Is it worth spending time on staking? Is the idea that 10% annually is good convincing to you? Aren't you bored? Is it good to invest 10 grand in order to get $500 in six months? This is undoubtedly worse and more boring than doubling up, however, let's be honest, it's much better than not getting anything at all or even losing.
To write off staking as boring and not too profitable, first prove to yourself that you have a choice and can regularly earn more using other tools (e.g., mining or trading). If there is no such evidence yet, then staking most likely does not deserve your contempt, and you may well try it out without telling a soul. Let it be the most boring 500 dollars in your life, but agree, your boring money is better than someone else's fun money.
Crypto staking explained
In staking, just as in mining, the most important thing is the consensus algorithm, i.e., the mechanism for confirming network transactions. In other words, any network (blockchain) as a system of trust between users is valuable precisely because it is impossible to spend the same money twice: the consensus algorithm is on guard - a mechanism that allows confirming transactions and preventing abuse without the involvement of any central authority.
Mining uses the Proof-of-Work (PoW) algorithm, which, as it turned out, requires too much electricity. In PoW, in order to obtain the right to confirm transactions, you need to spend significant energy resources, the cost of which exceeds the benefit from any abuse. In staking, the Proof-of-Stake (PoS) algorithm is used, and there is no energy consumption problem there. In PoS, instead of energy costs, users (validators) block their assets, which become the hostages and guarantors of their honesty.
Validators, like miners, compete with each other for the right to add a new block to the blockchain, and each new block must be filled with transactions on which the validator or miner receives commission. The longer the term and the more coins the validator stakes, the more competitive it is, although today all individual players gather in pools and act together, sharing the rewards among themselves in proportion to the investments.
Is staking crypto worth it? Let's use one of the many online calculators to assess the profitability of Ether cryptocurrency staking on the Ethereum network, and we’ll get the following result as of the beginning of April 2023:
Where is the “at least 10%” profit?” you ask. Well, the market dynamics is not particularly positive, however, the concept of staking includes not only PoS-staking related to the validators’ work, but also the so-called DeFi-staking, which is unrelated to validation - it is blocking assets in the liquidity pools of DeFi projects. This is where you can find interest rates of about 10% and much higher.
The benefits of crypto staking
Is staking worth it? Staking does not require significant operating expenses on your side. While mining forces you to support cryptocurrency farm operations by burning endless kilowatts, in staking you only need to buy and block the respective asset. It does not damage the environment, or require maintenance of expensive mining hardware or a place for it, in short, it is much easier than mining. You can choose a suitable cryptocurrency for PoS-staking, or you can plunge into DeFi and stake cryptocurrencies and tokens at the most attractive rates, and even with a compound interest.
You can find staking service aggregators online, where the interest rates are indicated opposite each asset. In the same way, centralized crypto exchanges offer their own staking options. You can also find interesting projects yourself and invest in staking directly on their websites.
All of this may seem risky, but you can diversify your investments in such a way that it does not look like a bet “only on red".
Is staking crypto worth it?
To get a broader idea of staking, let's see what one of the well-known aggregators offers. The rates for some assets are very interesting. No special knowledge or investments in equipment are required - just press the Deposit button and block a certain amount in staking to start receiving passive income.
Risks of staking crypto
At the same time, staking has its own set of risks, the main one being regulatory. Recently, the SEC has made it clear that it intends to consider all PoS crypto assets securities with all the consequences that follow. This means that most cryptocurrencies, and especially tokens, are under attack, and the market is expecting new shocks of varying severity.
There is also a risk born by the platform you work with directly, whether it’s an aggregator, a centralized exchange or something else. Today, even the seemingly most reliable player may let you down: just recall the CFTC's lawsuit against Binance.
Working with individual projects can bring you more income, but the risks are higher there. Today, there are so many projects in DeFi that attract user funds that looking at some of them, you can’t even tell if their disappearance would even make it to the news. It is very important that a project has more than an original idea - for instance,some real assets.
Can you lose money by staking crypto? One way or another, the risks of staking comprise a partial or complete loss of funds as a result of certain circumstances, the most banal of which is a drop in the value of the asset you have invested. However, the art of investing is to limit risks and diversify your investments in order to minimize losses.
Why not all cryptocurrencies have staking
As mentioned above, cryptocurrencies may differ in the consensus algorithm. For instance, Bitcoin is PoW, and Ether is PoS. This means that there is no PoS-staking for Bitcoin simply because transactions in its blockchain are confirmed in a different way. However, aggregators allow you to stake Bitcoin in DeFi, e.g., as you see from the pic above - with a quite decent APR of 8.7% (annually).
Therefore, in general, staking in DeFi is possible for any cryptocurrency, even if it’s not one of the PoS cryptocurrencies.
Pros and Cons of staking crypto
DeFi-staking is like a bank deposit: - you simply block your funds in order to get back more after the end of the blocking period. PoS-staking is another transaction validation process that you can participate in - not out of idle interest and commitment to crypto ideology, but for the sake of profit. In both cases, you earn by focusing on the average profitability indicators and get a significant additional bonus if the rate of your asset skyrockets.
Pros
Unlike mining, staking does not require additional investments from you: just buy the desired asset and block it on the appropriate platform. Evaluate profitability by comparing different projects and investing in different assets for different periods of time in such a way as to receive rewards every quarter or even every month.
Passive strategies are always less risky than active trading or mining, which require significant capex. In staking, you are not bound to one asset by specially purchased equipment, as in mining, and you aren’t risking the forced closure of a margin position in case of strong market fluctuations, as in trading. Your funds are much safer if they are stored quietly and earn you a certain interest.
Cons
In light of the recent SEC statements, as well as the general regulator's dissatisfaction with the DeFi segment, you should not count on a quiet life of PoS cryptocurrencies and the DeFi in the future. The regulator's attacks will continue. Depending on the vector of these attacks, certain services, assets, exchanges, etc. will suffer - it is impossible to insure against these risks.
Exchange rate fluctuations of assets in staking can nullify all efforts and prevent you from earning on the horizon of several months or a year. Staking, like mining, requires long-term participation, and it takes several years to judge the results of the work - then it will be a relatively fair assessment of profitability.
Conclusions
Staking is a great tool for those who prefer a passive earning strategy and are not ready to invest in complex equipment or trade on the crypto exchanges. Staking is the analogue of a bank deposit, and a very conservative investor can set it against the market as a kind of protection against ill-considered actions.
Staking provides an excellent opportunity to limit risks, but still maintain a certain profitability. You don't have to stake all your assets. You can trade using one part, stake another part, and use the third part in some other way. It is important that your actions fit into the general idea of what profit/risk ratio you consider the most acceptable for yourself. If staking is assigned the role of a risk limiter in your work, then you are on the right track.
Is Staking Crypto Worth It? FAQ
Is there a downside to staking crypto?
You may think that staking does not allow you to earn enough, because the interest rates are not always high, but staking is more of a risk-limiting tool that works well in addition to other activities. If you can earn more, do it, but don’t forget to limit the risks by staking!
Is staking crypto profitable?
Staking offers attractive interest rates and is undoubtedly profitable. However, market movements can negate your work. Investments in the crypto industry carry significant risks and require diversification. At the same time, staking is one of the least risky investments in crypto assets, since it is a passive strategy similar to a bank deposit.
Is staking better than holding?
One does not cancel the other, because by staking assets, you continue to hold them. However, this does not mean that you should stake all your assets in order to earn as much as possible. Staking contains some risks, so use only a part of your assets in staking.
Who benefits from staking?
If you don’t want to engage in mining, buying expensive equipment and maintaining it, if you do not want to trade on the crypto exchanges, staking is the best way for you to make money, since it is a passive strategy. You simply block your assets for a while, after which you get a profit. Staking may seem boring, but for those who carefully diversify risks, it is a very important tool to limit them.
