staking.
There is no FDIC insurance.
That’s right. Just like most investments, there is risk involved.
No access to your crypto
You may have to lock up your crypto for a specific amount of time. Yep. Some platforms require you to lock your crypto. It may be as little as one week or three years. You should have a strategy in place to determine the crypto you will stake out of all that you own.
If your crypto investment strategy includes buying and holding, then staking your crypto is an opportunity to generate income and rewards.
P.S. Want more crypto guidance? Check out our Crypto & NFT beginner course.
The course covers everything you need to know to get started with investing in crypto & NFTs.
Click the button below to check it out.