Since the introduction of cryptocurrencies, there have been impressive returns for holding crypto long-term. Bitcoin, for example, has been profitable for long-term holders for more than 90% of its total lifespan. Therefore, there is a great opportunity for profiting from crypto even though you choose not to actively trade the coins. Apart from long-term holding, there is a way in which you can earn interest on these holdings, much like you would with traditional savings account from your local bank. This is known as staking.

Staking 101

So what exactly do we mean by staking? This refers to locking your crypto on a blockchain to help it run efficiently and securely. In return, you will earn rewards at a specified rate, sort of like interest. This offers a perfect way to increase your holdings without needing to buy more. What’s more, staking typically offers a higher yield rate than the interest offered by banks.

However, not all coins can be staked. Only those that use the proof of stake consensus mechanism on their blockchain can be staked. To better understand this, let’s look at the mechanics of a blockchain. 

Blockchains are built with decentralization at the forefront, which means there are no middlemen to validate transactions and ensure no foul play goes. Therefore, crypto transactions have to be validated before they can be immutably stored on a blockchain. On Bitcoin, for example, those who were chosen to validate transactions had to have advanced computing equipment that solved an equation on the blockchain. This is known as mining, and it works with the proof of work consensus mechanism.

Proof of work proved to be highly energy-intensive, so a new consensus mechanism was born – proof of stake. Here, validators put some of their cryptocurrency on the line as collateral, after which they are selected to validate transactions. This is called staking. If they attempt to validate fraudulent or inaccurate transactions, they lose their staked crypto in what is known as slashing. If they succeed in validating a block, they receive rewards in crypto.

Top tokens for staking

Solana (SOL)

The Solana blockchain is built around smart contracts that facilitate the hosting of decentralized apps (dApps) on the platform. SOL, its native token, is a stakable coin that is used as a means of payment on the platform. To earn SOL from staking, you can either be a validator or a delegator. Validators verify transactions on the blockchain by staking their holdings, while delegators contribute their holdings to a pool and task the pool operator with validating transactions on their behalf. 

To become a validator, you have to run a node called a Cluster, which requires you to have a computer with sufficient hardware requirements running with no downtime. As you can imagine, this may prove expensive. Therefore, validators often charge commissions to the delegators under them. In case of any malicious activity by the validator, or poor performance of their equipment, Solana slashes their staked SOL.        

Cardano (ADA)

This blockchain was designed for building and implementing smart contracts. ADA, its native token, is used to pay transaction fees and maintain security on the network. To stake ADA, you can either be a validator or a delegator. 

Validators need to run a network node with no downtime in order to ensure the efficient running of the network. Usually, these are individuals who run stake pools. Delegators, on the other hand, contribute their holdings into these pools. 

The blockchain uses game theory to select validators for new transaction blocks. The more the ADA a pool stakes, the higher its chances of being selected to verify new blocks. Rewards for staking are paid out every five days.

Polkadot (DOT)

This is a blockchain that is built around interoperability with other chains. It utilizes parachains, which run parallel to the main network to reduce congestion and increase transaction speeds. DOT, its native token, in addition to being a governance token, is used for staking and connecting to parachains. 

Users who intend to stake can either be validators or delegators. Nominators have fewer responsibilities, and thus their minimum requirements are much more lenient than those of validators. They require no specialized equipment and no minimum DOT investment. 

Validators require approximately 350 DOT to qualify. They also need to run a network node that requires an i7 processor running at 4.2 GHz or more, 80 – 160 GB of SSD storage, and at least 64GB of error-correcting code (ECC) memory. Staking rewards are dished out every 24 hours and distributed among delegators and validators.   

Ethereum 2.0 (ETH)

This is an update to the Ethereum chain that was launched on the proof of work mechanism but has now switched to proof of stake. Other than enabling staking, this new update is expected to increase transaction speeds and reduce fees. 

To become a validator on this network, you require a minimum of 32 ETH, its native coin. You also need to run a software called node client to be able to validate transactions on this chain. Though the network does not allow delegation, staking pools exist where you can participate in staking if you can’t raise the 32 ETH. 

Terra (LUNA)

Terra is a blockchain that allows users to create their own stablecoins pegged to any fiat currency from all over the world. To stake LUNA, its native coin, you can either be a delegator or a validator. There are no minimum requirements for delegating. 

Being a validator, however, requires you to install Terra Core software and run a node with constant uptime. To get chosen to validate blocks, you need to appear in the top 100 validators, which can only be achieved by staking large amounts of LUNA. Thus, you will oftentimes need other delegators to pool their resources with you to qualify for staking rewards.

Conclusion

Staking refers to locking up crypto assets on a blockchain in order to facilitate its smooth and secure running. In return, the investor earns interest in the crypto. Only those coins that run on the PoS consensus mechanism can be staked.