Tired of Gambling on Crypto? Here’s How To Make Stable Returns With Staking
To date in 2022, a sell-off in cryptocurrencies has erased more than $700 billion of market value. Bitcoin, the “digital gold” of cryptocurrencies, has dropped from its peak of approximately $70,000 in November 2021 to its present $40,000. For die-hard HODLers, there are a lot of wounded wallets out there.
While some argue that these swings may be the signs of an upcoming bear market, violent price volatility is an old song for cryptocurrencies. In fact, market volatility has long been a main complaint among traditional investors and a key barrier to broader institutional adoption.
Yet, as blockchain technology applications have developed, so too has decentralized finance, or “DeFi,” given rise to a new suite of opportunities to earn income in the cryptosphere — even in the fiercest of bear markets.
Chief among these developments is an innovative way to earn stable yields through passive income called staking. Staking is a rapidly growing segment of the industry, with the top 30 proof-of-stake (“PoS”) tokens reaching a combined market cap of $594 billion — or more than half of the total market cap of all digital tokens.
The comparatively stable returns and minimal complexity have made staking a beloved way to put your crypto to work. In this article, we’ll break down the mechanics behind the staking movement and its potential for earning stable returns.
Ready to learn, Kyokoans? Let’s dive in.
The Basics of Staking
At first glance, you can compare crypto staking with its traditional counterpart: fixed banking deposits. Just as you could lock your hard-earned savings into a bank’s certificate of deposit product to earn interest, so too can you earn stable yields by staking cryptocurrency into a liquidity pool. And, while one of these savings programs exists in a centralized financial system and the other in an online decentralized application, the primary difference ultimately boils down to what is done with the staked funds in order to generate your return.
For traditional certificates of deposit, customers commit a certain amount of money for a set period of time at a bank. The bank can then reliably use this money to invest in other areas, thereby passing on a portion of the yields to the customer at the end of the lock up period. Similarly, tokenholders lock their digital assets into a smart contract on a Proof-of-Stake (“PoS”) network to become validators. Validators, like the name suggests, work to validate transactions on the network in proportion to the amount of staked tokens. While staked tokens cannot be bought or sold, they can return some pretty sweet yields — known as APR.
How Much Can You Earn Through Staking?
Staking rewards can vary greatly from one platform to the next. According to CryptoVantage, while APR’s can reach as high as 20%, legitimate PoS yields typically average around 5%. On top-tier digital asset exchange Coinbase, for example, users can currently stake Ethereum, Cosmos, and Tezos for APRs of 4.5%, 5%, and 4.63%, respectively.
Now, these are the types of returns to expect when participating in PoS staking applications. There are also alternative opportunities to stake coins into other blockchain-based projects, like emerging DAOs, that will typically offer much higher yields in return for significantly higher levels of risk. It is crucial to perform strict due diligence before committing tokens to these projects.
How to Make Stable Returns With Staking?
Choosing a Suitable PoS Network
The first step on the journey to earn passive income through crypto staking begins with selecting a suitable proof-of-stake blockchain application. As mentioned above, it is always important to conduct due diligence before staking tokens, and a few basic questions to first consider are:
- Has the platform been audited? What type of reputation does it have?
- Is the platform secure? Has it been hacked before? What sort of verifiable security systems does it have in place?
- Is the development team reliable? Do they have verifiable previous exposure to the industry? Do they have reputable backers?
Next, it’s important to consider the underlying volatility of the digital asset that you’re earning. It doesn’t make sense to bear the risk of staking tokens while wild price swings in your staked or earned tokens could outweigh out any potential returns. How have both tokens performed historically? Is there significant enough trading depth that you’ll be able to exchange for other tokens without dropping token prices?
Third, consider the key features of the project and what long-term solutions it brings to the cryptosphere. Blockchain projects with real-world application have more staying power and offer more stability for long-term profitable staking pools.
Identifying Your Top Staking Options
Not all staking mechanisms are equal. Different blockchains employ different processes for safeguarding staked tokens. Technologies are developing quickly, but the typical options currently include:
- Private Wallet: Users are required to keep staked coins within one single private wallet address throughout the entire duration of the staking period, otherwise a transfer will break the terms of the staking contract and cause the user to forfeit their rewards.
- Cold Staking: Users may be given the choice or requirement to store staked tokens in an offline “cold storage” wallet. While this is typically the most secure storage method for crypto assets, it requires higher levels of understanding of various storage techniques and requires upfront investment into the proper hardware.
- Staking-as-a-Service: There are specialized individuals and platforms that offer to manage staking operations for a fee — usually as measured by a percentage of staking profits or yields. Many offer sophisticated programs that aggregate various staking opportunities across the industry and automatically allocate funds towards the highest performing options, thereby outperforming what average investors could earn on their own. Importantly, transferring ownership of crypto assets to a third party platform like an exchange does expose you to more risk; though, if you use staking options on major exchanges like Coinbase or Binance, this risk is likely minimal.
Satisfying Staking Requirements
Finally, while most PoS blockchains and staking-as-a-service platforms do not have minimum staking requirements, there are some projects that do. For example, in order to stake with the Polkadot network, would-be stakers must stake at least 120 DOT, Polkadot’s native token, or ~$2,650 at current market prices as of publication. Likewise, some networks also place limits on the number of active validators that can support the network at once. Following the same example, Polkadot allows a maximum of 22,500 active network validators at any given time.
After you’ve ensured that you can satisfy the minimum staking requirements of your preferred blockchain, fund your crypto wallet with the desired amount of tokens. Lastly, navigate to the staking platform’s website and follow the instructions to connect your wallet and stake. And voilà! Just like that, you’re on your way to earning stable returns with staking!
Pretty straightforward, no? Now that we’ve walked you through the essentials of staking, let’s take a step back to consider the risks.
What Are the Risks of Staking?
While staking can provide relatively stable returns, it still carries risk. There are three major factors to consider: market volatility, token liquidity, and lockup periods.
Staking helps to offset the volatile nature of crypto markets. When the price of your favorite token drops, for example, staking returns can help negate some of those losses. By contrast, they can also compound gains on top of price growth. However, market volatility is still a challenge for many HODLERs and stakers could still see net losses.
For example, let’s say that Tom stakes 1 ETH at a hypothetical price of $1,000 per ETH, and locks in staking rewards at 5% APR. At the end of the year, Tom will expect to receive a total of 1.05 ETH for a net value of $1,050 at current pricing. However, should the price of ETH drop to $900 by the end of the year, Tom’s holdings of 1.05 ETH would be worth $945 dollars — or $55 less than his original 1 ETH at $1,000. Keep in mind that, if Tom had not staked his 1 ETH at the beginning of the year, his losses would be even greater at $100.
Liquidity refers to how easily an asset can be exchanged for another asset. Many altcoins suffer from liquidity issues that make it very difficult — or expensive — to exchange them into more other tokens or fiat currency. This is a typical problem for tokens that have low trading volumes on exchanges.
The price of a token is determined by supply and demand. If there are more traders placing orders to buy rather than sell a token, the token’s price will increase, and vice versa. In addition, the market price of a token is simply the latest strike price at which a buyer and a seller agree to exchange.
This is why it’s not only important to analyze the price growth potential of a token, but also the trading volume that’s being transacted on an exchange. For example, a small altcoin could have realized 1,000% price growth over the past 24 hours. However, if it only has $50 of demand at the current price and you want to exchange $100 of token, you’ll either need to sell the unfilled $50 at a steep discount — thereby forfeiting the gains you made from staking — or risk simply being stuck with $50 of unsaleable token.
So, keep in mind that high APRs of illiquid tokens may look attractive on paper, but if you’re unable to cash out, you’ll never realize these gains. To avoid this issue, only stake liquid assets with high trading volumes on reputable exchanges to reduce liquidity risks.
Many PoS networks will have requirements regarding how long a token must be staked in order to participate in staking. For example, as Ethereum looks to launch Ethereum 2.0, tokenholders can stake ETH to secure the network. However, this opportunity comes at a steep cost — tokens must be locked into Ethereum 2.0 until the official blockchain launch, which is still uncertain as of February 2022.
In many cases, lockup periods cannot be avoided. In the case of major projects, like ETH 2.0, the risk of the longer lockup period is minimal; however, always be sure to only stake tokens that are not required for daily living expenses or can be lost.
Is Staking Worth It?
Knowledge and due diligence are crucial to maximizing your earnings potential when staking cryptocurrencies. The more information you uncover, the deeper insights you’ll discern into the risk-reward trade off of various staking options and opportunities to earn serious passive income.
With the expansion of Web3.0, new blockchain projects are entering the foray. With more competitors in the arena, there will be more opportunities to stake and earn — after all, this is the beauty of staking. While it may not fully safeguard against market volatility, it still offers an opportunity to diversify income while contributing to the stability of innovative blockchain projects. So, we at Kyoko loudly declare: “STAKE ON!”
Kyoko.Finance will open its staking pools following its public IDO in Q1 2022. Follow Kyoko below to stay up-to-date on the latest announcements and releases!
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