For investors who want to do more than simply hold their token but do not have the time or expertise to actively trade, staking can be a useful way to generate passive income. It is also less risky than liquidity mining or yield farming.
As read through this article, remember that this is not financial advice and token value can decrease as well as increase.
Many individuals have found staking to be a great way to earn passive income from cryptocurrencies. These cryptocurrencies are held for different reason which might include:
- as a hedge against inflation of fiat currencies
- for ideological reasons because they believe in decentralization
- because they need the underlying token for a specific purpose
- because they want to make money from trading
- because they believe the value will go up significantly
When you hold tokens like WELL, the return are not really defined compared to buying of shares which returns money in the form of dividends. That been said, there are ways to accrue rewards for holding particular tokens, and one of these is staking. You can think of it like gaining interest on money held in a savings account.
But then, what do you get for staking tokens like WELL? For one thing, it removes the need for continuously purchasing expensive hardware and consuming energy. Also, The system offers guaranteed returns and a predictable source of income unlike the proof-of-work system where coins are rewarded through a mathematical process with a low probability of paying out.
Another benefit is that the value of your staked coins doesn’t depreciate unlike with ASICs and other mining hardware. Staked coins are only affected by market price fluctuations.
How to steak a WELL token
You can think of staking a WELL token as depositing money in the bank, only in this case, an investor locks up their assets, and in exchange, earns rewards, or “interest.”
A particular network’s protocol locks up an investor’s holdings — similar to depositing money in a bank, and agreeing not to withdraw it for a set time period, which benefits the network in a couple of ways, according to DeCicco.
You an go about staking your token in different ways, however, it boils down to these four key aspects:
- It requires token holders to lock in a minimum number of tokens into the blockchain network as a stake similar to security deposits in the tangible world.
- The stake is like buying a lottery ticket to earn the opportunity to create the next block in the blockchain network. The larger the stake, the higher chance of the node being chosen for the next block.
- Once the node has created a block, the staker, who is also the validator, gets a reward in the blockchain’s native currency.
- The stake incentivizes the holder to contribute positively to the blockchain since a part of their stake is lost in the case that they double sign or try to attack the network.
Staking can be done directly from compatible cryptocurrency wallets. Some cryptocurrency exchanges such as Binance, Kraken and KuCoin even offer staking services to the users of their platform, which provides a convenient way to earn money while keeping coins ready to trade.
Some blockchains also entitle stakers to voting rights on protocol changes to the blockchain, which means that these rights are instead awarded to the exchange if that’s where you’re storing your coins.
The token holder can stake their coins either through their own cryptocurrency wallet or through cryptocurrency exchanges, such as Binance or Coinbase, that offer staking services to users that register on their platform. There are several cryptocurrency wallets through which users can stake their cryptocurrency funds.
Can all Tokens be Staked?
With all the buzz in the cryptocurrency world and the different tokens that are available in the market, investors have wondered if all the tokens can be staked, maybe you have also wondered the same thing. While not every cryptocurrency can be staked, most can.
Below are some examples of tokens that you can stake and a list of the others.
- Ethereum: Previously employed a PoW system, Ethereum is now moving to PoS. To stake Ethereum on your own, you’ll need a minimum of 32 ETH to become a validator, and you’ll then “be responsible for storing data, processing transactions, and adding new blocks to the blockchain,” according to the Ethereum site.
- Cardano: Investors can also delegate Ada — the Cardano network’s cryptocurrency — to staking pools to earn rewards. Cardano users can even set up their own staking pools, too, assuming they have the technical know-how to create and administer one.
- Solana: Solana, or SOL, can likewise be staked or delegated to a staking pool, assuming an investor uses a digital wallet that supports it. From there, it’s a matter of selecting a validator and deciding how much you’d like to stake.
Below is a non-exhaustive list of cryptocurrency tokens that can be staked on their blockchain either through wallets or cryptocurrency exchanges:
- Ethereum (ETH)
- Cardano (ADA)
- Tether (USDT)
- XRP (XRP)
- Binance Coin (BNB)
- Polkadot (DOT)
- Algorand (ALGO)
- Chainlink (LINK)
- Tezos (XTZ)
- Band Protocol (BAND)
- EOS (EOS)
- Filecoin (FIL)
- LiteCoin (LTC)
- PancakeSwap (CAKE)
- Zilliqa (ZIL)
- Curve DAO Token (CRV)
- DAI (DAI)
- Bitcoin Cash (BCH)
- Ethereum Classic (ETC)
Are Tokens Safe?
With a lot of attention on different tokens, another concern for investors is safety. Many wonder if their investment is really safe. That is where the Munwell protection module. It is the mechanism built for securing the tokens locked by the investors.
Although different measures are being put in place for the safety of the tokens staked, there are some risks you should be aware of. They are mentioned below.
- Market risk: Staking doesn’t rid the token owner of the market risks involved in the cryptocurrency markets. If the price of the token falls in the market, the value of the token decreases as well and so do the attached rewards that come with it.
- Lock-up period: There may be a minimum lock-up period for how long the tokens need to be deposited. The period varies on the type of blockchain or dapp used for staking. During the lock-up period, the funds cannot be shifted or traded and obviously can’t be withdrawn. Fortunately, not all staking systems have a lock-up period.
- Proof of stake: PoS validators get a higher share of the rewards when compared to passive stakers. These higher rewards are meant to compensate the validators for the higher operating costs they bear to validate blocks and transactions on the blockchain actively. Since this requires high computational power, it is not something the average staker can be a part of.
- Penalties: Stakers can lose portions of their stake for failing to meet the specific requirements of the protocol. Penalizing stakers for such activities is known as slashing. Essentially, it is a process that the network and its governance use to disincentivize irregular and unethical behavior in the blockchain network.
- Exchanges: Stakers using cryptocurrency exchanges to stake their funds are vulnerable to hacks and exploits that are often seen in cryptocurrency markets.
- Voting: By staking through an exchange, the staker essentially gives up his/her voting privileges in the network by handing it over to thecry exchange, thus leading to a certain degree of centralization.
- Impermanent loss: When staking coins to provide liquidity to a decentralized exchange that uses an Automated Market Maker (AMM) model, the staker must be aware of the potential for impermanent loss, which is a risk unique to dual-token AMM pools. Explained briefly, impermanent loss is due to changes in the market value of staked tokens that causes the ratio between the staked tokens to change, resulting in a potential loss for the depositor when they withdraw their portion of the pool.
How to Secure Your Token Wallet
After you have spent your hard earn resources to invest in cryptocurrencies, it is only fair that you are worried about how to keep your tokens safe. Here is the reason.
Each crypto wallet has a public and a private key. The public key allows others to send you tokens and is shared with others publicly in transactions. A private key is only meant for you and allows you to spend your tokens. You are the only person who is meant to have a private key.
When a third party (e.g. Coinbase, GDAX, Mt Gox etc) holds your private keys in a database and that third party is hacked, your private key can be stolen and you can lose all of your coins.
We have provided a few tips and tricks that will help you keep your tokens safe while you stake them.
1. Store your tokens in a Hardware Wallet.
The first step to securing your crypto wallet is to store it in a hardware wallet. While you may need some of it online for transactions, only keep what you need in the short-term and store most of it offline. A hardware crypto wallet, which is similar in size to a USB device, holds a private key that can be used to access your funds.
You can set your own private key, but losing it could mean losing access to your investment. In a recent case, two investors forgot a private key for their hard wallet, yet the investment in their wallet rose to a value of several million. The investors hired a hardware hacker to successfully crack into their own crypto wallet with physical access and extract $2 million in cryptocurrency.
But if you’d rather not hire a private hacker, just make sure to store your private key well in the first place. Never share your private key with anyone, and for maximum security, store it in a physical space like a fireproof safe or safety deposit box.
One of the dangers of storing most of your cryptocurrency with online providers is that in most cases they have access to your private key, and if they get hacked and your private key is compromised, you could lose your investment.
To disperse risk, even more, you may want to hold multiple crypto wallets so that if one private key is stolen, the others are still safe. However, this means safekeeping more than one private key, which has its own complexities.
2. Make use of Only Trusted Exchange
Before making any transactions, understand that some exchanges are more secure than others. Do your research to know which cryptocurrency exchanges have been compromised in the past, because if the exchange is hacked, it shows poor security practices or existing vulnerabilities, thus your investment could be at risk.
Most cryptocurrency exchanges won’t legally ensure your crypto investment in the case of a cyberattack, so if it is compromised you could lose your holdings. That’s why it’s important to choose an exchange that uses security best practices such as requiring multi-factor authentication (MFA) and enforcing TLS/SSL encryption.
Also, determine if they have any safety measurements in places, such as balance transfer limits and notifications, or the option to freeze the account to mitigate damages.
3. Make sure you change your Password Often
The key to keeping your password safe is to set a complex one, store it safely and change it often. When choosing a password for your crypto wallet or any other sensitive site, do not reuse any passwords you already have.
Also, your password should not include any personal information. Instead of saving passwords to your browser, it is more secure to save them in a password manager like LastPass or 1Password. Finally, change your password about every six months.
4. Don’t use public WiFi to access your Wallet
Avoid using public WiFi when accessing your online cryptocurrency exchange or accounts. Additionally, use a VPN where possible to hide your IP address and location. VPNs can be used on any device to maintain your data privacy and avoid eavesdropping or tracking of your activities.
A VPN essentially creates an encrypted tunnel that keeps your online activity private and secure, giving you control over your data. Furthermore, you should make this a part of your general online security practices, not just for cryptocurrency trading.