The central theses
- Staking is a way to earn rewards that encourage long-term holding of a particular coin.
- Even those who are not tech savvy can take advantage of various staking strategies to earn rewards.
- One of the most popular exchanges in the industry, Phemex lowers the barrier to entry and offers an easy way to earn income from staking.
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Regardless of your level of experience with crypto, chances are you’ve heard of the concept of staking. Similar to a savings account or a bank certificate of deposit, staking allows you to earn interest on your cryptocurrency.
Similarly, stakers receive interest payments (known as staking rewards) after locking their tokens for a period of time. The higher the stake, the higher the crypto rewards.
The comparison to a thrift account only goes so far, as the purpose of staking your coins is to support the normal functioning and security of a blockchain through a system called proof-of-stake.
The ups and downs of staking
Without getting too technical, there are several ways you can participate in staking.
As previously mentioned, stakers must lock a minimum amount of coins in order to run a “solo” (individual) node, a computer that verifies authenticity and approves transactions taking place on the blockchain.
Running the software in a Solo node requires a certain amount of time, skill, and capital, and not everyone can meet all three requirements. For example, if you are using Ethereum, running a node requires an upfront payment of 32 ETH, or about $50,000.
If someone running a node cannot keep the software running continuously, they risk losing part of their stake (a process also known as slashing). Another way to get penalized for staking is by approving dishonest transactions.
However, those who cannot meet the solo staking requirements can also stake by delegating their coins to a larger group of participants. This is also known as staking pools where you can earn rewards.
The advantage of pooled stakes is that it is cheaper and easier to participate. The downside, however, is that as more people delegate, blockchains become more centralized, making them more vulnerable.
Here it must be argued that the Ethereum ecosystem has not achieved sufficient social decentralization. source: Twitter.
One of the advantages of pool staking is that you can withdraw your tokens at any time and there is no penalty for doing so; Your stake is simply liquidated in the form of a token representing your wagered assets.
For example, if users stake ETH on the Rocket Pool project, users will receive the same amount of liquid rETH tokens. Alternatively, when solo staking, users are rewarded with the same version of the staking token.
DeFi staking
We’ve mentioned applications that offer pooled or liquid staking as a solution for users who don’t have enough tokens or don’t feel comfortable staking individually.
Liquid staking is as simple as connecting a self-custodial wallet to a DeFi exchange and performing a swap. Now, users have the ability to custodian their wealth while earning income from staking, in addition to being able to earn more rewards through activities like yield farming.
Staking via a DeFi project means sending these tokens to a smart contract (software running on the blockchain where no central party can control the execution process). Examples of these DeFi staking services would be Lido, which supports many different blockchains, or Rocketpool on Ethereum.
Staking on Centralized Exchanges (CEX)
Many popular crypto exchanges Offer staking rewards for those who aren’t comfortable going down the DeFi route and don’t want to deal with constant oversight.
While a more convenient option, exchange staking has its potential downsides, the main downside being that the exchange takes a portion of the staking proceeds and may not offer a liquid replacement token. This means that users allow the exchange to take full control of the tokens during the staking period.
Just as one would when choosing a DeFi option, one should consider the yields offered, lock conditions, the number of tokens supported, and the security of the platform when choosing a CEX for staking.
Not sure which exchange to choose to stake? To learn LaunchPool by Phemexan option that allows users to get high staking rewards on different coins, withdraw at any time without penalties and enjoy hourly payouts.
Staking is an excellent way for investors to earn returns on their dormant cryptocurrencies, especially if they don’t care about short-term volatility and have a longer time horizon.
However, if the industry has taught us anything historically, caution is advised when returns are excessive and look too good to be true. Always do your own research before committing your cryptocurrency to any centralized or decentralized platform and understand that funds can be lost.
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