What are staking rewards?
Your questions answered
As we've discussed throughout the AlterCap Knowledge Base, cryptocurrency offers many advantages over fiat currencies. One of the most exciting of these is the ability to generate consistent, barrier-free, passive income through staking.
In the traditional economy, the only people who can really 'put their money to work' are the elite. Financial institutions control capital markets, and ultimately bar retail investors from accessing the most profitable opportunities. The passive income generation products that are available to regular people, such as cash deposits and fixed-income funds, offer low returns and unfair restrictions, including multi-year withdrawal locks and sky-high penalty fees.
Equally accessible to retail investors, high-net-worth individuals, and to institutions, staking is a better alternative for passive income generation. Benefits of this emerging financial tool include APYs as high as 20%, self-custody, and 24/7 access to assets. Today, we would like to answer just a few of the questions we often hear about this new, exciting, opportunity.
Our team of cryptocurrency experts specialise in helping new crypto investors create and execute digital asset investment strategies that work. Contact us to find out more.
In the traditional economy, the only people who can really 'put their money to work' are the elite. Financial institutions control capital markets, and ultimately bar retail investors from accessing the most profitable opportunities. The passive income generation products that are available to regular people, such as cash deposits and fixed-income funds, offer low returns and unfair restrictions, including multi-year withdrawal locks and sky-high penalty fees.
Equally accessible to retail investors, high-net-worth individuals, and to institutions, staking is a better alternative for passive income generation. Benefits of this emerging financial tool include APYs as high as 20%, self-custody, and 24/7 access to assets. Today, we would like to answer just a few of the questions we often hear about this new, exciting, opportunity.
What exactly is staking?
Mostly simply defined, staking is a means by which cryptocurrency users can "put up" their coins on a blockchain network in order to participate in the mechanism that helps to validate transactions. Participants in this system earn the right to newly minted coins, as well as to coins collected as transaction fees by the network.
Staking is a kind of mining - an essential part of proof of stake' protocols - where the network is protected from attacks by requiring participants (in PoS called validators) to lock their coins in a so-called "staking wallet." If a validator is proven to be dishonest, they lose their stake.
Many consider staking to be far more democratic and accessible for regular users than the proof-of-work mining of many blockchains (including Bitcoin). PoS, unlike PoW, does not require the purchase of any expensive equipment, nor does it involve the consumption of excessive energy resources.
Staking is a kind of mining - an essential part of proof of stake' protocols - where the network is protected from attacks by requiring participants (in PoS called validators) to lock their coins in a so-called "staking wallet." If a validator is proven to be dishonest, they lose their stake.
Many consider staking to be far more democratic and accessible for regular users than the proof-of-work mining of many blockchains (including Bitcoin). PoS, unlike PoW, does not require the purchase of any expensive equipment, nor does it involve the consumption of excessive energy resources.
How is staking better than a CD?
A cash deposit is a sum of money that you pay into an account at a bank. When you open a CD, your bank takes on the liability for your money in exchange for the right to use that cash to provide financial services — including credit products — to other clients.
In order to attract deposits, banks pay out interest to account holders. To encourage these clients to keep their money in their accounts, banks reward longer CD terms with higher rates. Unfortunately, however, today's ultra-low central bank interest rates and the current high availability of cash - among other economic factors - mean CD rates tend to be extremely low.
According to NerdWallet, the average rate in the US for a one-year deposit is only 0.14%. Five-year deposits provide an average APY of only 0.27%. High-yield accounts rarely provide rates anywhere near 1%, and no CD product comes close to meeting inflation rates.
While we are still in the early days of staking reward payouts, we already see depositors of Ethereum receiving upwards of 6% per year. Newer PoS networks like Cardano pay out around 3-4%. The most exciting opportunities for staking may be stablecoins, with interest rates for USDC and USDT deposits ranging from 12-15%.
In order to attract deposits, banks pay out interest to account holders. To encourage these clients to keep their money in their accounts, banks reward longer CD terms with higher rates. Unfortunately, however, today's ultra-low central bank interest rates and the current high availability of cash - among other economic factors - mean CD rates tend to be extremely low.
According to NerdWallet, the average rate in the US for a one-year deposit is only 0.14%. Five-year deposits provide an average APY of only 0.27%. High-yield accounts rarely provide rates anywhere near 1%, and no CD product comes close to meeting inflation rates.
While we are still in the early days of staking reward payouts, we already see depositors of Ethereum receiving upwards of 6% per year. Newer PoS networks like Cardano pay out around 3-4%. The most exciting opportunities for staking may be stablecoins, with interest rates for USDC and USDT deposits ranging from 12-15%.
Is staking the same as HODL?
If you have spent any time at all consuming crypto media, you have likely heard the term "HODL" thrown around a time or two. Now an acronym for "hold on for dear life," the HODL phenomenon came into existence as a misspelling of the word "hold." The term is usually used to refer to the philosophy of crypto investment where digital assets are bought and held (or not sold) for an extended period of time.
Since there is no obligation for PoS validators to hold onto coins indefinitely, staking is not, strictly speaking, the same thing as HODLing. That said, staking may be a very wise strategy for HODLers to pursue, as it allows for significant passive gains with time, including compound interest. To some, this approach may resemble certain dividend and value investing strategies, quite popular in traditional finance.
Since there is no obligation for PoS validators to hold onto coins indefinitely, staking is not, strictly speaking, the same thing as HODLing. That said, staking may be a very wise strategy for HODLers to pursue, as it allows for significant passive gains with time, including compound interest. To some, this approach may resemble certain dividend and value investing strategies, quite popular in traditional finance.
What are some popular staking coins and tokens?
As of October 2021, staking remains an emerging financial service. We can only guess which coins and tokens will prove themselves to be the most popular in the long-term. Regardless, here are three PoS blockchains and staking coins — listed in no particular order — that are currently getting a lot of attention.
Cardano (ADA) | Cardano is, as of the time of writing, the largest fully proof-of-stake blockchain network in terms of market cap. Competitive advantages for ADA include an academic approach to development and a large, dedicated, community. Typical APY for Cardano staking is in the 4-6% range.
Polkadot (DOT) | Polkadot is a decentralized network that aims for blockchain interoperability. In other words, DOT may eventually become a tool that enables users to carry out cross-network data and money transfers. DOT has proven itself to be one of the most profitable staking opportunities for crypto investors, with yields hovering around 12%.
Ethereum 2.0 (ETH) | While the Ethereum blockchain is still not expected to shift to PoS until at least 2022, it is already possible to begin staking tokens there. Yearly rewards are in the 5-7% range.
Cardano (ADA) | Cardano is, as of the time of writing, the largest fully proof-of-stake blockchain network in terms of market cap. Competitive advantages for ADA include an academic approach to development and a large, dedicated, community. Typical APY for Cardano staking is in the 4-6% range.
Polkadot (DOT) | Polkadot is a decentralized network that aims for blockchain interoperability. In other words, DOT may eventually become a tool that enables users to carry out cross-network data and money transfers. DOT has proven itself to be one of the most profitable staking opportunities for crypto investors, with yields hovering around 12%.
Ethereum 2.0 (ETH) | While the Ethereum blockchain is still not expected to shift to PoS until at least 2022, it is already possible to begin staking tokens there. Yearly rewards are in the 5-7% range.
How do I get started with staking?
The way that you should begin staking largely depends on the size of your portfolio: In order to stake independently (without using a 3rd party service), you may be required to hold a certain number of coins or tokens. For example, validators on the Ethereum network are required to hold 32 ETH, a sum which at the time of writing is valued at nearly 70 thousand dollars.
If you do have enough funds to stake on your own, you will need to hold the coins you intend to stake in a special 'staking' wallet. There may be other technical requirements and complexities involved and you need to be sure to set up an effective and secure crypto custody strategy. Feel free to contact us if you require any assistance during this process.
Plenty of third-party services exist that enable investors with smaller portfolios to earn through staking. Run by popular exchanges (including Kraken or Binance), and specialized providers (i.e. Staked and Stake Capital), these services enable users to begin staking — and to withdraw rewards — with just a few clicks. They do this by pooling client funds in aggregated staking wallets.
If you do have enough funds to stake on your own, you will need to hold the coins you intend to stake in a special 'staking' wallet. There may be other technical requirements and complexities involved and you need to be sure to set up an effective and secure crypto custody strategy. Feel free to contact us if you require any assistance during this process.
Plenty of third-party services exist that enable investors with smaller portfolios to earn through staking. Run by popular exchanges (including Kraken or Binance), and specialized providers (i.e. Staked and Stake Capital), these services enable users to begin staking — and to withdraw rewards — with just a few clicks. They do this by pooling client funds in aggregated staking wallets.
Can I withdraw staked crypto whenever I want?
The short answer is 'yes.' Unlike cash deposits and other traditional financial instruments, staked coins and tokens remain at all times under the control of the investor. In an operating PoS blockchain, staked crypto and staking rewards can always be withdrawn.
An interesting exception at the current moment is Ethereum. While it is already possible to deposit tokens and become a validator on the Ethereum blockchain, the actual PoS version of the network, Ethereum 2.0, has yet to be released. Deposited tokens will be locked until the network begins to function.
An interesting exception at the current moment is Ethereum. While it is already possible to deposit tokens and become a validator on the Ethereum blockchain, the actual PoS version of the network, Ethereum 2.0, has yet to be released. Deposited tokens will be locked until the network begins to function.
Can companies stake?
With good accounting and well-thought-out custody policy, there exist zero barriers keeping companies from participating in PoS blockchain networks as validators. Companies should consult with experienced crypto-finance advisors (such as the team at AlterCap) in order to develop fully secure and compliant investment strategies.
How does staking work for HNWI?
Many high-net-worth individuals have already started implementing cryptocurrency staking as a part of their long-term investment and inflation hedging strategies. Staking is a safe means by which to secure reliable passive income, and the size of the portfolio makes no difference in terms of its accessibility.
One thing that may differ between the experiences of HNW individuals and retail investors is the ability to stake directly on the network. Major PoS blockchains, including Ethereum 2.0, require a rather large token deposit in order for a user to become a validator. HNWI can likely meet these requirements with relative ease.
One thing that may differ between the experiences of HNW individuals and retail investors is the ability to stake directly on the network. Major PoS blockchains, including Ethereum 2.0, require a rather large token deposit in order for a user to become a validator. HNWI can likely meet these requirements with relative ease.
Is staking safe?
Participation in proof-of-stake protocols as a validator is, like other blockchain technologies, perfectly safe so long as you take good care to follow the principles of safe crypto custody. Blockchain networks themselves cannot be hacked, and your staked coins will at all times remain exactly as safe as the private key to your staking wallet.
We have already discussed in detail the advantages and disadvantages of various kinds of wallets elsewhere on the knowledge base. Regardless of the custody solution you choose, we recommend that you store your backup keys in a secure location, such as in a bank vault or using a specialised provider.
We have already discussed in detail the advantages and disadvantages of various kinds of wallets elsewhere on the knowledge base. Regardless of the custody solution you choose, we recommend that you store your backup keys in a secure location, such as in a bank vault or using a specialised provider.
Is staking the same thing as DeFi?
Decentralized Finance (DeFi) can be best defined as a movement to replace centralized aspects of finance with safer and more efficient decentralized alternatives. In both theory and in practice, blockchain technology has proven itself extremely effective at powering these alternative financial instruments.
Staking is just one part of DeFi, providing a set of tools that aid in the passive generation of income. More fundamentally, staking is, in its role within PoS protocols, a more energy-efficient and cost-effective way to carry out the decentralised verification of transactions.
Staking is just one part of DeFi, providing a set of tools that aid in the passive generation of income. More fundamentally, staking is, in its role within PoS protocols, a more energy-efficient and cost-effective way to carry out the decentralised verification of transactions.
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Our team of cryptocurrency experts specialise in helping new crypto investors create and execute digital asset investment strategies that work. Contact us to find out more.