Crypto Stacking: The ultimate guide with all you need to know

From the basics of crypto staking to exploring the different types of staking available, you'll learn everything you need to know about crypto dividends.

Crypto staking, cupmpound yield on crypto, crypto passive income
Published on

February 15, 2023

Cryptocurrency staking is the storage of tokens on a cryptocurrency wallet or exchange to ensure that the blockchain works. Validators receive remuneration for ensuring transactions on the blockchain.

In simple terms, tokenization is one way to passively generate income from cryptocurrency, based on the PoS algorithm. The process of token staking resembles a bank deposit at a certain interest rate.

Staking is common in networks that use the Proof of Stake (PoS) algorithm. PoS acts as an alternative to Proof of Work (PoW). PoW-based blockchains use mining to verify and validate new blocks. This is a time-consuming and expensive process.

PoS chains do this through cryptocurrency staking. The very process of mining new blocks in such networks is called foraging. Anyone can become a validator. To do this, the user only needs to buy a cryptocurrency and hold it. PoS validators are chosen by the number of coins in the system—in the stack. The more tokens the user puts into the steak, the more likely he is to become a validator.

The formation of blocks using the PoS algorithm makes the blockchain network more scalable. The transition of the Ethereum network from PoW to PoS is related to this.

Even though modern blockchain networks are based on DPoS, they are often written simply as "PoS" in their specifications, which can be confusing for inexperienced users. To know for sure, you need to study in detail the description of the platform on which you want to delegate your assets.

Types of Staking

Types of Staking

Limited stacking 

With this type of staking, the user specifies a specific period for which they hold the digital asset. The duration of this period cannot be changed.

The main advantage of this type is the high-interest rate. Usually, when the contract is signed, a specific amount is stipulated, which the stacker will receive at the end of the specified period for holding the cryptocurrency. Usually, this method is chosen by users interested in the highest possible profit.

Unlimited stacking 

In this case, the contract does not provide for a specific term for holding the coins. The user can terminate it and take the cryptocurrency back at any time if he or she wishes. Interest is accrued until the user transfers the funds to another wallet or places an order to sell the tokens on the exchange.

Usually, the first transfers for holding a digital asset are made as early as 24 hours after the conclusion of a perpetual staking contract. This does not happen every day. Payments are usually made once a month.

Perpetual staking is suitable for users who are unprepared for long-term cryptocurrency holding agreements and wish to have constant access to their capital.

Decentralized stacking 

Decentralized systems are common in the digital asset industry and are used to store, transfer, credit, and exchange cryptocurrency. The main advantage is that no one has direct access to the finances; all transactions are performed according to predetermined algorithms automatically.

Decentralized staking is based on the fact that certain individuals and organizations can borrow funds from your wallet, and the system will enforce all credit terms automatically. In essence, the mechanism resembles a regular bank deposit.

Advantages of decentralized staking

  • Fast Profit. Funds are credited every 24 hours, so you get your interest for holding the asset quickly and easily.
  • High returns. The entry threshold for decentralized banking is lower than other subspecies of this way of earning. At the same time, profitability is higher by up to 10 times. Sometimes the income exceeds 100% per year. The key value contains the selected coin as well as the holding period.
  • Guaranteed payments. On reliable platforms, payment of interest is guaranteed, and loss of funds is impossible.

The main function of services that perform decentralized staking is to control the execution of transactions. Although experts recommend checking the terms of each contract, they may contain vulnerabilities that could put your capital at risk. To eliminate gaps in the contract, contact the technical support staff of the site.

Risks of decentralized staking

  • Cryptocurrency prices are relatively volatile, meaning they can depreciate quickly. If prices fall too much, you could incur losses.
  • It can take anywhere from one to seven days to withdraw assets from staking.
  • When using coins for staking, it is important to understand that these coins will remain locked up for a long period. This means that you will not be able to do anything with these assets during that period.
  • The possibility of hacking or cyberattacks on the protocol or exchange is the main reason why some crypto investors perform staking on hardware wallets.
  • Validator nodes storing your tokens may be blocked if they do not maintain 100% uptime for transaction processing.

Blockchains for Staking

Blockchains for Staking

Ethereum (ETH) 

The platform provides the Ethereum Virtual Machine (EVM) and Solidity language for creating decentralized applications (DApps) based on the Ethereum blockchain.

The platform is currently running on the PoW mechanism, but it has already launched a test network, Medalla, running on PoS, where BETH coin staking—tokens replacing an equivalent amount of ETH—is available. Holders can now stack Ethereum cryptocurrency and earn up to a 20% annual return on their wallet, but the coins will be locked up for almost two years.

Why Ethereum is one of the best coins for staking

The cryptocurrency is backed by a large community, and the platform itself has a lot of promise. Although the network is currently losing significantly to today's platforms in terms of performance, developers are working to improve the protocol to ensure a transition to Proof-of-Stake.

Disadvantages of Ethereum

The platform is one of the first in its field, so it is not without its key flaws, which developers are trying to fix with the introduction of the Eth 2.0 update. The main problems with the current Ethereum network include low bandwidth, scalability issues, and slow and expensive transactions. These problems particularly stand out against the high demand for DeFi products and Yield Farming. Ethereum can only process up to 15 transactions per second.

Another obvious problem with Ethereum is its narrowly focused SDK for application development. The platform supports a single programming language, Solidity, written specifically for this blockchain. This limits developers who work with other programming languages and prefer to write code in them.

Cosmos Network (COSMOS) 

Cosmos is a decentralized network or ecosystem of parallel blockchains based on the Tendermint consensus algorithm that is interconnected but can function independently of each other. The Cosmos network is also called the "blockchain internet."

The Cosmos Network solves the problem of blockchain isolation by providing a single infrastructure that allows them to interact, In other words, users can easily transfer tokens from one blockchain to another. This property is called interoperability. Inter Blockchain Communication (IBC), a protocol that enables strong communication between different blockchains, was developed to enable interoperability.

What makes ATOM one of the best coins for staking

Like Ethereum, Cosmos Network has a large infrastructure supported by a large community of investors and developers who are constantly working on updates to the platform. For example, in early 2021, Cosmos developers introduced the Stargate update, which improved the platform's performance and connected Cosmos SDK-based blockchains using the Inter Blockchain Communication protocol.

One of the advantages of the Tendermint algorithm, on which the Cosmos network is based, is instant finality. This means that users can be sure that a transaction is completed as soon as a new block is mined, which is not the case with PoW blockchains such as Bitcoin and Ethereum.

Another advantage of the platform is the principle of modularity, which simplifies the development of applications for specific tasks without having to write source code from scratch. This also speeds up the creation and deployment of applications.

Problems of the Cosmos Network

The first drawback of Cosmos is the high level of competition among more well-known platforms, such as Polkadot, Polygon, and Ethereum. Sidechains like Polygon deploy solutions that take market share away from the Cosmos network.

The second problem is related to low user activity. The Cosmos IBC protocol launches in February 2021, and the ecosystem has only about 40 zones (network validator nodes), with 95% of activity occurring in only two zones. In addition, the U.S. Securities and Exchange Commission (SEC) has twice criticized the project's ICO and believes that the platform does not fit the definition of security.

Cardano (ADA)

Cardano is the world's first decentralized platform based on scientific research and empirical data. The platform is also known as the "Ethereum killer. The protocol allows the creation and launch of blockchain applications and smart contracts similar to Ethereum.

Cardano's platform was developed back in 2014, but unlike Ethereum developers, the team did not quickly launch the protocol but instead focused on researching and solving problems in the blockchain industry. In 2017, ADA tokens were issued, which act as a native cryptocurrency.

The Cardano network is based on two layers: the first layer is responsible for processing ADA transactions, while the second layer provides the functionality of the smart contract. Cardano has become one of the main competitors of Ethereum not only because it has a high throughput and does not have such pronounced scaling problems, but also because the entire ecosystem consumes only 6 GWh of electricity, which is only 0.01% of the Bitcoin network. This makes the platform more environmentally friendly and sustainable.

Benefits of Cardano

What sets the platform apart from Ethereum is its high network bandwidth and low-cost transactions. Ethereum belongs to the second generation of blockchains, while Cardano is the third. The two-tier architecture makes the network more secure and provides the ability to implement solutions to scale it.

The Cardano protocol has mathematically proven security, and the University of Edinburgh, the University of Connecticut, and the Tokyo Institute of Technology participated in the development of the code.

Disadvantages

One of the main disadvantages of Cardano is the low staking yield of 5.3% per annum. This is caused by the fact that many users have blocked their coins, which has reduced the yield.

Another significant disadvantage is the complexity of development and the ambition of the team, which makes it necessary to put everything on the line. This leads to the risk that in the future there may be problems due to which updates will not come out for a long time or will be suspended indefinitely. Moreover, this disadvantage is evident now, as developers have not yet implemented many of the projects they had in mind, and it is unclear when these projects will be ready and what stage they are at.

Polygon (MATIC)

Polygon Network, formerly known as Matic, is a scalable decentralized network that provides frameworks for creating a multichain ecosystem of Ethereum-compatible blockchains. The platform is also referred to as the "Ethereum blockchain internet."

The Polygon platform solves blockchain scalability problems, as well as slow and expensive transactions, without compromising network security. The protocol works on a modular "security-as-a-service" basis and resembles the Cosmos Network in structure, as it aims for blockchain interoperability, but on the Ethereum network.

Why Polygon is one of the best blockchains for staking

The Polygon platform is based on Ethereum, the largest DeFi ecosystem, and is supported by a large community of crypto-enthusiasts. The developers are constantly working to improve the network and strive to provide a scalable solution that allows for instant and cheap transactions.

Disadvantages of Polygon

One of the main problems has to do with competition. Solutions like MATIC are being developed now and can be a better alternative. The problem is that Polygon focuses on the Ethereum ecosystem and does not use sidechains, while other new platforms aim more globally and provide solutions beyond one blockchain. Crypto-enthusiasts believe that Polygon is a temporary solution until new platforms emerge.

Another drawback has to do with the large number of blockchain assets. If new, more efficient, and flexible platforms similar to Polygon emerge, the exchange rate of MATIC tokens could suddenly collapse.

Tron (TRX)

Tron is another serious competitor to Ethereum with its developed ecosystem, but with higher throughput: the Tron network is capable of processing about 2,000 transactions per second. Although the Tron platform did not offer anything new to the blockchain community after Ethereum, it has a developed infrastructure, and Ripple Labs was involved in the protocol's development.

Another difference between Tron and Ethereum is that the platform focuses on the gaming industry. A large part of the Tron ecosystem is decentralized games and casinos, making the blockchain more narrowly focused. This has made it possible to create apps that are exempt from commissions from stores such as the App Store and Google Play.

What makes Tron one of the most effective staking platforms

The Tron ecosystem includes video hosting, a social network, a streaming platform, a gaming portal, an online casino, a payment platform, and online publishing.

The platform helps develop the entertainment industry and provides advanced tools for the creation and promotion of blockchain games based on developer incentives.

Tron's problems

TRX's low staking yield is one of the cryptocurrency's main problems. Yields barely exceed 1% p.a., so staking is more suitable for Tron holders. TRX has an issue of $100 billion, which is almost 500 times that of Bitcoin, which makes it unlikely that the coin will rise to at least $10.

The second problem is that community users accuse the platform of being centralized: about 50% of available coins are stored in just 10 addresses, which makes the rate vulnerable and can discourage new investors.

In addition, there have been many scandals surrounding the Tron ecosystem. Project creator Justin Sun claimed major partnerships with Chinese market giants such as Alibaba and Baofeng in 2017–2018. These partnerships could have attracted more than 200 million new users, but the claims turned out to be wrong, and they only hurt the ecosystem. In reality, it turned out that it was about the blockchain divisions, not the companies themselves.

Polkadot (DOT)

Polkadot is arguably Polygon's main competitor (MATIC). Like Polygon, the Polkadot platform aims to scale the Ethereum network. The ecosystem of the platform consists of subchains, also known as parachains. Polkadot's main focus is to create a network of Ethereum-compatible blockchains that can communicate with each other, exchanging transactions and data.

Polkadot provides blockchain developers with Parity Technologies' Substrate modular framework, allowing them to select the components that are best suited for developing specific applications.

Polkadot's strengths

Polkadot, like similar platforms, develops a solution for Ethereum, the largest protocol in the DeFi ecosystem, so it can attract a lot of users. Blockchains and applications developed on the Polkadot network use a common security model, which saves developers from having to worry about enforcing network validators.

Polkadot parachains serve as bridges linking the blockchain to external networks such as Bitcoin and Ethereum. The platform is one of the top 10 largest cryptocurrencies by market capitalization and is integrated with Chainlink, the largest blockchain oracle provider in the crypto industry.

Weaknesses

Polkadot has many competitors with similar goals. Among them are major platforms such as Cosmos, Cardano, Tezos, and Polygon. In addition, the protocol has been found to have vulnerabilities that have already been exploited twice by hackers who have managed to withdraw several million dollars worth of cryptocurrency.

The number of parachains is limited, which also makes the scalability of the platform limited.

Classification of Staking Services

Classification of Staking Services

Centralized exchanges 

Exchanges naturally began to engage in staking due to the large number of users on their platforms.

Through staking, traders can diversify their income stream and monetize their free funds on exchanges. Leading cryptocurrency exchanges that support staking include, but are not limited to:

Binance

Binance is the largest digital exchange by trading volume. That's why many investors choose it when they plan to do staking on trading platforms. In addition, the exchange supports DeFi staking, which hosts cryptocurrencies such as DAI, Tether (USDT), Binance USD (BUSD), BTC, and Binance Coin (BNB).

Coinbase

Coinbase is another popular cryptocurrency exchange where you can stake multiple cryptocurrencies. In addition to ETH 2.0 staking, other coins for staking on Coinbase include ALGO and XTZ.

Cold or private wallets

This form of steaking is also called cold staking. However, the stacker must keep the coins in the stack at the same address because moving them interrupts the blocking period, which consequently results in a loss of the staking reward.

Among the leading offline/private cryptocurrency wallets that support staking are:

Ledger

A leader in the cold wallet industry. The advantage of hardware wallets is that you still have full control over your coins during the staking period.

In addition to the security benefits, Ledger allows users to put up to seven different cryptocurrencies into a staking pool. Some of the supported coins for steaking are Tron (TRX), ATOM, and ALGO.

Trust Wallet

A universal Trust Wallet is a private wallet with Binance support. This wallet allows users to earn passive income from staking XTZ, ATOM, VeChain (VET), TRX, IoTeX (IOTX), ALGO, TomoChain (TOMO), and Callisto (CLO).

Cool Wallet 

The first mobile hardware wallet with Bluetooth, CoolWallet, offers Stablecoin (USDT) in-app stealing with X-Savings.

Trezor

The world's first hardware wallet Trezor also supports the staking of some assets, like Tezos, through third-party apps like Exodus Wallet.

Staking platforms as a service

Unlike cryptocurrency exchanges and wallets, which are used as a means of trading and storing, staking platforms, as a service, are solely for staking. However, these platforms take a percentage of the rewards earned to cover their commissions. Staking on these platforms is also known as "soft staking."

Stake capital

Loom Network (LOOM), KAVA, XTZ, Aion (AION), Livepeer (LPT), and Cosmos (ATOM) are all supported by Stake Capital.

Mycontainer

At Mycointainer you have a choice between Power Max, Power Plus, and Basic rates when staking their virtual assets. These three tiers display the steering fee.

For example, Basic plan users pay as little as $1, while those on the Power Max plan pay more than $10 per month. The platform supports staking for over 50 cryptocurrencies with on-chain support.

DeFi staking

Maker (MKR)

Allows users to borrow stablecoins in exchange for unstable cryptocurrencies such as bitcoin. Notably, DAI is the main stablecoin of the network. Thus, profitable farmers deposit DAIs, which are lent to borrowers, and are rewarded with interest on the loans.

Sythetix (SNX)

Has its currency called SNX? As the name indicates, the platform is used to issue synthetic assets, also known as "synths."

Synths are virtual assets used to represent physical and real assets such as stocks, cryptocurrencies, and fiat money.

Yget finance (YFI)

The protocol emerged in February 2020 as a DeFi aggregator. Thus, instead of facilitating lending and borrowing, it allocates deposited funds to platforms with better returns and lower risk profiles. For example, it allocates funds between Aave and Compound when those platforms provide the highest rewards and lower-risk returns.

Compound (COMP)

Allows users to borrow or lend a small range of cryptocurrencies, which include ETH, USD Coin (USDC), Basic Attention Token (BAT), Ethereum (ETH), and DAI. The platform uses credit pools and charges interest on loans. As collateral, the protocol requires borrowers to contribute a certain number of supported coins.

Staking pools

With staking pools, anyone can connect to one of the validators and give it even a small amount of cryptocurrency in exchange for its services, receiving income with the deduction of a small commission.

How do staking pools work

A validator is screened, and the network allows it to participate in transaction validation. To do this, it must provide a dedicated server 24 hours a day, 7 days a week to perform the necessary calculations on it. By reserving a large amount of cryptocurrency, he starts solo staking.

It is profitable for each validator to open a service and attract more coins to the staking; this way, his reward will grow and he can get additional income from the commission that will be paid by the attracted users. This is how the pool appears.

Any user can transfer his coins to the validator's contract address and join the mining. The minimum amount for steaking and the commission percentage are fixed and known in advance.

The proof-of-ownership algorithm is designed so that as the total amount of staking increases, the annual percentage of the reward decreases. At the same time, emissions are decreasing. Therefore, do not worry too much if, instead of 15% per annum at the beginning of the contract, you see that the network now pays 5% per year. The amount of interest in dollars does not decrease as a result.

Advantages of Staking Pools

The low entry threshold is a major plus. You don't have to have dozens of ethers or thousands of crystals. It's elementary: with a few clicks of the mouse, you place a cryptocurrency, and it starts generating income. This is very convenient if you plan to invest in it for years to come; you will get additional growth.

Since the pool always monitors the state of its servers and the validation process, its participants can safely count on a stable, round-the-clock profit, which can be withdrawn at any time. Although there are also contracts with a freeze for a certain period.

How to Choose a Staking Platform

How to Choose a Staking Platform

Before you rush to put your coins into staking, you need to understand that choosing a staking platform is just as important as the number of rewards. If you make the wrong choice, you could lose all your rewards and coins in staking.

A few recommendations for choosing a staking platform

When it comes to new DeFi platforms, never take the founders' or team's word for whatever protocol they're trying to implement, especially if you're not a techie. Go to Reddit and Twitter and see what others are saying about the protocol. User developers can usually spot the possibility of cheating and will usually alert the community to any signs of foul play or code vulnerabilities that they have been able to identify.

Don't get too carried away with annual rewards, or APYs. There are many other important factors to consider, such as the reputation and longevity of the platform.

As much as possible, stick to reputable platforms like Maker, Cool Wallet, etc. instead of risking your cryptocurrency savings on suspicious platforms that promise extremely high returns from staking.

Use reliable analytics, such as CoinMarketCap, to verify information about a PoS-based platform. This also applies to steaking platforms as a service and third-party steaking services.

Before you participate in a staking service, read the terms or rules governing the staking process. The rules deal with things like the need for your wallet to be connected to the internet 24/7, the period that cryptocurrency is frozen in the staking pool before it can be withdrawn, and the minimum amount of staking, among other factors.

How to choose the best option for staking

Count and count again. Compare conditions: per year, per day, per month. Different assets may have completely different rates. They are regulated directly by the financial analysts of each particular exchange.

How to Choose a Token for Staking

The main monitoring resource is staking rewards, here you can find all the information about currencies, project capitalization, and annual yield from staking, as well as choose a suitable provider.

As a rule, the normal yield from staking is from 5% to 15% a year, it is not so much for sophisticated cryptanalysts, but it allows them not just to keep promising assets in a portfolio, but also to generate additional profit from their holding, so it should be enough.

Carefully study the terms of delegating your coins, most of the time, staking requires you to freeze your assets for a certain amount of time. Don't be fooled by the high-interest rate of staking, or you risk ending up with a bunch of cash.

Study the basic numbers (capitalization, percentage of coins in staking, and inflation rates), and look at a chart of coin rates over the past 3–12 months.

Study the project, who is behind it, what value it carries (except for the 500% p.a. in cryptocurrency...), try to find out what business model the project has, and whether token burning (redemption of tokens from the market by project owners) is done as it is on Binance with the BNB native token.

 

 


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