How to stake cryptocurrencies to earn yield safely
Staking? When you look at the possible options for investment in cryptocurrencies, lending is one of the top options that come to mind. Some platforms pay you just like a savings account and others pay you interest in specific crypto for lending specific crypto. The two main lending options are:
- DeFi or CeFi
DeFi, short for decentralized finance, is the single biggest trend in the cryptoeconomy right now. Platforms like Uniswap and Compound have billions of dollars of crypto locked into their apps as collateral for borrowing.
And CeFi, centralized finance apps, like BlockFi or Celsius, are seeing record volumes too. With these, you can lend your crypto out to earn interest. On these apps, you have the company involved, too. Some see the centralized company support as a good thing, and others as a bad thing.
And yet, for some reason, one of the safest options available in the cryptoeconomy is hardly ever talked about for generating a yield on your crypto assets. That option is staking. When you stake a POS blockchain, you are helping it operate, stay secure, and confirming transactions. It’s the ultimate insider position. And you are not dependent on crypto prices or a centralized third party to be sure you get your money.
Stablecoins: Often Considered the Lowest Risk
Stablecoins, whose objective is to maintain price stability, are usually considered the lowest risk savings option in the cryptoeconomy. And it is pretty low risk since the asset these coins usually try to maintain stability with is the USD. That means that many are removing the risk of currency fluctuations in the price of crypto to earn some interest. To these savers, it’s just a digital dollar they are lending and earning interest on. And that’s okay. Let’s see what rates you can earn on USDT (Tether) in some of these different places.
Spoiler Alert: these rates, on average, will crush the bank savings deposit rates they offer the public.
|Platform||DeFi or CeFi or Other||Interest Rate on USDT|
Click the links for sources for these Interest Rates on these platforms.
Custody of your funds answers the question of who controls your money? In a CeFi platform like BlockFi, you don’t control your money. You custody your funds with them. The same is true for every other CeFi platform. Part of the centralization is that control over the funds. The company also can step in and negate transactions or help enforce a collection. Honestly, that’s what legacy financial institutions do, just available now in the cryptoeconomy.
Some investors in crypto are dead set against custody of their funds with someone else. To them, the true believers, it goes against the ethos of investing in cryptos in the first place. For them, DeFi where you custody your funds and keep them in your wallet while you lend is the only way to go.
While some people care about this deeply, others don’t care at all. It’s up to you to decide if this is important.
The idea of price stability and many times what you can earn in a bank makes these options attractive. That’s especially true for newer investors.
Yet, they are missing out on staking, which can be even safer than stablecoins.
Staking: The Ultimate Insider Position
One reason legacy banks make so much money is that they are in the best position to benefit from changes in the market or new financial products. They are the link between you and the financial markets.
‘You want to use the new financial product X? Great, just pay us 1% and we will let you use that product.’ The bank is the ultimate financial insider. With staking, that’s no longer true.
The bank isn’t the insider. You are.
The bank is not earning a portion of the fee every time someone uses the network. You are.
The bank is not securing the network making it safe to use by holding onto some of its coins. You are.
The bank (or the platform) doesn’t give you the option of non-custody. But you have that choice.
The bank is not making these choices for you. You are.
Instead of buying dollars or a dollar-based stablecoin like USDT, with staking you are buying some of the crypto of your choice and staking it to help the network run.
Opportunities with Staking
Staking your cryptocurrency means you will be:
- Buying a cryptocurrency
- Staking it with a custodial or non-custodial provider
- Earning interest from fees generated on the network
Buying a Cryptocurrency
When you stake you start by buying the crypto of your choice. You want a network that is active and running and generating fees. More transactions equal more fees equal more return on your investment.
Seems simple enough, yet there is wide variation in rates and fees you can earn. On our front page here at Staking Rewards, this is just a snapshot of some of the different rates you can earn. Remember these rates change slightly all the time as investors stake and unstake their crypto.
Asset #1 Cardano pays 6.22% in this snapshot while asset #5 Terra pays 5.4% and asset #3 Polkadot pays 13.21%. The rates vary widely.
One reason rates vary like this is supply and demand. Some chains offer higher rates to attract more funds. Another reason is how much is staked already. Cardano has 69.75% of its eligible tokens staked already. This means that while more staked coins from different parties benefit them for security, they are well taken care of right now. They don’t need your coins as much so they don’t have to offer large rewards for them.
Staking Your Crypto with a Custodial or Non-Custodial Provider
Here you have a decision to make. Like with DeFi or CeFi for lending, you can choose to custody or not custody the crypto that you stake. We can help make this decision easier for you. It’s one of our missions at Staking Rewards. Let’s take a look at how you can decide.
Pick your crypto. In this case, we chose Cosmos (ATOM) from the front page of the website just under the listed staked assets.
And there are two options here: Decentralized or Custodial. Remember custody means control so you are giving up some control if you choose it. Decentralized means you maintain control of your funds while staking by connecting your wallet into their system.
Search the Custodial options. With a Binance account, you can immediately start staking ATOM or many other cryptocurrencies. If you want this option but don’t have a Binance account, then you can go open your account here.
Search the Decentralized options. These options like Figment and Stakezone give you more control. We see with Figment we can earn 9.47%. Another nice benefit of our analysis of providers is that if you find a provider you like then you can see what other cryptos they also stake. Here is Figment’s page on our site.
And there’s good information here too of fees and number of stakers using their platform. Here’s what Stakezone looks like for 10.69%.
The platforms have different offerings from each other and different fees that you want to know in advance. So we’ve found the box listing for ATOM and clicked on it. This is from the ATOM listing.
A validator is the one who validates the transactions in a POS network. When you stake you can run a validator yourself if you have the tech expertise or you can assign/delegate your coins to a validator solely for the purposes of validating transactions and pooling your votes together for governance questions. It sounds confusing but don’t worry. If you pick a provider like Figment or Stakezone, then they are doing the validator work for you. You only have to select if you stake for yourself from your own servers.
On our ATOM listing, down at the bottom, you can see places to delegate your coins for validation and voting that include Binance and Coinbase. Our decentralized options are here too.
Earn Interest from Fees generated on the network
Your interest and your ROI come from fees generated on the network from transactions. Those fees are in the same crypto you are staking. This means you have the option of holding more of that crypto, trading it out for another crypto, or exchanging it out for fiat. The choice is yours with the only possible exception being some cryptos have a lockup period where you can’t move the currency for a few days. That should be clearly outlined and understood before you start staking.
You can see that from these listings there are many blockchain projects that are large and stable but still pay more than 10% for you to stake your coins there. Many would make for good investments but they are not without risk.
Risks with Staking
Staking your coins is a lower risk than many people think at first. But there are risks.
You face two major risks staking:
- The underlying crypto declines in value
- The underlying network becomes less popular
Underlying Crypto declines in value
Your biggest risk with staking is that the underlying crypto declines in value. Crypto is volatile. Some will look at this risk like a dividend-paying stock and say that the underlying asset is less relevant than its continuous payments. That’s partly true. The bigger problem with a decline in the crypto’s value is that you are receiving your rewards (a portion of the fees) in the same crypto that you stake. So they will be worth less too bringing your ROI down. Also, other reasons that cause the underlying crypto to decline could make it a less attractive investment overall. One example of this would be an expensive and long-running lawsuit like XRP has with the SEC in the US.
So you need to watch what your crypto does and not be afraid to move from one project to another if you’ve lost confidence in it as an investment.
Underlying Network becomes less popular
While this risk would tend to get reflected in a declining price (our first risk above), the risk of the underlying network becoming less popular is a separate risk unto itself. This can happen for many reasons including technological obsolescence, losing ground to a competing blockchain, or other reasons.
But the bottom line is this. If the network becomes less popular, then it generates fewer fees. If it generates fewer fees, then they have to pay you less. Transaction volumes and sizes, as well as developer interest in the network, are both good ways to see if the blockchain for your crypto is growing, maintaining, or losing popularity with its users.
Staking combines low risk with many options
With stablecoins, there are only a few, and almost all are tied to the USD. With staking, you combine the low risk of stablecoins with many more choices. Fees that custodial or decentralized platforms charge are transparent giving you a good idea of exactly how much you will earn. You can then decide if you are comfortable with ATOM, or ADA, or ETH, or Kusama and the rates of return that they offer. With this number of choices, it’s easier to find something that fits your level of risk.