Cryptocurrency staking is rapidly growing in popularity among cryptocurrency holders thanks to the accessibility and profitability of the practice. However, investors are often torn between the high yield offered by staking coins, and the security offered by a standard savings account. Here, we shed some light on the whys and hows of cryptocurrency staking compared to traditional savings, helping you choose the passive income option that works for you.
An introduction to Proof of Stake
In order to understand the staking process, you will first need a basic understanding of Proof of Stake (PoS) blockchains.
Proof of Stake is one of the two main ways that a blockchain reaches consensus. Reaching consensus in practical terms means verifies itself. When a transaction is sent to the network, the network nodes verify this transaction to make sure the person has enough tokens or isn’t doing damage to the network. If it is verified, then the transaction is added to the blockchain and cannot be altered.
Proof of Stake (PoS) has emerged as a popular alternative to the original Proof of Work consensus algorithm (that Bitcoin uses). PoS is considered to be an energy-conserving approach to achieving consensus, since it removes high-powered cryptocurrency miners from the equation. Instead, mining practices are replaced with nodes that stake coins or tokens to participate in the block creation process.
Because of the benefits it offers compared to most older consensus algorithms the number of PoS blockchains are growing rapidly, and several major blockchains have even switched (or plan to switch) to Proof of Stake— including Ethereum, Tezos, Tron, Cosmos and Algorand.
Stakers Earn Rewards From the Network
The staking process means nodes put their coins or tokens on the line in order to participate in the network by creating blocks. The proportion of the reward a node receives from the network generally corresponds to the size of their stake.
Some Proof of Stake blockchains allow practically anybody to participate in this process, so long as they put up a sufficient stake. Others, however, have a limited number of nodes that are supported and voted for by the other nodes.
Now that we’ve covered the basics, it’s time to discuss how to participate in the staking economy, and examine why the industry has seen such incredible growth in recent years.
Putting Investments to Work
Although cryptocurrency staking is primarily used to ensure a robust blockchain, this can only be achieved if nodes are properly incentivized for their efforts. As we briefly touched on earlier, this incentive comes in the form of network rewards.
Depending on the exact Proof of Stake implementation, staking coin holders are able to generate a yield on their balance by either delegating their stake to a validator node or by simply holding their assets in their wallet for a fixed period.
This process will grow the balance of the staking participant. This is as simple as holding your coins in your wallet and giving permission to stake: an effortless way to generate a passive income.
Although the exact yield generated by the staking process can vary between blockchains and depend on a wide range of factors. The average currently sits at more than 5-15% per year according to StakingRewards.
Staking represents a lucrative proposition for many cryptocurrency holders. They are able to hold onto their assets and benefit from any improvements in their underlying market value, all while generating compounding interest. This is possible with little to no maintenance costs and very little oversight.
Staking vs Saving: Which is Better?
Today, the most common way people seek to turn profit on their investments is with a savings account. These types of accounts are offered by most banks and pay a regular interest rate on savings.
However, depending on where you are based and the options available to you, odds are that even the most generous savings account will only pay somewhere in the range of 1-2% APR. This value is barely above the rate of inflation in most countries.
Banks provide this interest rate because they essentially use your deposits to generate their own income. For instance, they might provide loans or make investments with your cash. Some of the profits they receive from these business practices are then provided as interest to savers.
Comparatively, even the least generous staking coins can generate a yield of more than 5%. Many, such as Tezos (XTZ) and Cosmos (ATOM), Polkadot (DOT), currently generate a yield of 5.69%, 7.8% and 13.11% respectively. Again, these values and your exact yield can vary based on a few parameters, but it will almost certainly be more than the very best savings accounts can offer.
With that said, cryptocurrencies are also notoriously volatile. Depending on the length of time an individual participates in the staking process and the market situation, it is quite possible that an individual could lose money overall, despite the additional staking rewards. If the price of your asset goes down 20%, but you only make a 10% yield, then you are at a loss.
Traditional savings accounts, on the other hand, are much less risky since fiat currencies tend to be more stable — only fluctuating by a fraction of a percent each day, compared to more than 1% for most cryptocurrencies.
But the biggest issue is that the bank controls your assets, not you. In the previous Financial Crisis, some banks across the globe went bankrupt and if it wasn’t for government intervention many savers would have lost money.
Additionally, when comparing the startup time for either investment method, it is quite clear that staking is by far the quickest option. The cryptocurrency staking process usually takes just seconds, whereas it can take several days to open a savings account — and there’s still the possibility of being rejected.
Cryptocurrency staking is often simpler and potentially the more profitable option between the two, with some added risk. However, savings accounts also have their merits and can form part of a diverse investment portfolio.
Staking Rewards: What to Expect
Although cryptocurrency staking was once a rather complicated process, things have changed for the better in recent years. Blockchain projects have simplified the process by improving the user experience and breaking down technical hurdles.
Nowadays, participating in the staking economy can be as simple as creating a wallet, loading it with staking coins and clicking a button or two to begin staking. This can easily be done through our own Ledger Live application. Right now, we currently support Tezos (XTZ), Tron (TRX), Cosmos (ATOM) and Polkadot (DOT) with more soon to launch. We allow our users to easily stake crypto and earn passive income directly on the app and from the safety of their hardware wallet.
Once set up, users should then start receiving periodic rewards, in proportion to the amount of coins they have staked. This essentially means that the more you stake, the greater the rewards you will receive — though your APR will typically be the same regardless how much you stake.
During this time you will be unable to use or transact using your staked coins, and will need to participate in the unstaking process to remove this restriction. This process might take several days, e.g. 21 days for Cosmos or around 3 days for Tezos.
Hopefully, you found this post an insightful comparison between staking and saving. If you think staking is for you then you can find out more information through our website.