Crypto Staking: Earn Passive Income With Crypto

Staking cryptocurrency is a way to earn passive income on your crypto holdings.
Sep 15, 2022

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Crypto staking is a way of earning passive income, and it can be seen as the crypto world's equivalent of earning interest or dividends while holding onto your underlying assets.

Staking allows you to earn cryptocurrency as a reward for using your existing holdings to vouch for the accuracy of transactions on an underlying blockchain network. While this sounds complicated, everyday users can often do it directly from their digital wallets, or they can use services provided by crypto exchanges that will handle the technical details for a cut of the proceeds.

Generally speaking, cryptocurrency staking offers returns that exceed those you can earn in a savings account. However, staking is not without risk. You'll earn rewards in crypto, a volatile asset. Sometimes, you have to lock up your crypto for a set period of time. And there is a chance that you could lose some of the cryptocurrency you've staked as a penalty if the system doesn't work as expected.

That said, staking can also be a way to grow your crypto portfolio using assets you plan to hang onto for awhile. Staking is also a more energy efficient way of running a crypto network than the mining process used by Bitcoin and some others.

» Ready to get started? See our picks for the best crypto platforms for staking and rewards

What cryptocurrencies allow staking?

Crypto staking is an important part of the technology behind certain cryptocurrencies. However, it's important to note that not all crypto networks use staking.

Proof-of-stake cryptocurrencies, as they are called, are likely to support staking. Here are a few examples:

Proof-of-work cryptocurrencies use mining, which relies on expensive computers and can use a significant amount of electricity. They generally do not support staking. Proof-of-work cryptos include:

» Learn more: What are altcoins?

How does staking work?

To understand staking, it helps to have a basic grasp of what blockchain networks do. Here are a few details you need to know.

Blockchains are “decentralized,” meaning there’s no middleman — such as a bank — to validate new activity and make sure it comports with a historic record maintained by computers across the network. Instead, users collate “blocks” of recent transactions and submit them for inclusion into an immutable historic record. Users whose blocks are accepted get a transaction fee paid in cryptocurrency.

Staking is a way of preventing fraud and errors in this process. Users proposing a new block — or voting to accept a proposed block — put some of their own cryptocurrency on the line, which incentivizes playing by the rules.

Generally, the more that is at stake, the better a user’s chance of earning transaction fee rewards. But when a user’s proposed block is found to have inaccurate information, they can lose some of their stake — in a process known as slashing.

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How do you stake cryptocurrency?

There are several ways to start staking cryptocurrency, depending on how much of a technical, financial and research commitment you’re willing to make.

Your first decision will be whether to actually validate transactions using your own computer or to “delegate” your cryptocurrency to someone who’s doing that legwork for you.

Networks that support crypto staking typically allow people who own tokens to provide them for other users to deploy in validating transactions, thereby earning a share of the rewards.

Using an exchange

The simplest option is to use an online service to stake your tokens for you. Some popular cryptocurrency exchanges offer staking in exchange for a commission, and they allow you to use fiat currency to purchase crypto.

Exchanges that offer staking

Of the crypto exchanges reviewed by NerdWallet, three offer staking for at least some crypto assets: Binance.US, Coinbase and eToro. Others offer rewards programs that let users earn additional crypto in a way that's similar to staking. (See our list of exchanges with the best staking and rewards programs.)

Joining a pool

If you don’t want to trust an exchange to make your staking decisions for you — or if you can’t find one that supports the token you want to stake — you can join what is known as a “staking pool” operated by another user.

To do this, you’ll likely have to know how to use a crypto wallet in order to connect your tokens with the validator’s pool.

The official websites of many proof-of-stake blockchains include information about how to research validators, including links to details about how they operate.

Omkar Bhat, data engineering lead at Boston-based analytics firm Flipside Crypto, suggested looking carefully at a prospective validator’s track record.

Some information that is publicly available can help you see whether a pool operator has ever been penalized for mistakes or malfeasance, and some lay out their policies for protecting people who delegate tokens. Other details you can look at include the level of fees or commissions.

Bhat says it’s good to pick an established pool, though you might not want to pick the absolute biggest. Blockchains are supposed to be decentralized, so there’s an argument for preventing any one group from accumulating too much influence.

“People often delegate to validators with lower voting power to increase the decentralization of an ecosystem,” Bhat says.

Becoming a validator

Setting up your own staking infrastructure can be complicated. It requires the proper computing equipment and software and downloading a copy of a blockchain’s entire transaction history. It can also have a high cost to entry.

On the Ethereum network, for example, you’d need to start with at least 32 ETH, which on Sept. 15, 2022, would be worth about $48,000. Staking through a pool or through an online service does not carry such requirements.

What kind of returns does staking offer?

The rewards for staking vary based on the cryptocurrency, conditions (such as demand on the blockchain network in question) and the method you use. But the rates offered by exchanges offer some insight into what you can expect.

Binance.US, for instance, was estimating in September of 2022 that annual yield for its highest-yielding cryptocurrency, ATOM would be 13.5%. Coinbase, meanwhile, was offering Algorand staking at a 5.75% annual percentage yield.

For comparison, yields on savings accounts reviewed by NerdWallet are generally around 0.5% APY. The average interest for U.S. savings accounts is 0.17% APY, according to the Federal Deposit Insurance Corp.

Is staking the right option?

Staking may not be for everyone. There are a few questions to ask before making a decision about whether to stake your crypto.

Will you need access to your staked crypto?

Crypto staking can involve committing your assets for a set period of time during which you might not be able to sell or trade them. If you think you might move your crypto on short notice, make sure you look at the terms carefully before staking it.

It’s important to remember that crypto is a volatile asset. While crypto staking can provide a measure of predictability in investment returns, if the market value for your cryptocurrency drops in value by 20% during the time you’re staking it, for instance, the rewards you’re getting may not look as attractive.

Do you believe in the project?

Ultimately, deciding to stake your cryptocurrency may come down to whether you feel confident that it’s a good investment over the long term.

If you believe in the value of the Ethereum network, for instance, the day-to-day swings in price may not affect your desire to sell. Staking is one thing you can do to get shorter-term value from a crypto investment you want to hold onto.

Have you explored other forms of passive income?

Crypto staking is one way of earning passive income, which does not require daily effort after an initial investment. And while staking may be a good choice for some cryptocurrency owners, there are many other ways of generating passive income. It may be worth looking into some of those options, as well.

Other common forms of passive income include dividends from stock holdings, interest on bonds, and real estate income. There are also non-staking options for earning on your crypto, including lending programs and decentralized finance (DeFi) applications.

Disclosure: The author owned Bitcoin, Ethereum, Shiba Inu, Cardano and Solana at the time of publication. The editor owned Ethereum and Bitcoin at the time of publication. NerdWallet is not recommending or advising readers to buy or sell Bitcoin or any other cryptocurrency.

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