Staking: Passive income with Crypto currencies
I started working on my passive income streams in 2018. The first thing I did was buying real estate that can generate stable rent for the years to come. With the passive income from the rent I started investing in stocks and ETFs. I invest in a way that I always have additional passive income in form of dividends. I bought my first crypto currency in the end of 2018, but it was in late 2020 when I realized that I could also generate passive income with the crypto that I have invested in.
Passive income has been a long-known solution for generation of more liquidity. In today’s times of low interest rates and high inflation, it is becoming more and more important to generate more sources of income.
The inflation rate for the US for May 2021 was 5% (according to Statista) and for the EU 2% (according to Eurostat). However, this is consumer price inflation and represents the rise of consumer prices of an average basket of goods and services. In reality, every person has a different inflation rate, due to the fact that we consume differently and it is very possible that your inflation is higher that the consumer price inflation. Increase in consumer prices increases our costs and to cover the costs everyone needs liquidity. Typically our salary is the source of liquidity, however according to Eurostat the labor price cost (e.g. salaries) has increased only with 1,7% in Q1 2021. There is a large gap between the increase in inflation and the increase in salaries. The real wage declines.
Asset holders can generate passive income in various ways: for real estate, this is getting rent, for stocks it is receiving dividend. For crypto assets, there are multiple ways to create passive income streams.
This article focuses on staking as a method for passive income generation, which requires no technical understanding, little effort to set up and almost no effort to maintain.
Before we look into staking, I want to mention that I have never bought crypto currency only for the purposes of generating passive income. My strategy is to buy crypto currency, which I want to hold long-term. Utilizing the passive income opportunities of these crypto currencies is a bonus.
What is staking:
In the simplest terms, staking is the transfer of cryptocurrencies for a certain period of time in exchange for interest. When you open a savings account and lock your money for a certain period of time, then you get your original money plus interest at the end of certain period of time. Similar is the case of staking in cryptocurrency.
For example, if you have 1000 ADA tokens and choose to stake them for a 6,33% reward, here are the pay outs you can expect on a daily, weekly, monthly and yearly basis:
Only crypto currencies, which work on the Proof of Stake consensus mechanism, can be staked. In Proof of Stake a decentralized blockchain network is secured by allowing people who hold that blockchain’s coins to validate transactions and blocks.
Through this process, known as staking, validators are able to earn additional coins (known as block rewards) proportional to the amount staked. Those with more coins at stake typically validate more blocks and thus earn more block rewards.
How does PoS work?
In PoS crypto assets are locked on a node (computer) connected to the blockchain network and are used as collateral to govern participation in the consensus process of a blockchain network. In PoS the nodes (also called validators) compete with their stake to forge the next block in the blockchain. Forging depends on several factors such as the amount of assets that are being staked, the period for which they are staked as well as randomization, so no entity can gain a monopoly over forging. The node that gets to forge the next block in the blockchain gets a reward in form of the staked cryptocurrency. Typically the reward is not paid annually like when depositing fiat money in the bank, but rather it is paid much more frequently (daily, weekly, monthly) depending on the chosen staking option and platform.
However not everyone can become a validator node. First, validator nodes get elected and there is a limitation to the number validator nodes for each crypto currency. To set up a validator node one has to have technical knowledge, a dedicated computer and a minimum amount of assets to stake. Luckily, third party services allow small coin holders to delegate their coins and share staking rewards.
The Top 5 Crypto Assets by Staked Value
The staking reward varies from one blockchain network to another. The longer the duration of your holding, the higher the amount you are likely to be awarded. You can use this Calculator for an overview of potential rewards.
This article describes three ways to stake your assets without holding a large amount of assets and without technical knowledge.
1. Staking-as-a-Service Platform
2. Digital Asset Exchanges That Offer “Exchange Staking”:
3. Staking on a hardware wallet (Cold staking)
1. Staking-as-a-Service Platform
Staking-as-a-Service (StaaS) Platforms are third parties, which enable investors to stake even small amounts of crypto assets. The asset owners delegate their crypto assets to the Staking-as-a-service provider, which will support the consensus with the delegator´s stake. The StaaS provider takes a percentage of the rewards for its service.
The advantages of using a staking as a service platform are:
· Participating in staking with no technical knowledge. Due to the dynamic and decentralized nature of PoS networks, a single operator falling offline or halting operations would have a negative impact on a stakeholder’s capacity to earn tokens. StaaS provides reassurance that rewards will be generated in a consistent and reliable manner by experienced operators. Furthermore, many StaaS providers have insurance against slashing, which is a mechanism built into proof of stake to discourage validator misbehavior.
· StaaS providers are user friendly. Typically staking requires research to choose the right party to delegate to, understanding the fees related to this as well as tracking that the operator performs as promised. StaaS platforms manage the whole process and take out the complexity.
Popular Staking-as-a-Service platforms are:
i. Figment Networks
ii. MyCointainer
iii. Stake Capital
iv. Stake.Fish
v. Staked
2. Digital Asset Exchanges That Offer “Exchange Staking”
Another popular method of Staking is “Exchange Staking” in which digital asset exchanges take care of all technicalities and users get a hassle-free passive income channel in exchange of small fees/charges. You earn interest, in the form of new tokens, by just holding your coins in your trading account.
The advantage is that you can stake your assets on the same exchange, where you bought them. If you choose to stake your coins on the same exchange, where you purchased them, there is no need of an additional registration on a different platform, or any further transactions.
The top Digital Asset Exchanges are:
· Binance
· Coinbase
· KuKoin
· Kraken
· Poloniex
As an example of staking on an exchange let us look into Binance. On the crypto exchange Binance there are two options for staking:
· Flexible, where you can pay out the staked amount at any time
· Locked, where you lock your assets for a fixed period of time (30 days, 60 days or 90 days). It offers higher return compared to the flexible staking, however you have to keep your assets staked for the chosen time period. If you choose to terminate the staking before the end of this period, you will not receive any rewards for the whole Staking-Period.
On Binance rewards are accumulated on a daily basis.
The following example shows how rewards are accumulated for Polkadot staking. I am showing my personal Binance account, where I am staking 48,35 Polkadot tokens for 30 days and an expected annual return of 11,51%.
3. Staking on a hardware wallet (Cold staking)
In this process, coins are usually stored offline typically on a hardware wallet. The investor needs to transfer the coins to the wallet with one transaction and then choose to stake them on the wallet. This is a secure way to stake, because hardware wallets offer the highest protection for your assets when it comes to custody.
Leading offline/private cryptocurrency wallets supporting staking include:
i. Ledger
ii. Trust Wallet.
iii. CoolWallet S
iv. Trezor
Which staking option should I choose?
Deciding whether to stake on a StaaS provider, on an exchange or on a wallet depends on several factors such as:
· Which coins you want to stake
· Which reward payout timeframe you wish
· The staking fee you are willing to pay
· The period you are willing to lock up your coins for
The following table gives an overview of some of the staking platforms comparing these factors.
As a practical example let us look into Polkadot staking. You can compare the staking options and conditions on this website.
Calculator for the estimated earnings
With this calculator, you can plug and play with different USD dollar amounts or Polkadot amounts you want to stake, as well as with the time period and with different price scenarios. The simulation of price is particularly interesting to predict earnings under certain price movements: +/-25%; +/-50%, +/-100%; +/-500%; +/-1000%.
Comparison of Polkadot Staking provider
Risks:
- Underlying price volatility — crypto currencies have high volatility. If you choose to stake a crypto currency for the period of 30 days, which is currently valued at 10$, with a 10% reward, you should be aware that after 30 days it could be worth significantly less. This means that you will receive 10% more tokens, however they could be worth less than the original 10$.
- Do not just pick the highest percentage yield — Before purchasing a token you should consider the quality of its business case and not only the staking reward. Some tokens seem attractive with very high staking rewards, however if they do not have a solid business case you have a tremendous risk on the token price movement.
- Pay attention to the time limits. Different networks have different payout schedules and timeframes that you must commit to the network to receive rewards. Do your research and know how long your commitment is.
Summary:
It has become inevitable to meet your expenses with more than one income channel. Staking is one of the options to generate passive income with crypto currencies. Only crypto currencies based on the proof-of-stake consensus mechanism are eligible for staking. Staking-as-a-service providers, crypto exchanges and Cold Wallets provide user-friendly ways to stake tokens without any technical knowledge or minimum amount of assets to stake. Before considering staking, each investor should be aware of the risks and do sufficient research in order to find the best staking option for them.
