- Choose the right projects
- Get familiar with staking requirements
- Pick the right staking method
- Choose your validators
- Diversify your portfolio
- Monitor performance
If you’re ready to stake and put your idle crypto to work, simply click below.
As you navigate the exciting world of cryptocurrencies, you might wonder how to make the most of your investments. Enter staking: a powerful strategy to generate passive income.
Many new crypto investors ask, Should I Stake My Tokens?
So, we will explore the risks and benefits of staking your crypto tokens and why it could be a great way to build wealth over time.
What is staking?
Staking is the process of participating in the Proof-of-Stake (PoS) consensus mechanism. You stake your tokens with a validator.
The validator verifies on-chain transactions and is paid tokens as a reward.
Those block rewards then get distributed to delegators, who have staked their tokens with validators.
Staking yield comes from block rewards and transaction fees collected by validators. Think of it as putting your idle crypto to work while you sit back and accumulate more tokens.
Why stake your crypto tokens?
1. Passive income: The most compelling reason to stake your tokens is to earn passive income. Claiming staking rewards and then restaking them compounds your investment over time.
2. Low barrier to entry: Unlike mining, which requires expensive hardware, technical expertise and high energy costs, staking only requires a compatible wallet. The validators run the computers that produce blocks and verify transactions, so you don’t have to.
Validators make staking accessible to investors looking to generate income and extra return, without the hassle of running their own nodes.
3. Support your favorite projects: By staking your tokens, you are actively participating in the consensus process and contributing to the blockchain’s stability, security, and growth. You are directly playing a role in their long-term success.
If you care about the protocol and community, staking your tokens is a simple way to get involved.
4. Influence governance: You get to vote on network proposals too, which means you get a say in the project’s future. If you don’t have the time or desire to vote, no problem. Staking your tokens gives your validator voting power and allows them to vote for you.
5. Inflation hedge: Most networks have built-in inflationary models, which means the total token supply increases over time. Those newly issued tokens are paid to delegators as staking rewards. Staking helps offset the dilution on your token holdings, preserving your purchasing power.
The passive income earned from staking your tokens depends on several factors, including the specific blockchain, network activity, the number of tokens you stake, the stated inflation rate, performance of your validator, and the commission charged by your validator.
It is important to note that in the United States, staking rewards get taxed like stock dividends. You will owe income tax at the end of the year, so keep track of your staking income using a spreadsheet or crypto accounting program.
We like Accointing to keep track of your crypto and generate reports for taxes. It’s simple and free to use until you generate a report to file with your income taxes.
How to estimate your potential passive income from staking
1. Staking yield: The yield is expressed as an annual percentage rate (APR). Staking yield fluctuates based on a few factors, which we will discuss below.
2. Number of tokens: Your rewards will be proportional to the number of tokens you have staked. The more tokens you stake, the higher your potential passive income.
3. Token price: The value of your staking rewards will depend on the market price of the underlying cryptocurrency. If the token price increases over time, your passive income will be worth more in terms of USD or other fiat currencies. Conversely, if the token’s price decreases, the value of your rewards will be lower.
4. Validator performance: The performance of the validator can impact your passive income. Stake with a validator with at least 98% uptime and check out our article, How To Choose a Validator.
5. Validator commission: It costs time and money to run validator nodes. Before switching data centers we were paying AWS $1200/month to run our Polygon MATIC validator. We must charge commission to cover our costs.
DO NOT STAKE YOUR TOKENS WITH 0% COMMISSION VALIDATORS.
Not all 0% commission validators are crooks, but 0% commission is usually the bait that dishonest node operators use.
Ask yourself, “Why would a stranger on the internet offer me something for nothing?” Take pride in supporting your validator and paying at least 1% commission. 10% commission is the average across all blockchains.
Additionally, 0% commission nodes collect delegations quickly, because most don’t realize the risks. Huge nodes are a threat to network security. If you care about the market price of the tokens in your wallet, you should care about network security.
To estimate your potential passive income from staking, you can use the following simplified formula:
Passive Income = (Number of Tokens Staked) x (Staking Yield) x (Token Price)
Many staking calculators are available online for specific blockchain networks, which can provide a more accurate estimate of your potential passive income.
The MATIC staking calculator is a good example. These calculators usually consider network-specific parameters and allow you to input your own staking amount and other variables to give you a tailored projection.
Stakingrewards.com has a staking calculator as well.
Why does staking yield fluctuate?
1. Network participation: As more people stake their tokens, the total rewards are distributed to more participants. Dividing the rewards between more wallets lowers individual yields. Conversely, if fewer people are staking, the yield rises.
2. Validator performance: If a validator consistently maintains high uptime and participates in the consensus process, they may provide better yields. On the other hand, if a validator underperforms or gets penalized, it can negatively impact your yield.
It’s important your validator runs 24/7/365.
3. Inflation rate: Networks often adjust the rate at which new tokens are issued. Higher inflation rates may lead to increased block rewards and higher staking yields. Lower inflation rates can have the opposite effect. As the inflation rate changes, the staking yield fluctuates.
4. Transaction fees: Transaction fees can vary depending on network usage and congestion. During periods of high network activity, transaction fees may increase, leading to higher staking yields. During periods of low network activity, transaction fees may decrease and potentially reduce staking yields.
Delegators need to be aware of these factors and monitor the performance of their chosen validators. That will help you make informed decisions and fine-tune your staking strategy.
The risks of staking crypto
Alright, so staking isn’t all rainbows and sunshine. There are risks involved. Here are the main risks of staking crypto:
1. Lock-up periods: Staking often requires you to lock up your tokens for a certain period of time. That means you will not have immediate access to your assets if you need to sell or trade them.
MATIC staking has no lock-up, but the unbonding process takes around 2 days. ATOM and KAVA staking requires a 21 day unbonding period. The longer unbonding period actually makes the networks more stable, as it discourages people from jumping in and out of staking.
2. Slashing risks: Some PoS networks implement slashing, a penalty for validators who misbehave or fail to maintain the network properly. If you are staking with a validator that gets slashed, you lose some of your staked tokens too.
On Cosmos the validator slashing penalty for being offline for 10,000 or more blocks is a mild slap of 0.01%. If the validator double signs blocks, which is uncommon, the penalty is much stiffer at 5%.
Double signing blocks generally occurs for 2 reasons: The validator is running multiple servers and they interfered with each other. Or, the validator is dishonest and says tokens went one place when they actually went somewhere else.
3. Dishonest validators: Not all 0% commission validators are dishonest, but 0% commission is usually the bait they use to lure people in. The dishonest validators raise their commission to 100% to steal your rewards and then lower it back to 0% to keep deceiving you.
You can avoid this by taking pride in supporting your validator and paying a little commission. That allows them to run the best equipment.
It is important to note that non-custodial validators never take custody of your tokens. You can unbond, or redelegate to a different validator whenever you like, even if your validator is offline.
4. Smart contract exploits: Worst case scenario, the staking smart contract gets hacked and the tokens stolen. Fortunately, smart contracts are continually audited by independent third parties.
Depending on the blockchain, your tokens or their voting power is moved into a smart contract.
Every blockchain is different. MATIC tokens are moved from your wallet to a smart contract. ATOM and other Cosmos tokens never leave your wallet. Instead, their voting power is moved to a staking module and delegated to your validator.
Please do your own research (DYOR).
Building wealth through staking
To build wealth through staking, consider the following steps:
1. Choose the right project: Research various PoS blockchain projects and invest in those with solid fundamentals, strong development teams, and long-term potential. Check out the top 50 largest crypto projects by market cap, and start there.
Coingecko.com is an excellent resource.
2. Get familiar with staking requirements: Each network has its own set of rules and requirements for staking. For example, Polkadot requires a minimum of 250 DOT tokens to stake. Make sure you understand the minimum staking amount, lock-up periods, and any other conditions before committing your tokens.
3. Pick the right staking method: Staking can be done through wallets, staking pools, or exchanges. Research the pros and cons of each and choose the method that best suits your needs.
We recommend staking directly with a validator right from your non-custodial wallet. Check out our article, The Best and Worst Places to Stake ATOM Tokens for a little more detail.
Custodial staking is when you entrust your tokens to a third party, like an exchange. They handle the staking process, but generally charge high commissions for the convenience.
Plus, you have far less control over your assets. We advise against staking with centralized providers. The risks are entirely different compared to leaving your stocks and mutual funds with a broker-dealer.
Gemini users lost their tokens after Genesis declared bankruptcy and are still fighting to get them back. You can avoid this headache by moving your tokens from the exchange to your non-custodial wallet.
With non-custodial staking, you maintain control of your private keys and stake directly from your wallet. You have more control, but are also responsible for managing the staking process and safeguarding your wallet. There is no customer service department to help you if you make a mistake.
4. Diversify your portfolio: To maximize your potential returns and minimize risk, consider staking in multiple projects with different risk profiles. It is also wise to stake with several validators. Doing so will hedge your risk of downtime slashing.
Diversification creates a more robust and resilient crypto portfolio.
Build the number of stacks you own by investing in different cryptos. Then build each stack by regularly claiming and restaking your rewards to compound your returns.
5. Monitor performance: Keep an eye on your staked tokens. Staking is not set it and forget it. Those 0% commission validators who steal your rewards are hoping you don’t check in on your delegation.
Plus, you can sell staking rewards to invest in other cryptos. That’s a great way to build a portfolio.
So, should you stake your crypto tokens? It depends on your financial goals, risk tolerance, the time you would like to devote to your portfolio, and the specific projects you are considering.
Staking does offer crypto investors an accessible way to generate passive income and accumulate assets over time.
By carefully selecting projects, understanding staking requirements and diversifying your assets, you can grow your crypto holdings by supporting the projects you believe in.
Be on the lookout for our next article in this series: Crypto Staking, An Easy Way to Earn Money from Home.
Until then, be well!
Why wait? Dive into the world of staking and start building your crypto portfolio today!
Frequently Asked Questions
That depends on how you define, “good.” Staking your tokens is one of the most conservative ways to generate yield and compound your holdings. You get to support the networks you like and participate as much or as little as you like in governance.
That totally depends on your time horizon, investment goals, and risk tolerance. If you are a long-term investor who wants to generate passive income to compound your holdings, staking is worth considering.
Yes, and we discussed the risks of crypto staking above. To recap:
- Lock-up periods
- Slashing risk
- Dishonest validators stealing rewards
- Smart contract exploits
Because of potential lock-up periods it is only advisable to stake your medium to long-term funds.
We sell 1/3 of our tokens on a triple, so it is important for those tokens to be liquid. It makes sense to stake 2/3 of long-term funds.
Yes, you lose tokens if your validator is slashed for being offline, or for double signing blocks. Double signing blocks occurs for 2 reasons:
- The validator runs more than one node on the same network and they interfere with each other.
- The validator is a thief and is saying tokens went one place when they actually went another.
Slashing for downtime is usually just a slap on the wrist of 0.01%.
Slashing for double signing blocks usually results in the validator being jailed and losing 5% of their staked tokens.
Absolutely. Staking rewards are taxed like stock dividends in the United States. Please check with your tax advisor.
Theoretically, yes. When tokens are staked they are removed from the circulating supply. All things being equal, if there is less supply the price should rise due to demand.
Nothing we say is financial advice or a recommendation to buy or sell anything. Cryptocurrency is a highly speculative asset class. Staking crypto tokens carries additional risks, including but not limited to smart-contract exploitation, poor validator performance or slashing, token price volatility, loss or theft, lockup periods, and illiquidity. Past performance is not indicative of future results. Never invest more than you can afford to lose. Additionally, the information contained in our articles, social media posts, emails, and on our website is not intended as, and shall not be understood or construed as financial advice. We are not attorneys, accountants, or financial advisors, nor are we holding ourselves out to be. The information contained in our articles, social media posts, emails, and on our website is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation. We have done our best to ensure that the information provided in our articles, social media posts, emails, and the resources on our website are accurate and provide valuable information. Regardless of anything to the contrary, nothing available in our articles, social media posts, website, or emails should be understood as a recommendation to buy or sell anything and make any investment or financial decisions without consulting with a financial professional to address your particular situation. Blocks United expressly recommends that you seek advice from a professional. Neither Blocks United nor any of its employees or owners shall be held liable or responsible for any errors or omissions in our articles, in our social media posts, in our emails, or on our website, or for any damage or financial losses you may suffer. The decisions you make belong to you and you only, so always Do Your Own Research.