If you’ve been in the crypto world for any amount of time, you’ve probably heard of cryptocurrency staking. And if you’re like many, there may be questions. Basically, crypto staking is a way to passively earn incentives, usually in the form of more crypto, by temporarily leaving (holding) your crypto in your wallet/exchange instead of making a quick sell or trade. Your crypto is used by someone else for a short period of time to earn interest for you and anyone else in the group of people also staking in the same pool.

Sounds easy? Well, maybe, but there are a few points to consider before choosing crypto staking as your next investment strategy. Before you start, we’ll explain how profiting from crypto staking works and more so you can make the right investment decision for you.

How crypto staking pools relate to the blockchain

You probably already know that blockchain is like an infinitely growing database in the cloud; a peer-to-peer network that’s recording data transactions, and implementing high level cryptography to protect it from hacking. Cryptocurrencies like Bitcoin, Ethereum, and others are built upon blockchain-based platforms. Because blockchain is decentralized finance (DeFi), instead of going through one central authorizer (like a bank or broker) blockchain (and crypto) depends on millions of computers (called nodes)—and their owners, all over the world to do the heavy lifting of verifying transactions and other blockchain-related work.

Blocks on the crypto blockchain are verified using a system called a consensus mechanism: a way to confirm the majority of those millions of computers on the network “agree” that a transaction is “verified” correctly and the job is complete. Once this is done the blockchain can move to the next transaction or block. The businesses or individuals running these computer nodes are called validators. In addition to expert level blockchain knowledge and access to a powerful computing system, they also need to own a minimum amount of cryptocurrency based on the blockchain they’re working with to be certified as a validator

So, since transactions on the blockchain are computed on millions of computer nodes, each run by different validators, how can the system confirm everything is correct with each block?

For crypto, that is done through the consensus mechanism.

The consensus mechanism system

There are currently two systems in place that dictate how blockchain-related platforms, like crypto work.

• Proof of work (PoW)
• Proof of stake (PoS)

Some cryptocurrencies, like Bitcoin, use the PoW consensus method. Currencies using proof of work don’t offer crypto staking as investment option.

But among those using proof of stake, like Ethereum, staking may be an option. So proof of stake is the method we’ll be talking about.

More about proof of stake

Briefly, the proof of stake consensus mechanism is what makes staking pools viable. As said before, the mechanism is how blockchains decide when to move to the next transaction. It’s also used by staking pools to decide which validators win the right to process each transaction.

You see, those millions of validators (and their computers) aren’t working for free. Each validator earns extra crypto each time their computer is used for a blockchain computation. There is an algorithm used to determine which validator and computer are used to verify each one of the endless blocks on the crypto blockchain.

This is where the staking pool comes in.

What is a crypto staking pool

So, at some point, some validators choose to up the ante and create their own staking pools, to generate more crypto for themselves. When they do this, these validators are also referred to as staking pool operators. Validators who are also staking pool operators usually add a portion of their personal crypto to the pool to get it started, and gain trust from other potential members. Once their staking pool is approved and active, other individuals can join their staking pool(s), which they can usually find listed in their crypto wallet or exchange.

Staking pools are made of many different participants, each who has independently joined the pool in hopes their shared assets will be used by the validator/staking pool operator to successfully earn more on the crypto’s blockchain, which will then be shared with them.

How does crypto staking help members to earn more

Crypto blockchains using the proof of stake consensus usually select the validators with the most crypto in their account to perform transactions.

One lone validator may get to verify only a few transactions.

But when a group of crypto holders temporarily “delegate” their stake (merge) with that of the validator/staking pool operator through the staking pool, that validator is more likely to be selected for more transactions. The more crypto invested in the pool, the more crypto the staking pool and its operator earns.

How staking pools earn passive income for crypto holders

Staking crypto can be compared to putting traditional money in a savings account or an interest-bearing fund. If you decide to “stake” as an investment, it means you’ve entered into an agreement with a staking pool, agreeing to leave a set minimum of tokens in your account to be used by them temporarily for profit.

Interest or profits you’ll receive is earned, not from shares of a stock or fund, but because you’ve given the staking pool the temporary permission to use (delegated) some of your crypto. This is used to help the validator/staking pool operator get more blockchain transactions and earn more crypto. The rewards are then shared with you and the rest of the pool.

Delegating means earning while keeping crypto in your account

Earlier, we said that even though your crypto is used, it never actually leaves your wallet or exchange account.

So, why are you being rewarded with passive income for basically letting your crypto sit?

Though your funds never leave your account, when you delegate them to a staking pool, you’ve pledged their use. In the case of staking, this means your assets are added temporarily to the staking pool’s total (along with other member funds.) Because validators with the most crypto in their accounts are more likely to win transactions, the totals from running staking pools make it easier for staking pool operators/validators to meet the algorithm’s financial requirements, and more likely to be chosen.

Why the algorithm is set up this way

The algorithm was designed to select larger financial investments from validators in part because those with more stake in the game, are more likely to be stable and dependable. They’ll be less likely to mess up transactions since they’ll lose their assets if it’s wrong. Also, staking encourages cryptocurrency buyers to hold on to their assets a little longer, again adding to the stability of the crypto’s wallet or exchange.

How rewards are calculated from staking, briefly

Each staking pool is different, but in general, after a pre-determined amount of time (usually a few days or weeks, sometimes more) a percent of the profits or interest goes into the pool to be divvied up. The interest is usually deposited back into your crypto account as it’s earned, again the way a bank rewards users for deposited funds. With crypto, you’ll usually receive a rate of return that is much higher than you’ll see from most traditional banking accounts and other investments.

Usually, you can invest in multiple staking pools through your wallet or exchange. You also can un-stake or re-stake your staking pools, after a certain amount of time has passed. By doing this, if you don’t like the return you received on your investment and want to try something else, or just want to stop staking altogether, you can do so after the staking pool’s hold period has passed.

Two other ways to make money from crypto staking

1. If you’re tech savvy, you can start your own staking pool

If you already have some experience with validating and working on the blockchain, you could always start your own staking pool. A staking pool can be run by anyone with enough knowledge and computing power to ensure transactions are legitimate and done correctly. However, most investors choose to join a staking pool run by someone else.

2. Liquid staking, best of both worlds (for some)

Some cryptocurrencies may offer soft staking or liquid staking. Liquid staking lets stakers access their assets during the stake period. The funds stay in escrow until the lock up period is over, but are still available in a “tokenized” version provided by the pool. You can sell and use these tokens the same way you’d use your actual crypto.

Liquid staking is touted by some as a better option for individuals looking to start investing. Not only can you use your assets, but because you can trade or sell, even while the staking period is ongoing, it may be a good option for avoiding losses in the volatile crypto market.

FYI: Not all exchanges offer liquid crypto, so research is required. However, crypto.com is one that does offer it, currently.

Some other benefits of crypto staking

Staking helps your crypto’s stability and the blockchain

As we said, your stake is used to help the staking pool operator win more transactions, helping to ensure blockchain transactions are correctly validated. But it does more than that. By keeping your crypto in your account a little longer, you’re helping keep the blockchain stable. And less volatility means better returns for everyone.

According to one article, there are other benefits to staking. Here’s a few, taken from the MSN/Business Insider article.

• Staking is better for the environment than crypto mining
• As a staker, you’ll get voting rights in your crypto’s blockchain network, like a stock owner
• It’s passive income. You set it up, then forget it, letting it grow

Those with less can do more by pool staking

Finally, staking is also a way for those with smaller crypto amounts to invest more with less. By pooling their assets with others in the pool, they can grow their crypto accounts faster.

A few caveats regarding crypto staking

Don’t forget, staking pools lock-in investments

Again, crypto staking locks up your stake for a set period (vesting.) Depending on the pool you select, your crypto may be locked for days, weeks or even months. If it’s a short amount of time this may not matter. However, if your crypto investment is affected by market changes during this period, remember you’re prevented from selling or trading until the lock up period is over, meaning you may lose a portion of the investment. If you can’t afford to not have access to your account for short periods of time, you may want to consider liquid staking instead or other investments.

There will be fees

As with many things associated with the blockchain, there will be fees associated with your investment. Usually, these are taken from the earnings awarded to you.

Earnings may vary

There is no guarantee the pool you select will earn anything of value. You may have to try several staking pools before finding the right one.

Watch out for oversaturated staking pools

Remember, the earnings are split among all members of the pool. If a pool is too popular, or oversaturated, that means it has more members than optimal for maximum earnings. If there are too many members, that means any earnings must be split among more people. To make sure you maximize your investment, try to find pools with lower saturation rates. Pool saturation info is usually included in the pool’s stats, along with performance and other figures.

Only some crypto currencies allow staking

Not all cryptocurrencies offer staking. As we said before, only those that use proof of stake or PoS do. So that means Bitcoin and others are a no go for staking, meanwhile Ethereum does. Rules and regulations of some crypto change often. So, if a crypto is having problems of any type, it may temporarily or permanently pause its staking programs.

Below is a list of cryptocurrencies that offer staking as an investment option.

*Please, note this is not a recommendation of any cryptocurrencies. As always do your research before entering any investments.

According to a May 2022, Motley Fool crypto investment article, cryptocurrencies currently offering staking include:

• Ethereum
• Cardano
• Polkadot
• Solana

Now it’s your turn

That’s it for our guide on profiting from crypto staking. There’s never been a better time than today to profit from crypto staking. Though it has challenges, the possibility for high rewards means crypto staking will continue to attract many.