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Ethereum’s transition to a Proof-of-Stake (PoS) blockchain reinforced the concept of staking crypto assets to support network consensus and security. Barely two years since this milestone, the amount of staked ETH stands at 32.3 million, which translates to around 26.89% of the total supply in circulation.
So, why are more crypto natives opting to stake their digital asset holdings? One of the main motivations is the passive income derived from this process, but before diving into the details, let’s first define the concept of crypto staking.
Crypto Staking Explained
Simply put, crypto staking provides an opportunity for token holders to participate in the validation of transactions in PoS blockchain ecosystems such as Ethereum, Avalanche, and Solana. In return, stakers are rewarded for their contribution to ensuring that PoS blockchains remain stable, secure, and free from manipulation.
The process involves locking one’s native tokens in a staking contract, after which they can run the associated validator program. For example, in Ethereum’s PoS consensus, crypto natives who wish to become network validators have to lock up to 32 ETH to be eligible to run their own validator nodes.
However, there are other alternatives, such as staking as a service, pooled staking, and centralized exchanges, which allow ETH holders to participate in staking even if they do not meet the threshold to run a full node.
Of course, the technicalities and requirements are different for each PoS chain, but the overall goal of staking is to serve as the fundamental pillar in supporting transaction validation, just like the Proof-of-Work (PoW) consensus does for Bitcoin.
Benefits of Staking Crypto Assets
There are several reasons why staking has, in the recent past, emerged as one of the high-activity realms within the larger crypto industry:
Source of a Passive Income
As mentioned in the introduction, crypto staking provides an alternative source of income, especially for token holders with a long-term horizon. Instead of leaving one’s tokens sitting idle on a centralized exchange or non-custodial wallet, why not put the tokens to work and generate a passive income for network participation?
While the rewards offered by different PoS blockchains or associated DeFi protocols may vary, there are some platforms where the annual percentage rate (APR) could go as high as 5%. As of writing, the staking reward rate on AVAX stands at 8.05%, Solana’s is 7.43%, while Celestia’s and DOT’s are above 10%.
Network Participation
One of the core ethos of cryptocurrencies is decentralization. Unlike centralized financial markets, where a select number of players run the show, blockchain networks are fueled by decentralized community participation.
Staking allows crypto natives to become part of this revolution by enabling them to participate in the transaction validation process. Moreover, in some PoS blockchains and DeFi protocols, such as MakerDAO, Uniswap, and Compound, stakers have a say in the governance process depending on the amount of native tokens they have locked in the staking contract. Stakers can vote on development proposals and ecosystem modifications, among other key factors.
Portfolio Diversification
With the debut of liquid staking protocols (LSTs) such as Lido and Rocket Pool, DeFi users now have the flexibility to explore multiple earning opportunities. Initially, staking one’s tokens meant locking them in a specific PoS chain or protocol until the redemption date. However, LST protocols have changed the narrative, as it is now possible to stake ETH and, in turn, get an LST token like stETH, which can be used to explore opportunities in other DeFi ecosystems during the lockup period.
Low Barrier to Entry
Staking also requires minimal resources and technical know-how to get started compared to mining through the PoW consensus. To put it into perspective, running a Bitcoin node would require one to purchase mining hardware, not to mention the cost of electricity to maintain the node 24/7. On the contrary, it is possible to participate in ETH staking with as little as 0.0001 ETH through centralized exchanges like Binance or other service providers offering delegated or pooled staking initiatives.
Where to Get Started on Crypto Staking
Crypto staking has evolved a great deal since the pioneer offerings during the inaugural DeFi summer of 2020.
Today, even those with very little or no experience can earn a passive income by staking through crypto exchanges such as VALR. This FSCA-licensed exchange is one of the few platforms that is currently giving crypto users a seamless way to participate in staking across multiple PoS blockchains, including Solana, Avalanche, and Tron, which is the latest addition to VALR’s staking offerings.
As for the more sophisticated crypto users, there is the option of directly staking one’s token through non-custodial wallets. For instance, if one wanted to stake on the Ethereum blockchain, they would have to use non-custodial wallets like MetaMask and MyEtherWallet to interact with the staking contract.
Other PoS blockchains such as Solana and Avalanche also have dedicated non-custodial wallets that DeFi users can leverage to access staking opportunities. The downside with direct staking, however, is the technicality involved in the staking process.
Unlike centralized exchanges, which offer a simplified gateway to staking initiatives, non-custodial staking requires a higher level of technical knowledge, making it cumbersome for newbies and some crypto veterans to navigate.
Conclusion
Although a relatively nascent area of innovation, crypto staking has proved to be a reliable approach to sustaining the PoS consensus. Going by the trends, the next era of DeFi innovation will likely be marked by more participation either through indirect or direct staking. As such, embracing staking now positions prospective innovators and investors at the forefront of the crypto revolution.
