Polkadot is a third-generation blockchain network with lofty ambitions. It aims to solve the major pain points of the traditional blockchain ecosystem by providing a new way to solve issues surrounding scaling, security, blockchain creation and cross-blockchain transfers.
Polkadot does this through the use of parachains – an interoperable network of blockchains each with their own unique rules and functionality. This is a distinct departure from blockchains such as Ethereum and Cardano, which focus on Smart Contracts to achieve similar results.
Unlike Bitcoin, which uses a proof-of-work (PoW) consensus algorithm to validate transactions and mine new tokens, Polkadot uses a nominated proof-of-stake (NPoS) system in which users deposit DOT tokens into d addresses in order to validate the chain and earn rewards. This is a process known as staking.
This guide will explore the various ways that you can stake DOT tokens to earn rewards, whether by directly staking on chain or through some of the more novel methods, such as using an exchange or DeFi service.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific
provider, service or offering. It is not a recommendation to trade.
What is Polkadot staking?
To explain staking, let's look at a traditional savings account. Each month, you deposit cash into your account and your bank pays you interest on your savings. It pays you this interest because it's using your money to make money. This is one of the ways the banking system works.
Staking works in a similar way. The funds that you lock in, or stake, are used to help validate transactions on the Polkadot network. You receive your "interest" from these tokens in the form of DOT rewards.
You can stake Polkadot in two ways: as a validator or a nominator. Validators are those who create the blocks, nominators are those who vote on who gets to be a validator. If the validator that you've voted for with one of your 16 votes wins a block, you get part of their bounty.
Similarly to Bitcoin mining, staking Polkadot as a validator requires a high level of technical know-how and investment in a masternode that runs 24/7 before you can make a profit.
Alternatively, anyone can stake Polkadot as a nominator without any technical expertise or significant investment in equipment. You can do this by depositing funds on a cryptocurrency exchange or by locking them in a wallet.
Lastly, while it isn't technically staking, another way to earn passive rewards from simply holding Polkadot is to transfer it to one of many lending platforms such as Celsius or Crypto.com, where they use it to lend to other investors, earning you a variable amount over your deposit term.
How to stake Polkadot
1. Staking on an exchange
The easiest way to get started with Polkadot staking is through a cryptocurrency exchange such as Binance or Kraken. Using an exchange to stake is as easy as buying DOT tokens, picking your favourite exchange and depositing your tokens into your Polkadot wallet. Once you have tokens in your wallet, it's easy to start staking.
Find the "Finance" drop-down in the top menu bar and click "Binance Earn".
Search for DOT in the coin search box.
You'll be given two options: Staking or Flexible Savings. Click the yellow "Stake" button.
Choose how long you wish to stake for and learn about the APY on the next page.
Add how much you want to stake and click "Confirm Purchase".
Pros of staking on an exchange
The minimum locked amount that you can stake with can be as low as 1 DOT.
It's easy to calculate your estimated APY (annual percentage yield).
You can start staking instantly without any set-up or hardware costs.
It requires zero technical know-how.
Cons of staking on an exchange
Some exchanges take longer to unstake and unbond (release) your tokens.
While you are waiting for your tokens to be released, you cannot react to sudden price fluctuations.
What you can earn by staking on an exchange can be reduced due to the presence of fees.
You're unable to choose your own validators.
You hand over your voting rights to the exchange, which may vote on protocol changes that you don't agree with. It also risks concentrating a lot of power in the hands of cryptocurrency exchanges.
2. Staking with a wallet
Another way to stake Polkadot is with a wallet or node. You can choose from physical hardware wallets such as a Ledger to browser-based wallets like Polkadot JS and mobile wallets like imToken.
It's straightforward to stake with a mobile wallet such as imToken:
Download the imToken app from the App Store or Google Play.
Create an identity and save your password.
Add your coin(s) from the next screen, select "DOT" and click "Confirm".
Securely back up your new mnemonic.
Find your wallet address and deposit DOT tokens.
Once deposited, click "Staking" from within your DOT wallet and select your validators.
Click "Confirm Validators" and enter your bond amount.
Pros of staking with a wallet
Choose how your funds are used and which validator you want (as a nominator).
You're in control of your own security.
Once you have transferred DOT funds, all you need to do is redeem your rewards.
Cons of staking with a wallet
You need in excess of 200 DOT tokens to participate in wallet staking to ensure you're eligible for rewards and can cover each transaction fee.
While choosing your own validators gives you more freedom, it comes with its own risks. It's essential to review a validator's history before nominating them to shield yourself from being slashed and losing rewards.
Setting up and depositing tokens on your own wallet requires a higher level of skill.
3. Staking with a masternode
Often reserved for the most hardcore fans, the most complex way to stake Polkadot is via your own masternode set-up as a validator. Even Polkadot's help section recommends having "significant system administration experience" before running your own validator.
Since a masternode is always synced with the blockchain, it must remain running at all times with both the speed and the capacity to cope with this load. Given this, those wishing to go down the masternode route will require significant investment in either hardware or virtual machines (VPS).
Likewise, to be an active validator, you will be required to stake around 2 million DOT tokens to take part.
How to stake Polkadot for parachain auctions and crowdloans
Polkadot's unique parachain-based protocol presents a new way for DOT holders to stake their tokens in exchange for rewards. This can be done by participating in a Parachain Slot Auction.
What is a Polkadot Parachain Slot Auction?
A slot auction is based on Polkadot's two underlying blockchain technologies – parachains and the relay chain.
Parachains rely on the relay chain to execute transactions, but the current structure only supports 100 parachains connected to the main Polkadot network at any given time. As new projects and software being developed on the Polkadot network need to be hosted on a parachain, this means that there is a lot of competition for not many slots.
Polkadot has implemented a "candle auction" system to solve this issue and fairly disseminate slots. Essentially, DOT holders can lock in their tokens to support a project they believe should be hosted on a parachain. The project developer will often incentivise bidding on their application by offering airdropped tokens or other rewards.
The auction will then stop at a randod time, granting whichever project had the most DOT support access to the parachain.
How to participate in a Polkadot parachain auction
You can easily participate in a Polkadot parachain auction through popular cryptocurrency exchanges such as Binance.
First, you have to sign up for an account on Binance. If you don't already own any DOT tokens, you can purchase them on the platform. Otherwise, transfer the tokens to your Binance wallet address.
Head over to the Binance Earn tab, where you will see the option to vote on various proposed projects. From here, you can read about each individual project, their goals, the lock-up period and the potential rewards on offer.
Once a decision has been made, all you have to do is click "Vote" on the desired project and input the amount of DOT you'd like to stake. That's all there is to it.
This process can be replicated on other exchanges, including Kraken and Houbi.
The easiest way to stake DOT for a Parachain Auction is through an exchange, but more advanced users can participate directly on-chain using Polkadot-js. This method is only recommended for experienced crypto holders and requires a degree of technological know-how.
Why stake DOT for a parachain auction?
Participating in a parachain auction allows users invested in the Polkadot network to directly contribute to the blockchain's future. They can become involved in the community and support projects they believe will help improve the Polkadot ecosystem.
Lock-in periods for staked tokens are quite lengthy – generally 2 years. In this sense, participating in an auction is almost like buying a term deposit. The minimum stake for a parachain auction is also quite low compared to some other staking opportunities. Interested holders can vote on a project with as little as 0.1 DOT.
In return for locking your precious DOT away for so long, you are rewarded with quite lucrative interest rates. In the first parachain auction (November 2021) projects paid 20-550% APY to attract crowd lenders.
Where to stake Polkadot
As mentioned above, you can use platforms such as exchanges, lending services and certain DeFi protocols to deposit your DOT tokens in return for rewards. While not all of these services provide staking in the true sense (depositing tokens to secure the blockchain), they provide similar rewards.
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How much can I earn from Polkadot staking?
The good thing about staking Polkadot is that it's almost entirely passive income. Once you've deposited and locked in your stake, you start earning.
While how much you can earn varies depending on how much commission your chosen validators tend to pay out, the number of validators and the number of tokens you initially staked, the returns will always be greater than if you had simply left your tokens idling in your wallet.
Is staking Polkadot safe?
Staking Polkadot is an easy way to earn additional passive income in a relatively safe, low-risk way. However, there is one core drawback: the risk of being penalised and fined if one of the people (validators) that you have nominated chooses to misbehave or becomes reckless with the protocol.
Used to boost network security, "slashing" reinforces the need to nominate validators with a strong performance record.
Benefits of staking Polkadot
There are three key reasons why cryptocurrency fans enjoy staking Polkadot:
The passive income and ability to earn new rewards without lifting a finger.
The chance to protect their investment by reinforcing the network and making it less susceptible to interference from attacks.
The ability to have a proper voice on the issue of network governance.
Drawbacks of staking Polkadot
As with many cryptocurrency projects, there are some things you need to remain aware of:
Your tokens are locked in and cannot be redeemed without losing your earned interest.
While your tokens are locked in and you are unable to react to changing market prices.
Your stake is susceptible to slashing if your validator misbehaves.
While some validators reward tokens immediately, others can release them days or even weeks later.
If you lose your login details or wallet address and key, you will be unable to regain access to your currency.
Polkadot is a blockchain project that allows you to earn rewards by staking DOT tokens on a cryptocurrency exchange or within a wallet. These tokens are locked in for a period of time and used by validators to facilitate network transactions.
For those interested in holding cryptocurrency for the long term, this is a passive way to earn additional DOT tokens without a significant amount of investment or effort.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly
volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
You should also verify the nature of any product or service (including its legal status and relevant regulatory
requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.
James Edwards is the global cryptocurrency editor at Finder. He coordinates a distributed team of journalists to help further Finder's mission of helping people make better financial decisions.
He has been using Bitcoin since 2013 and began working in the industry in 2017. He takes pride in boiling down complex topics into language his parents can understand.
His expertise has seen him called on to report at events such as TechCrunch Disrupt, CoinDesk Consensus and IBM Think and has coordinated a vast number of high-profile interviews with the industry's brightest minds.
He is a regular contributor to Nasdaq, The Street and is frequently called upon for market commentary in Australia and abroad.
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