Guide To Crypto Staking: What It Is, How It Works, And How To Get Started

By Samuel Becker · 4 minute read

Generally, when investors contemplate investing in cryptocurrencies, they think about either mining crypto or purchasing it outright on a crypto exchange. But crypto staking—or staking coins, as it’s often called—is another viable alternative for the crypto-curious to get assets in their wallets.

While “staking” may be a relatively new addition to the financial lexicon, it’s important for those interested in crypto investing to understand what it is, how it works, and what cryptocurrencies it can be used to obtain.

Crypto staking may feel like it’s a step beyond simply learning how to buy Bitcoin or how a crypto exchange works, but learning about cryptocurrency staking can broaden your knowledge, making you a more informed investor.

This article will run through it all, from staking basics to the platforms investors can use for staking coins.

Crypto Staking 101: What is Staking Coins?

Crypto staking is the process of locking up crypto holdings in order to obtain rewards or earn interest. Cryptocurrencies are built with blockchain technology, in which crypto transactions are verified, and the resulting data is stored on the blockchain. Staking is another way to describe validating those transactions on a blockchain.

Depending on the types of cryptocurrency you’re working with and its supporting technologies, these validation processes are called “proof-of-stake” or “proof-of-work.” Each of these processes help crypto networks achieve consensus, or confirmation that all of the transaction data adds up to what it should.

But achieving that consensus requires participants. That’s what staking is—investors who actively hold onto, or lock up their crypto holdings in their digital wallet are participating in these networks’ consensus-taking processes. Stakers are, in essence, approving and verifying transactions on the blockchain.

For doing so, the networks reward those investors. The specific rewards will depend on the network.

It may be helpful to think of crypto staking as similar to depositing cash in a savings account. The depositor earns interest on their money while it’s in the bank, as a reward from the bank, who uses the money for other purposes (lending, etc.). Staking coins is, then, similar to earning interest.

How crypto staking works

For the investor, crypto staking is a passive activity. When a crypto investor stakes their holdings (in other words, leaves them in their wallet), the network can use those holdings to forge new blocks on the blockchain. The more crypto you’re staking, the better the odds are that your holdings will be selected.

Information is “written” into the new block, and the investor’s holdings are used to validate it. Since coins already have “baked in” data from the blockchain, they can be used as validators. Then, for allowing those holdings to be used as validators, the network rewards the staker.

Pros & Cons of Staking Coins

Because staking coins is a passive form of investment, there is little downside. But it helps to consider the block rewards associated with staking coins you hold, as well as to recognize the volatility of cryptocurrency in general—if the value of the coin drops, that would impact the value of your staking interest earned.

Popular Types of Staking Coins

There are many different types of cryptocurrency, and many of them can be staked to earn rewards. While this is far from an exhaustive list, here are a few cryptos and coins that can be staked to earn returns:

•   Ethereum: Ethereum has become one of the most popular cryptocurrencies on the market—although it is not exactly a cryptocurrency itself. Staking Ethereum on your own will require a minimum of 32 ETH. Rewards vary, but it’s expected that the rate of return on Ethereum staking is 5-17% per year.

•   EOS: EOS is similar to Ethereum in that it’s used to support decentralized programs. EOS tokens are native to the EOS blockchain, and like other cryptos, can be staked to earn rewards. As of late April 2021, the expected rate of return for EOS staking is 3.2%.

•   Tezos: Like EOS and Ethereum, Tezos is an open-source blockchain network with its own native currency, with a symbol of XTZ. And it, too, can be staked on certain platforms and networks. The current expected rate of return for Tezos staking is around 6%.

How to Start Staking Crypto

To start crypto staking, an investor needs to decide where and what they want to stake. Here are four simple steps to get started.

1. Choose a crypto or coin to stake.
2. Choose and download a digital wallet in which to store your coins for staking. That may mean going directly to the specific crypto’s main website and downloading its corresponding wallet.
3. Purchase at least the minimum required number of coins. Some networks require that stakers have a minimum number of coins to participate (for example, Ethereum holders must have 32).
4. Make sure you have the necessary computing power and an uninterrupted internet connection.

With everything in place, the staking process can begin in earnest. From here, most people will only need to check in on their crypto holdings every once in a while to make sure everything is humming along as it should.

Where to Stake Crypto

There are numerous platforms that allow users to start staking coins, and quickly.

There are big-name platforms that most crypto investors are probably familiar with, including Coinbase and Kraken, which allow users to stake coins. On exchanges like these, investors must opt in to staking in order to benefit from rewards.

Enterprising stakers could also look at “staking-as-a-service” providers—which specialize in staking, rather than exchanging. Examples of those platforms include MyContainer, Stake Capital, and Staked.

It’s important to note that each of these platforms will have different offerings, rules, and fees. It’s worth the time spent researching a few to make sure your goals align with a certain platform before you jump in.

The Takeaway

Staking is a way to use your crypto holdings or coins to earn additional rewards. It can be helpful to think of it as along the lines of generating interest on cash savings, or earning dividends on stock holdings.

Essentially, coin holders allow their crypto to be used as a part of the blockchain validation process, and are rewarded by the network for the use of their assets. For crypto investors, staking can open up another potential avenue to generating returns.

Crypto piquing your interest? With Crypto trading from SoFi Invest®, you can trade crypto like Ethereum, Bitcoin, Litecoin and more, 24/7 in the SoFi app.