Many cryptocurrencies use a Proof of Stake model to determine which transactions are valid to add to a blockchain’s ledger. This model also uses far less computational power and energy than Proof of Work. With Proof of Stake, validators add a stake into the network (like a security deposit) and check if all of the transactions are valid. If everything checks out, the block is added to the chain. As a reward, the validator receives the fees associated with each transaction.
Earning passive income through staking
If you don’t have the knowledge or set up to become a validator, people can earn passive income by simply contributing their cryptocurrencies in a staking pool and earning rewards in the form of free coins. By staking your coins, you are called a delegator. You earn by getting a percentage of the coins you contribute, not the fiat value. The coins can be cashed out for fiat anytime once the rewards are added to your wallet.
First, let’s use an example with money. The amount of interest you earn per year depends on the annual percentage yield, or APY. So if the APY is 5%, this means if you put $1000 in an investment, you would have $1,050 by the end of the year. If the APY was 10%, then you would have $1,100 by the end of the year.
With crypto, your rewards are in coins rather than fiat value. So for example, if a coin gives 10% APY and you staked 1000 coins, after a year you would get 105 free coins as a reward for a total of 1105 coins. And the value of those coins can go up or down over time.
Let’s say at the beginning of the year, if you got 1000 coins at $1.00 per coin, then the assets will be worth $1000. If at the end of the year, the price goes up to $3.00 per coin, the 1,105 coins would be worth $3315.
How often delegators get paid depends on the cryptocurrency. Some cryptocurrencies pay daily, while others pay every 5 days or every few weeks.
Here are some examples of how many coins you would earn depending on how long you staked them for.
|# of coins||Number of days staked||# of coins earned||Total number of coins at time of redemption|
1000 coins at 20% APY
So of course the longer you stake your coins, then the more free coins you will earn. So people who are investing in cryptocurrencies long term benefit from staking because if they’re going to just be waiting for the value to go up, then they can be earning more passive income and more coins.
How to stake cryptocurrencies
People can stake cryptocurrencies directly on exchanges through a cryptocurrency wallet directly.
On Binance, you can stake many cryptocurrencies on the platform for 30, 60, and 90 day periods to earn rewards that get deposited directly on your Binance wallet.
You can also stake directly on a coin’s official wallet. Cardano has a wallet called Yoroi, which is a browser extension and people can stake and earn rewards within the wallet. So in this example, this person holds 20461 Cardano units. For staking all of these units, she has cumulatively received 588 free Cardano coins just for staking over the course of 10 months. Cardano deposits the rewards every 5 days.
So if the Cardano price was $3.00 per unit, she would have earned $1,764 in staking rewards for doing nothing and simply staking. If the price was $5.00, then she would have earned $2,940.
You may be wondering why cryptocurrencies provide rewards. By staking your cryptocurrencies, you are helping secure the network by locking up the tokens as transactions get verified on the blockchain. In return, cryptocurrencies reward delegators in the form of tokens.