What is Crypto Staking? Comprehensive Guide on Crypto Staking
Crypto staking is well worth considering if you are looking to earn interest on your tokens while you HODL.
All you need to do is choose a suitable staking platform that offers competitive APYs and favorable lock-up terms that align with your investment goals.
In this beginner’s guide, we explain everything there is to know about crypto staking.
- 1 What is Crypto Staking – Quick Overview
- 2 How Does Crypto Staking Work?
- 3 Calculating Crypto Staking Rewards
- 4 Is Crypto Staking Safe? The Risks of Crypto Staking
- 5 Choosing the Best Crypto Staking Platform
- 6 Start Crypto Staking Today on DeFi Swap – Step-by-Step Walkthrough
- 7 Crypto Staking Guide: Conclusion
- 8 FAQs
What is Crypto Staking – Quick Overview
For a quick overview of what crypto staking is – check out the key points outlined below:
- Crypto staking requires you to deposit your tokens into a blockchain network or third-party platform
- In doing so, you will be paid a rate of interest for as long as the tokens are staked
- The interest is either paid for via network fees, liquidity provision, or loans
- Some platforms offer a variety of staking terms with a lock-up that can range from 0 to 365 days
- Once your chosen term has concluded, you will receive your staking rewards alongside your original deposit
While crypto staking offers a simple way to generate a competitive yield on your idle tokens – it is important to understand how this DeFi tool works before proceeding.
How Does Crypto Staking Work?
It is wise to have a firm grasp of how crypto staking works before you proceed.
And for this reason, this section will explain the ins and outs of crypto staking in terms of the fundamentals, potential yields, risks, and more.
PoS Coins and Networks
In its original form, crypto staking was a process utilized exclusively by proof-of-stake (PoS) blockchain networks. The main concept is by depositing and locking your tokens into a PoS network, you will be helping the blockchain confirm transactions in a decentralized manner.
- In turn, for as long as your tokens are locked, you will earn interest in the form of staking rewards.
- These rewards are subsequently paid in the same crypto asset that is being staked.
- That is to say, if you were to stake tokens on the Cardano blockchain, your rewards would be distributed in ADA.
On the one hand, it could be argued that the risks of staking tokens directly onto a PoS blockchain are somewhat lower when compared to that of a third-party platform.
After all, you are not dealing with a provider outside of the respective network. However, the yields on offer when staking via a PoS blockchain are somewhat uninspiring.
As such, we would argue that crypto staking is best-performed via a specialized, decentralized exchange like DeFi Swap.
Staking platforms are simply exchanges and third-party providers that allow you to engage in crypto staking outside of a blockchain network. This means that your interest payments will not come from the process of indirectly validating transactions.
Instead, when you deposit tokens into a decentralized exchange like DeFi Swap, the funds are put to much better use. For instance, the tokens might be used to fund crypto loans or provide liquidity for Automated Market Maker pools.
Either way, the yields on offer are oftentimes significantly higher when using a third-party platform. As a prime example, when you stake DeFi Coin on the DeFi Swap exchange, you can earn an APY of up to 75%.
As we cover in more detail shortly, DeFi Swap is a decentralized exchange that is backed by immutable smart contracts. This means that your capital is always safe. On the contrary, many staking platforms in this industry are centralized and thus – can be risky – especially if the provider is hacked.
The next thing to understand when learning about crypto staking is that you will often be presented with a variety of lock-up terms. This refers to the length of time that you will need to have your tokens locked up.
This can be compared to a traditional savings account that comes with fixed terms. For instance, a bank might offer an APY of 4% on the proviso that you cannot make a withdrawal for two years.
- In the case of staking, lock-up terms can vary depending on the provider and respective token.
- At DeFi Swap, you can typically choose from four terms – 30, 90, 180, or 360 days.
- Most importantly, the longer the term, the higher the APY.
You might also come across platforms that offer flexible staking terms. These are plans that give you the opportunity to withdraw your tokens at any time without facing a financial penalty.
However, DeFi Swap does not offer flexible terms because the platform seeks to reward long-term holders. Furthermore, having a lock-up period in place ensures that the respective token continues to operate in smooth market conditions.
After all, one of the biggest mistakes that Terra UST made – which has since lost its peg to the US dollar, was that it offered huge interest rates on flexible terms. And, when market sentiment turned sour, mass withdrawals subsequently led to the destruction of the project.
When you get into crypto staking for the first time, you will invariably come across the term APY. This simply refers to the annual percentage yield of the respective staking agreement.
For instance, let’s suppose that you take full advantage of the 75% APY available on DeFi Swap when staking DeFi Coin. This means that for staking 2,000 DeFi Coin for a period of one year, you will receive rewards of 1,500 tokens.
We offer some handy examples of how much you can make from crypto staking later. With that said, we should note the APY is based on a period of one year – meaning that the effective rate will be lower for shorter terms.
For example, if you stake crypto tokens at an APY 50% for six months, then you are essentially earning 25%.
It is also important to understand how your crypto staking rewards will be paid. As we briefly mentioned earlier, your rewards will be distributed in the same token that you stake.
For instance, if you stake 10 BNB at an APY of 10% for one year, you will receive:
- Your original 10 BNB
- 1 BNB in staking rewards
- Thus – you receive a total of 11 BNB
It goes without saying that while you are staking crypto, the market value of the tokens will rise and fall. As we explain in more detail shortly, this needs to be taken into account when calculating your staking profits.
After all, if the value of the token drops by a higher percentage than the APY being earned, you are effectively losing money.
Calculating Crypto Staking Rewards
To fully comprehend how crypto staking works, you will need to understand how to calculate your potential rewards.
In this section, we offer a real-world example to help clear the mist.
- Let’s say that you are looking to stake Cosmos (ATOM)
- You opt for a lock-up period of six months at an APY of 40%
- In total, you deposit 5,000 ATOM
At the time that you deposit your 5,000 ATOM into the staking agreement, the digital asset has a market price of $10. This means that your total investment amounts to $50,000.
- Once the six month staking period has passed, you receive your original 5,000 ATOM
- You also receive 1,000 ATOM in staking rewards
- This is because, at an APY of 40%, the reward amounts to 2,000 ATOM. However, you only staked for six months, so we need to divide the rewards in half.
- Nonetheless, your new total balance is 6,000 ATOM
Six months have passed since you staked ATOM. The digital asset is now worth $15 per token. As such, we need to take this price increase into account.
- You have 6,000 ATOM
- Each ATOM is worth $15 – so that’s a total balance of $90,000
- Your original investment amounted to 5,000 ATOM when the token was worth $10 – so that’s $50,000
As per the above example, you made a total profit of $40,000. This is for two key reasons. First, you increased your ATOM balance by an additional 1,000 tokens by engaging in staking for six months. Second, the value of ATOM increases from $10 to $15 – or 50%.
Once again, don’t forget that the value of the token can also decrease. If this happens, you might be running at a financial loss.
Is Crypto Staking Safe? The Risks of Crypto Staking
With attractive APYs on offer, crypto staking can be lucrative. However, crypto staking is far from risk-free.
As such, before you start your crypto staking journey – be sure to consider the risks discussed below:
The risk that you will be presented with is that of the staking platform itself. Crucially, in order to stake, you will need to deposit your tokens into the platform of your choosing.
The amount of risk associated with the staking platform will largely depend on whether it is centralized or decentralized.
- As noted earlier, DeFi Swap is a decentralized platform – which means that funds are never held or controlled by a third party.
- On the contrary, staking is facilitated by a decentralized smart contract that operates on the blockchain network.
- This means that you are not transferring funds to DeFi Swap itself – as you would at a centralized exchange.
- Instead, the funds are deposited into a smart contract.
- Then, when the staking term has concluded, the smart contract will transfer your funds plus the rewards back into your wallet.
In comparison, centralized staking platforms require you to deposit funds into a wallet that the provider personally controls. This means that if the platform is hacked or engages in malpractice, your funds are at severe risk of loss.
In the example we gave earlier, we mentioned that ATOM was priced at $10 when the staking agreement started and $15 by the time the six-month term has concluded. This is an example of a favorable price movement.
However, cryptocurrencies are both volatile and unpredictable. As such, there is every possibility that the value of the token that you are staking will decline.
- Let’s say that you stake 3 BNB when the token is worth $500
- This takes your total investment to $1,500
- You opt for a 12-month lock-up term that pays an APY of 30%
- After the 12 months have passed, you get your 3 BNB back.
- You also get 0.9 BNB in staking rewards – which is 30% of 3 BNB
- However, BNB is now worth $300
- You have 3.9 BNB in total – so at $300 per token, your total investment is now worth $1,170
As per the above example, you originally invested the equivalent of $1,500. Now that the 12 months have passed, you have more BNB tokens, but your investment is worth just $1,170.
Ultimately, this is because the value of BNB has declined by more than the APY that you generated from staking.
One of the most effective ways to reduce volatility risk when staking is to ensure that you are well diversified. This means that you should avoid putting all of your funds into one staking agreement. Instead, consider staking a wide variety of different tokens.
Another risk to consider when learning how crypto staking works is with respect to the opportunity cost of not being able to cash out.
- For example, let’s suppose that you stake 1,000 Dogecoin on a six-month lock-up term
- This yields an APY of 60%
- At the time of the staking agreement, Dogecoin is worth $1 per token
- Three months into the lock-up period, Dogecoin begins to go on a huge upward trajectory – hitting a price of $45
- You can’t, however, withdraw and sell your tokens to take advantage of this – as your staking agreement still has another three months to pass
- By the time the staking agreement has concluded, Dogecoin is trading at $2
At $1 per token, your Dogecoin was originally worth $1,000 when you deposited funds into the staking pool.
If you were able to sell your Dogecoin at $45, you would be looking at a total value of $45,000. However, by the time your lock-up term had concluded, Dogecoin had already dropped down to $2.
This is why it is important to choose your lock-up term wisely. While shorter terms typically yield a lower APY, you will reduce the opportunity risk in the event that the token begins to increase in value.
Choosing the Best Crypto Staking Platform
One of the most important steps that you will need to take when learning about crypto staking is the platform that you use for this purpose.
The best platforms in this space will offer high yields alongside a secure infrastructure. You will also need to check what lock-up terms apply and whether or not there are any limits in place.
In the sections below, we discuss the most important factors to consider when choosing a suitable staking platform for your needs.
Centralized vs Decentralized
As we noted earlier, there are staking platforms that are centralized, while others are decentralized. To reduce your platform risk as much as practically possible, we would suggest opting for a decentralized exchange.
In doing so, the platform does not hold your tokens. Instead, everything is automated by smart contracts.
By engaging in crypto staking, you are doing so to increase the value of your portfolio in a passive manner. As such, it is important to check what yields are on offer at your chosen platform.
The best platforms in this space offer a variety of lock-up terms so that investors of all requirements are catered for. This is why DeFi Swap offers four options across a 30, 90, 180, or 365-day term.
Some staking sites will advertise a high yield on a specific token, only to then state in their terms and conditions that there are limits in place.
For instance, you might be able to earn 20% on BNB staking deposits – but only on the first 0.1 BNB. The balance will then be paid at a much lower APY.
Another metric to consider when searching for a platform to stake is that of asset diversity. Crucially, it’s best to choose a platform that offers a wide scope of supported tokens.
In doing so, not only can you create a diversified portfolio of staking agreements, but you can switch between pools much easier.
Start Crypto Staking Today on DeFi Swap – Step-by-Step Walkthrough
To conclude this guide on crypto staking, we will now show you the ropes with DeFi Swap.
DeFi Swap is a decentralized exchange that supports a wide range of staking and yield farming pools. Yields are very competitive and there are a variety of terms to choose from.
Step 1: Connect Wallet to DeFi Swap
One of the best things about using a decentralized exchange like DeFi Swap is that there is no requirement to open an account. Instead, it’s just a case of connecting your wallet to the DeFi Swap platform.
In contrast, when you use a centralized staking provider, not only do you need to provide personal information and contact details – but verification documents for the KYC process.
Most people will use MetaMask to connect to DeFi Swap. However, the platform also supports WalletConnect – which will connect with most BSc wallets in this space – including Trust Wallet.
Step 2: Choose Staking Token
Next, head over to the staking department of the DeFi Swap platform. Then, choose the token that you wish to stake.
Step 3: Choose Lock-Up Term
Once you have decided which token to stake, you will then need to select your term.
To recap, at DeFi Swap, you can choose from a:
- 30-day term
- 90-day term
- 180-day term
- 365-day term
The longer the term that you choose, the higher the APY.
Step 4: Confirm and Authorize Staking Term
Once you confirm your chosen term, you will receive a pop-up notification in the wallet that you currently have connected to the DeFi Swap exchange.
For instance, if using the MetaMask browser extension, this will pop up on your desktop device. If using a mobile wallet, the notification will appear via the app.
Either way, you will need to confirm that you authorized DeFi Swap to debit your wallet and subsequently transfer the funds into the staking contract.
Step 5: Enjoy Staking Rewards
Once the Staking agreement is confirmed, you won’t need to do anything else. After your chosen term has concluded, the DeFi Swap smart contract will transfer:
- Your original staking deposit
- Your staking rewards
Crypto Staking Guide: Conclusion
This beginner’s guide has explained how crypto staking works and why it can be beneficial to your long-term investment goals. We have covered key terms surrounding APYs and lock-up terms, as well as the important risks to consider before proceeding.
DeFi Swap offers a staking platform that allows you to start earning interest on your tokens with no requirement to open an account or provide any personal information.
All you need to do is connect your preferred wallet, select a token to stake alongside your chosen term and that’s it – you’re good to go.