Dive deeper: Best crypto staking platforms in Canada
What is staking?
Staking lets you earn passive income from crypto. Here’s what’s involved and the risks you need to watch out for.
So you’ve invested in a few crypto coins and tokens and you plan to hold them for the long-term. But while you could just leave those cryptos in your wallet and wait for them to (hopefully) rise in value, there’s also another option: using your crypto holdings to earn passive income. And that’s where staking comes in.
But how does crypto staking work, how much can you earn and what are the risks involved? Keep reading to find out.
Key takeaways
- Staking lets you earn crypto rewards by helping to secure a blockchain network.
- When you lock up your crypto tokens on a staking platform, they can be used to validate transactions on a blockchain. In return you receive a percentage of your staked tokens as a reward.
- Staking lets you earn passive income from your crypto holdings, but lock-up periods, crypto price volatility and security threats are just some of the risks involved.
What is staking?
Staking is when you deposit cryptocurrency into a smart contract or a staking pool to receive tokens as a reward. In many ways, staking is a little like a guaranteed investment certificate (GIC), but with a much higher level of risk.
With a traditional GIC, you deposit money for a fixed period to earn a guaranteed rate of interest.
With staking, you agree to lock away your crypto tokens for a fixed period, often ranging from a few days to a few months. In return you receive rewards in the form of more crypto tokens.
The crypto you stake is used as collateral to enable various functions on the blockchain network, which range from validating transactions to providing financial collateral in order to mint new tokens.
You can stake cryptocurrency through an exchange, from your wallet, or by participating in a staking pool.
Proof of work vs proof of stake
Most cryptocurrencies run on blockchains. In order to verify transactions, those blockchains use what is known as a consensus mechanism to ensure that all nodes in a decentralized network agree that a transaction is valid and can be added to the blockchain.
Bitcoin uses a proof of work (PoW) consensus mechanism. In this system, miners use computing power to solve complicated puzzles and verify transactions. But many other cryptocurrencies use a consensus mechanism known as proof of stake (PoS).
Proof of stake enables stakers to validate blocks by depositing their tokens as collateral. This helps to ensure honesty when validating transactions. If the validator were to submit false transactions to the network, they would be punished by missing out on rewards or losing a portion of their staked tokens.
On the flip side, validators are rewarded with newly minted tokens for doing the right thing.
Typically, validators are chosen at random, but their chance of validating a block (and earning rewards) is higher if they have more tokens staked across the network.
How does staking work?
Staking can be achieved in a number of ways, but typically it involves four key aspects:
- It requires token holders to lock in a minimum number of tokens into the blockchain network as a stake. This is similar to how security deposits work in the real world.
- The stake is like buying a lottery ticket to earn the opportunity to create the next block in the blockchain network. The larger the stake, the higher the chance of the node being chosen for the next block.
- Once the node has created a block, the staker, who is also the validator, gets a reward in the blockchain’s native currency.
- The stake provides an incentive for the holder to contribute positively to the blockchain since a part of their stake is lost if they act dishonestly.
Staking can be done directly from compatible cryptocurrency wallets. Many crypto exchanges also offer staking services, which provides a convenient way to earn money while keeping coins ready to trade.
How to stake crypto in Canada
Ready to start staking crypto? Here’s what you need to do.
Step 1: Choose a cryptocurrency
Choose a proof-of-stake cryptocurrency that you would like to stake. Consider the use cases for the token, the team behind the crypto project and the project’s roadmap. You’ll also need to research the yields on offer for staking that crypto.
Once you’ve chosen a cryptocurrency, you’ll need to buy it on an exchange. Learn more about choosing a platform in our guide to the best crypto exchanges.
There are several centralised and decentralised exchanges that offer staking services on various tokens. Here is a list of a few of the major exchanges that offer these services:
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Finder Score for crypto exchanges
To make comparing even easier we came up with the Finder Score. Supported coins, account fees and features across 28 cryptocurrency trading platforms are all weighted and scaled to produce a score out of 10. The higher the score, the better the exchange—simple.
Step 2: Choose a staking platform
Next, decide which platform you want to use to stake your crypto. You can use a centralized exchange such as Coinbase or Kraken, or choose a decentralized exchange. Many crypto wallets also allow you to stake tokens directly from your wallet.
If you’re new to crypto, staking on a centralized exchange is the simplest way to get started. For simplicity’s sake, it will help if the exchange where you buy your crypto also supports staking. But if there are lower trading commissions elsewhere, you may choose separate platforms for buying crypto and staking.
Step 3: Stake your cryptocurrency
Log in to the staking platform of your choice and select the crypto you want to stake. Enter the amount of tokens you want to stake and review the details of how long your crypto will be locked away.
Step 4: Earn rewards
Now you can start earning staking rewards. Some platforms allow you to set up “auto restaking” in order to compound your rewards, but others will require you to do this manually.
You’ll also need to monitor the performance of the crypto you’re holding and the APY you can receive.
Types of staking
There are several different ways you can stake your crypto. Some require technical knowledge and a large investment, while others involve a more passive approach and are more accessible for the average crypto investor. Let’s take a closer look at the different types of staking.
- Solo staking. This is staking in its purest form, where you run your own validator node to contribute to the blockchain’s consensus mechanism. This gives you complete control and lets you earn higher rewards, but you’ll need a decent level of computing expertise and there’s often a high minimum investment required.
- Delegated staking. With this option, you delegate your tokens to someone else who manages their own validator node. This allows you to take more of a hands-off approach and means you don’t need as much technical expertise, but you’ll need to share the rewards with the validator.
- Pooled staking. With many proof-of-stake cryptocurrencies, you’ll need to hold a minimum number of tokens to be eligible to validate transactions. Ethereum is a well-known example of this—you’ll need a minimum of 32 ETH, a sizable investment, to start staking. Staking pools offer a way around this problem, allowing multiple holders to combine their computational resources in the blockchain to increase the chances of earning block rewards. The funds of all the stakeholders in the staking pool are collected and locked up, with staking rewards split between all the stakeholders in the pool.
- Liquid staking. When you stake your tokens, you receive representative tokens in exchange. These tokens can be used or traded, so you can still put your crypto assets to work earning rewards across other DeFi protocols while they’re being staked.
- Centralized staking. Many leading crypto exchanges provide staking services so you can stake your crypto assets directly through their trading platforms. The exchange then takes care of the staking process on your behalf and distributes rewards, but it does involve trusting your tokens to a centralized exchange.
Popular cryptos that can be staked
Several of the world’s largest cryptocurrencies in terms of market capitalization can be staked. These include:
Is staking crypto even worth it?
The amount you can earn from staking varies depending on the cryptocurrency and the staking platform you choose. However, it’s common to see annual percentage yields of between 5% and 15% advertised on staking platforms.
Each blockchain or smart contract may use a different method of assigning and calculating staking rewards. A few blockchains offer a fixed percentage of the funds as a staking reward, while many others base the rewards on various factors. Some of these factors are listed below:
- The inflation rate.
- The number of coins staked in the network in total.
- How long a particular staker has been involved in the staking process.
- The number of tokens staked by the holder.
Benefits of crypto staking
Aside from the potential for high returns, there are several other reasons why you might want to stake crypto, including:
- Put your crypto holdings to work. Staking your crypto is kind of like if you have a spare $1,000 that you don’t need for your day-to-day spending. Rather than just leave it sitting in your chequing account doing nothing, you can move it over to a savings account to earn interest. Of course, be aware that staking crypto is a much more high-risk option than depositing money in a savings account.
- Earn passive income. Staking lets you use your crypto to generate passive income without requiring any ongoing effort on your part. You can also take advantage of compounding returns to grow your crypto balance.
- Support the network. By staking your crypto, you can help validate transactions and secure the blockchain network. This provides a way to support blockchain projects you’re interested in or passionate about.
- Cheap and energy efficient. Unlike mining crypto, which is energy-intensive and requires a lot of expensive hardware, staking is much more energy efficient and allows you to get started with just a small amount of crypto.
What are the risks of crypto staking?
While there are plenty of potential benefits to staking, there are also several risks you would be aware of before you get started:
- Price volatility. Cryptocurrencies are infamous for their volatility. If the price of the token you are staking falls, the value of your crypto decreases along with any rewards you receive.
- Lock-up period. You may need to deposit and lock-up your tokens for a minimum period of time. During the lock-up period, the funds cannot be traded or withdrawn. Fortunately, not all staking systems have a lock-up period, but these flexible staking options tend to have lower rewards.
- Security risks. The staking platform you use could be vulnerable to hacking and other online threats, while smart contract bugs could allow scammers to steal your tokens.
- Tax obligations. You’ll need to make sure you meet your CRA reporting requirements for any staking rewards you receive.
- Slashing penalties. Stakers can lose portions of their stake for failing to meet the specific requirements of the protocol. Penalising stakers for such activities is known as slashing, and it’s designed to discourage dishonest behaviour in the blockchain network.
Wallets for staking
Here is a non-exhaustive list of cryptocurrency wallets that allow users to stake digital tokens directly from their own wallets where they hold their cryptocurrencies:
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Bottom line
Staking provides a simple way to grow a bigger crypto balance. It’s quick and easy to get started, and you can potentially earn higher rewards than you would get from a traditional savings account. But the chance of higher returns also means taking on a higher level of risk, so make sure you understand exactly what’s involved before staking any of your crypto.
Frequently asked questions about staking
Sources
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