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The original was posted on /r/cryptocurrency by /u/ToshiSat on 2023-08-11 20:54:12.
If you don’t understand staking and would like to learn more, this guide is made for you ! It’s a lenghty post but I won’t get too technical, I’ll try to dumb it down as much as possible.
Summary
-
What is Staking ?
- Why can’t I stake Bitcoin ?!
- Locking Periods
- The Risks
- The Rewards
- Native vs. 3rd Party
-
How to Stake
- Solo Staking
- Pooled Staking
- Using a CEX
-
What is Staking ? ====================
Staking is like saying “I promise I won’t sell those coins!”, and you receive rewards because of it. That’s the most easiest way to look at it. Of course, it’s a bit more complicated than that so let’s get into it !
I’m going to take Ethereum as an example through this post, but staking is not exclusive to ETH.
By Staking your coins, you’re actually helping the blockchain work, and you’re helping securing the network. Staking is a very important part of a project like Ethereum, because it’s a Proof-of-stake (PoS) blockchain. It means that the blocks aren’t mined like Bitcoin, they are created and validated by the Validators. And who are thoses Validators ? The people who stake !
Because you need to stake your coins to become a validator, it ensures that you’re not going to help destroy the network since you have money in that network. Because you’re helping the network, you’re getting rewarded. We’ll get to that !
1.1 Why can’t I stake Bitcoin ?!
Because Bitcoin isn’t a PoS blockchain, they don’t use validators but miners to create the blocks. Since they don’t have validators, they don’t have staking. Simple as that.
The projects that allow staking are the PoS projects, like Ethereum, Cardano, Polkadot or Cosmos to name a few.
1.2 Locking Periods
Some projects have a Locking Period for staking. If you decide to stake a coin with a locking period, you won’t be able to use those coins for a determined time. The idea is too make sure that validators aren’t going to leave the project on a impulse decision, the funds are locked and can’t be accessed, no matter what, before the end of the locking period.
If you trust a project enough to stake your coins, locking them for a bit of time shoudln’t be an issue. But beware, if your project has a massive crash during your locking period, you won’t be able to sell, you may end up having a lot of coins with no value.
1.3 The Risks
There isn’t a lot of risks related to Staking in itself, it’s very safe. Staking Ethereum shouldn’t worry you in the slightest.
Since becoming a validator is expensive, most people can’t stake by themselves. They need to pool their resources, often using a centralized validator. Those centralized validators can go bankrupt, steal your coins, or be hacked. It doesn’t mean that they will, but some do. Like any centralized solution, trust is a major issue and you should always choose a trusted validator to help you stake your coins. We’ll get to that too !
I won’t talk about the risk directly related to crypto or investments, like having a coin lose 25% of its value or things like that. It’s not a risk related to staking in itself.
1.4 The Rewards
It’s pretty simple, you’ll know beforehand how much you should receive for you staked coins. It’s almost aways a % of what you invested, and it’s called APY or APR. Let’s imagine you have 1000 ETH that you want to stake (lucky you!). Right new the APR is 4.2%, it means that after a year, you would have 1042 ETH in your account, instead of a 1000. The APR is changing overtime but with stable projects like Ethereum, the APR is also quite stable
1.5 Native vs 3rd Party
Projects like Ethereum offer the possibility of Native Staking, it means that you can stake your coins without having to trust anyone. You can stake your coins directly on the blockchain, to make it simple. You’re not lending your coins to anyone, you still have full custody of your coins since you can be a Validator by yourself if you have enough ETH.
If you can’t use native staking, you’ll have to rely on 3rd party staking. Meaning that you’ll have to deposit your coins, give them to a trusted validator, and that validator will give you the rewards. It’s not self-custody, there’s more risks as we’ve seen earlier.
- How to Stake ===============
There’s a few way to stake your coins, I’ll go over the most common ones. Unfortunately, no everyone will be able to stake by themselves, but there’s still a way !
2.1 Solo Staking
It’s the best way to stake, but it often requires a lot of money. On the Ethereum chain, you can become a Validator by yourself if you have 32 ETH available. Most people don’t have that kind of money available for investing, let alone in a single cryptocurrency. If you can do it, do it !
You can deal with all the hardware and become a full-fledged validator at home, or you can use “Staking as a Service”. It allows you to Solo Stake without having to deal with the hardware. It’s still your coins, your wallet, your validator keys.
2.2 Pooled Staking or Liquid Staking
Let’s be honest : you probably don’t have 32 ETH available. We wish we could all be this rich on r/cc, but we aren’t. We thus need to pool our resources !
Since it’s not native to the Ethereum network, the pools are solutions built on top of it. Liquid staking is when you stake some ETH, and you receive a token representing your staked ETH. It’s a solution that uses smart contracts, and require less trust that using a centralized pool.
Do your own research on the different validators available, and don’t trust someone offering your a high APY/APR. If it’s too good to be true, it probably is !
2.3 Using a CEX
It’s a bit like using a Pool, you don’t have enough ETH to Solo Stake, so you need a trusted entity to stake it for you. Most Centralized Exchanges (CEX) are offering staking services now.
For example, you can stake ETH on Kraken ! Just hit the “Earn” button on your portfolio page, and you’ll be able to stake your coins !
It comes with all the risks associated with using a CEX. Not your keys, not your coins !
I really hope this guide helped some people understand Staking, if you have more questions I’ll be happy to answer them in the comments. Cheers !