Passive income is a type of income that is gained with little to no effort on the part of the earner. It is a great way to maintain your lifestyle or grow your savings, in conjunction with working a regular job. There are numerous ways to earn passive income, from side hustles to investments. If you’re looking for a new and unique way to earn passive income, consider crypto staking.
What Is Crypto Staking?
Crypto staking involves users actively holding or locking their crypto holdings in their crypto wallet. Doing so permits those who participate to earn rewards or interest without selling their crypto assets.
Only certain currencies are able to be staked, which are those that are in a crypto network that uses PoS (proof of stake) to process transactions. During the process of staking, the crypto assets locked are used to support the blockchain and validate cryptocurrency transactions.
How Does It Work?
Staking is a mechanism used to replace crypto mining, which uses a PoW (proof of work) mechanism. Staking is more energy efficient. Blockchain networks that use PoS include validator nodes that work to verify transactions before they are recorded to the blockchain indefinitely.
Staking crypto involves joining a staking pool or having one of your coins selected to be a validator node. The more coins an investor is staking, the more an investor is likely to be chosen as a validator. Validator nodes then work together in order to secure the blockchain. The reward received from staking is in the form of an annual percentage yield often in the form of the blockchain’s native coin.
Proof-of-Stake vs. Proof-of-Work
Proof-of-Stake and Proof-of-Work are algorithms that help keep the blockchain secure. However, each mechanism works differently and has a different way of qualifying and adding transactions to the blockchain by users.
Proof-of-Work
This consensus mechanism is most notably used on the Bitcoin blockchain and involves crypto miners. Mining is the process of solving an extremely complex math problem before the block can be added; the miner must decipher the hash value associated with the specific block. Each block has its own unique equation and although it is very difficult to solve, it is very easy to verify once the hash number has been found.
The reward for deciphering the hash number is around 6.25 BTC which provides an incentive for miners to keep working. The complexity of the math problem is constantly adjusting so that a block is added every ten minutes regardless of how many miners are working.
Proof-of-Stake
PoS came after PoW. PoS does not use external resources and is a blockchain network way of verifying transactions that do not include miners; it achieves the same results with fewer resource inputs.
The key difference between PoS and PoW is that PoS requires people to stake their crypto and use it as collateral to reap rewards and validate blockchain transactions. It is common that newer crypto tokens use PoS over PoW; Ethereum recently switched over to PoS.
How To Stake Cryptocurrency
There are two options when considering crypto staking.
- Staking Pool – The easier of the two is joining a staking pool; this requires no technical knowledge and has users pooling together their resources.
- Validator Node – The other option is going solo and becoming a validator node, which requires expertise in staking as well as a large amount of crypto to put up as you aren’t pooling resources with other investors. Going solo has the potential to reap more benefits but you are solely responsible for the validation and you must have your computer running at all times.
Where Can You Stake Crypto In Canada?
There are a number of crypto platforms you can use to stake crypto in Canada. Some of the best spots for crypto staking for Canadians is NDAX, CoinSmart and BitBuy.
| NDAX | Recently, NDAX has opened up a crypto staking program that allows verified users to stake their crypto for rewards of up to 12% APY. – Ethereum at 5% APY – Polkadot at 12% APY – Cardano at 4.8% APY with a 28 day unstaking period; 4% APY |
| BitBuy | Bitbuy has yet to launch this service, however, they plan on offering crypto staking for coins like Solana, Ethereum and Polkadot. |
Advantages of Crypto Staking
Staking your crypto can provide you with multiple benefits as you aid in securing the blockchain:
- Financial Rewards: The main benefit of crypto staking is, by far, the financial rewards you can receive by putting your tokens up for collateral. It is a fantastic way to generate passive income as you’ll receive an Annual Percentage Yield (APY) ranging from 5% to 20%.
- Easy to Do: There is no special equipment or training required to stake your crypto. It is simple to join a staking pool and all you need is a token that uses PoS.
- Low Barriers to Entry: You can start staking with fractional coins; there are no minimum requirements which means anyone with a PoS token can do it.
- Helping Secure the Blockchain: Staking allows you to take an active role within the blockchain and help in maintaining its security, which benefits you as an investor.
- Environmentally Friendly: PoW involves a large energy expense as the equations are often solved using supercomputers that have a high wattage; PoS doesn’t require such resources and is by far the more eco-friendly choice.
Disadvantages Of Crypto Staking
Although there are multiple upsides to staking your crypto, there are a few risks to be mindful of:
- Price Dropping: Crypto prices are known to be volatile, and if there is a large drop while your crypto is locked up (i.e. staked) the possible losses could leave any rewards redundant.
- Lock-Ups: Some blockchains implement a lock-up period for staked cryptos. During this period of time, you are unable to access, un-stake, or trade your tokens until it’s over.
- Difficulty in Liquifying Assets: Some smaller coins offer notably high rewards, but it may be harder to sell or trade (i.e. liquify) these altcoins.
- Cybercriminals: The pool you are staking your crypto in could become a victim of a hack, resulting in large losses.
- Risk in Becoming a Validator Node: While simply staking your crypto is a relatively painless process, becoming a validator node requires a certain amount of expertise and if done incorrectly, meaning your node goes offline or validates incorrectly, you can lose your entire stake.
Difference Between Staking And Mining
Staking (PoS) and mining (PoW) have several things that differentiate them, including:
- Blockchain Networks – Staking is the mechanism by which blockchains that use PoS are validated; mining is the mechanism by which blockchains that use PoW are validated through complex mathematical problems.
- Qualification Criteria – In order to be a miner, you require advanced computer hardware, whereas, with staking, anyone can join a pool.
- Computational Power – Mining requires a huge amount of computational power and resources compared to staking.
Bottom Line
Staking is a great way to generate passive income as a crypto investor so long as you understand the potential downsides. Joining a staking pool is a great way to generate interest in your crypto assets and help in securing the blockchain you’re a part of.
