Passive income opportunities are elusive in the traditional economy. The good news? That’s not the case in Web3.
Staking crypto is an easy way to earn passive income via your crypto portfolio. In exchange for allowing your crypto to be used to validate blockchain transactions you are rewarded with additional crypto tokens. The biggest implication? Your crypto is locked: it cannot be sold or exchanged until it is un-staked.
Staking crypto is like volunteering your crypto as Tribute to the blockchain network, but with a more positive outcome than Katniss’ PTSD: in exchange for lending your crypto to run the blockchain, you receive additional crypto.
It is putting your money to work. When you want your money to stop working - perhaps you want to sell it - you unstake your crypto. Unstaking means the crypto is unlocked: it is yours to sell or exchange again, but you no longer earn rewards.
Only cryptos operating on a proof-of-stake blockchain can be staked. This includes, but is not limited to, Cardano ($ADA), Polkadot ($DOT), Kusama ($KSM), Solana ($SOL), Polygon ($MATIC), and (sort of) Ethereum ($ETH) – a special-case we’ll discuss later.
One of the easiest ways to stake crypto is directly on an exchange, like Coinbase or Kraken. The pros to staking on an exchange are typically a more user-friendly experience and potentially higher rewards. The con is that your crypto is locked in that exchange, and if an exchange suspends activity, that could be risky.
If the latter concerns you, staking is also enabled by some wallets like Ledger and Trust.
For More: WTF Is… A Crypto Wallet
Staking is a means for earning crypto. Reward earnings are typically a percentage yield paid out in regular intervals. Rewards vary based on the token and where it is staked. For example, on the exchange Kraken, staking $SOL yields 5%-8% rewards annually paid out every Saturday. On Coinbase, staking $SOL yields ~3.85% APY paid out 5-7 days for your first payment and then roughly every 3-4 days for following payments.
Always monitor exchanges’ and wallets’ terms for staking as rewards rates can change.
Some terms of staking are set or adjusted by the exchange or wallet, and others are set by the crypto’s protocol.
You can decide how much of a crypto position you would like to stake, but there is typically a minimum amount required to be eligible. This can also depend on where you stake. Continuing with the $SOL example, Coinbase requires a minimum amount of $1 in $SOL to be staked and Kraken’s minimum is less. You can stake as much or as little as you’d like as long as it exceeds the minimum.
There are also timing parameters called bonding/unbonding times that vary by crypto protocol. For $SOL, it takes between 2-4 days to stake or unstake. For $DOT, it’s 28 days. This means, if you unstake some $SOL, there is a 2-4 day window before you can sell. There is a 28 day period before you can sell unstaked $DOT.
Some crypto cannot be unstaked, most notably $ETH. Pre-Merge, $ETH has not been able to be unstaked. This sounds less scary now that the Merge is imminent, but staking was certainly a vote of confidence from investors who have been staking ETH for a while pre-Merge.
How-to stake will vary on where you’re staking. Most wallets and exchanges have great how-to guides. On exchanges, it is as simple as a click of the Stake or Unstake button.
Why does staking exist?
Why do crypto protocols want you to stake? Your increased participation strengthens the network.
Investors are incentivized to stake crypto for two main reasons: Firstly, it provides resources required to validate transactions on their blockchain and further secures the network. Secondly, because staked crypto cannot be sold, it mitigates volatility. The more staked crypto, the less that can be sold. Bonding/unbonding times also mean selling cycles become relatively more predictable.
Staking a crypto is typically a sign of confidence in that crypto project: you wouldn’t sacrifice your ability to sell the crypto, if you didn’t see long-term potential. That is why staking is a great way to support a crypto community you believe in. Staked crypto actively contributes to the security and functioning of its network. The more staked crypto a project has, the more investor confidence exists.
If you know you’re going to be HODLing a crypto, it is worth considering staking it.
Why do exchanges and wallets want you to stake crypto with them? Well, they want you as a customer!
I started staking my crypto two years ago when my friend, collaborator, podcast co-host and Founding BFF Sophie Holm introduced me to it. I’m glad she did.
Listen: Sophie Holm on DeFi in a Bear Market
I love watching rewards hit my account. I call checking my portfolio in the morning the ‘Stake-and-Wake.’
I stake a portion of all the proof-of-stake cryptos in my portfolio with the exception of $ETH, and I do a mix of staking on exchanges and wallets.
It’s true that staking is a vote of confidence in a crypto protocol.
Staking is also, however, a low-risk way to increase exposure to cryptos you’re less sure about. I use this strategy for some of my investments. I buy a small position in a crypto I consider ‘experimental’ and grow my position through staking rather than buying in over time. There’s little downside for me and much upside if the crypto moons.
One of my financial goals is to increase the percentage of my total income yielded through passive means. Staking helps with that. High interest savings accounts in the US have an average APY of about 10%. Although that is part of my fiat investment strategy, many exchanges offer crypto staking rewards with higher APYs.
I am generally a HODLer, investing in crypto for the long-term rather than short-term trades, so staking is a good fit for me. If I’m holding the crypto anyway, I might as well reap rewards. When deciding how much to stake, I estimate the threshold at which rewards outweigh the potential opportunity cost of not selling.
Staking is another upside to participating early in building a new economy: being rewarded for participating in it.
What’s staking? Allowing your crypto assets to be used to validate network transactions and earning crypto rewards in exchange, typically a pre-set percentage yield. It is a promise not to sell your crypto for a period of time, so that crypto can be used by the blockchain network. Your crypto is locked and cannot be sold or exchanged while staked.
Why stake? It’s passive crypto income! Free money.
How to stake
Staking Considerations:
Things to Remember:
Further Resources:
This is not financial advice. If you don't want to spend money investing in crypto or Web3 — you don’t have to. The intent of this article is to help others educate themselves and learn.
Nicole Kyle is a storyteller, podcaster, and gender equity advocate exploring the intersection of money, equality, technology, and creativity with a focus on crypto & web3 education. Nicole was named a 2022 LinkedIn Top Voice in Gender Equity.
