How To Earn Passive Income From Crypto Staking (3 Methods)
Einstein said that compound interest is the 8th wonder of the world. If he were still around today, he’d probably call staking the 9th. But what is crypto staking exactly, and how can it transform your digital investments into a source of passive income? In this guide, I’ll explain what staking is and how it works. I’ll then compare the 3 ways that you can stake your own coins and tokens to make your crypto work harder for you. We’ll go from complete beginner staking options to the highly advanced.
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What is staking?
Staking is the system that makes blockchains like Ethereum and Solana run smoothly. It lets them validate and secure transactions without relying on a central “middleman” (like a bank). For example, when I send you ether (ETH) over the Ethereum blockchain, that transaction is processed by a worldwide network of computers. These computers all act independently of each other – making the blockchain decentralized.
The computers are also called validators. Validators are chosen by the network to stake their own ether by locking it up on the blockchain for a certain amount of time. This staked ether acts like a security deposit. If validators correctly process blockchain transactions, they can earn interest in ether (in proportion to their stake). But if they try something dodgy, they could lose some of their stake. This system secures the blockchain by incentivizing validators to do what’s best for its users.
The below infographic explains how staking works in more detail.
Side note: The mechanics behind staking vary slightly depending on the type of blockchain. So the above explanation is just a general idea of what staking is.
Another side note: Bitcoin doesn’t have staking – it has mining instead. That’s where computers compete to solve complex cryptographic puzzles to earn bitcoin.
Now that you know what staking is, let’s get to the good stuff: how you can stake crypto yourself to earn passive income.
Crypto staking method 1: Centralized exchanges (beginner level)
The simplest way to start staking your coins and tokens is through a crypto exchange like Coinbase, Binance, or Kraken. Here’s a breakdown of its pros and cons:
It’s easy to stake on an exchange: Just like depositing cash into a bank savings account, staking through an exchange is simple. You just deposit your crypto, and the exchange handles the rest.
It’s accessible: Most major exchanges offer staking services, making it easy to find a platform you’re comfortable with.
Pooling benefits: Exchanges pool investor funds together and stake them as one big entity. This can sometimes mean more consistent staking rewards.
Middleman risks: When you stake through an exchange, you’re relying on a centralized entity. If the exchange isn’t well-regulated, or goes bust, there could be risks involved.
Lower yields: Exchanges often take a cut of the staking rewards for their services – meaning you might not earn the full potential yield on your staked crypto.
Regulatory constraints: Depending on where you live, there might be regulations that limit or prohibit staking on exchanges.
Crypto staking method 2: Decentralized staking platform (intermediate level)
Decentralized staking platforms like Lido Finance and Rocket Pool allow you to stake crypto without having to become a validator yourself. It’s a bit like centralized crypto exchange staking (where you pool funds with other investors and share the reward) except there’s no middleman. This method is for those who have a decent understanding of blockchain technology and prefer having more control over their staking activities.
Greater control and autonomy: Unlike centralized exchanges, decentralized platforms give you more control over your staking decisions. You’re not handing over your assets to a third party, so you don’t need to trust them to always act in your best interests.
Potentially higher returns: Since there’s no middleman taking a cut, the yields on decentralized platforms can be higher. This means more of the staking rewards go directly to your crypto wallet.
Diversification options: Decentralized platforms often provide a wider range of coins and tokens to stake. This includes access to earlier stage crypto projects that might offer higher staking interest – but come with more risk.
Complexity: These platforms can be less user-friendly and might require more understanding of blockchain technology and the staking process.
Security risks: You’re more exposed to blockchain vulnerabilities or platform-specific risks, as decentralized platforms aren’t regulated.
Liquidity concerns: Depending on the platform and token, you might face challenges in quickly converting staked assets back into usable funds.
Comparison table: Staking on a centralized vs decentralized platform
|More control, user managed.
|Less control, managed by exchange.
|Blockchain vulnerabilities, platform specific risks.
|Middleman risks, regulatory constraints.
|Higher potential yield.
|Lower potential yield.
Crypto staking method 3: Become a blockchain validator (advanced level)
Becoming a blockchain validator is the most advanced form of staking. It involves actively participating in the blockchain network by validating transactions and blocks. This method is reserved for those with excellent technical knowledge and a substantial amount of crypto capital. It has more responsibilities and more risks.
Maximum earnings: As a validator, you can potentially earn the highest possible returns from staking, as you’re directly contributing to the blockchain’s operation. There’s no exchange or staking pool that takes a cut of your interest.
Influence on the network: Validators play a key role in maintaining the blockchain’s integrity. They’re a bit like shareholders of a company – they get to vote on how the blockchain operates.
Technical mastery: Becoming a validator is a technical learning experience of the highest order. Some people enjoy that kind of thing.
High entry barriers: Validators usually need a lot of crypto and technical expertise, making it out of reach for most people. For example, to become an Ethereum validator, you’ll need to stake at least 32 ethers. Not everyone has that sort of cash lying around!
Risk of penalties: As mentioned earlier, validators could lose some of their stake if they don’t validate transactions “the right way”.
Resource intensive: Validating requires a continuous commitment of resources. You’ll need to run and maintain special hardware and software programs, and stay updated with network changes and upgrades. This can cost you time and money.
Wrapping up: Which staking option is right for you?
The true definition of “passive” income means that you don’t have to work for it. So on that front, becoming a validator (option 3) might not be ideal for most people – since you’re technically working for your crypto.
Staking on a crypto exchange (option 1) is by far the easiest and most hands-off method of earning passive income. But if you do go down this route, make sure you read the fine print and use a reputable (and regulated) exchange.
If you’re reasonably tech-savvy and prefer more control over your funds, using a decentralized platform (option 2) is a good middle ground. Just keep in mind that these platforms don’t have customer service departments to complain to if something goes wrong.
- Ease vs. control: Centralized exchanges offer the easiest staking method with less control, while decentralized platforms provide more control but require a better understanding of blockchain technology.
- Risk vs. reward: Higher potential yields are possible with decentralized staking, but they come with increased risks like blockchain vulnerabilities. Centralized exchanges offer lower yields but involve middleman risks and regulatory constraints.
- Technical involvement: Becoming a blockchain validator is for those with technical expertise and significant crypto capital. This offers potentially higher returns and network influence but requires substantial resource commitment.
- Choose wisely: Your staking choice depends on your technical comfort level, risk tolerance, and desire for control. Centralized exchanges are best for beginners seeking simplicity, while decentralized platforms suit the more tech-savvy. Validator roles are for the technically advanced with substantial resources.