The concept of staking cryptos is the same as getting a dividend or paycheck paid out to you in the form of more shares. In order to get a dividend in traditional markets, you have to buy a stock in traditional markets that offers a dividend for investing in their company. The only difference between that concept and staking cryptos is that you aren’t owning a stock or share of a company when you stake a crypto. Any crypto that has a (Proof of Stake) algorithym built into the blockchain project/token… will have at some point staking capabilities, meaning you will be able to stake the token for rewards.
For further explanation of what proof of stake is and how it differs from Proof of work projects take a look at the diagram picture below.
With staking you are locking up a specific amount of your cryptos that you own on an exchange, such as Kraken and you are receiving more of that token on a monthly or yearly basis. This creates passive income for you, which is the best type of income to earn to build wealth over time.
When you lock up tokens or stake them, you are essentially helping confirm transactions through the blockchain for the crypto token you own. This helps harden the network and secure the blockchain because you are participating as a validator Node on the blockchain to help build trust within the blockchain ecosystem of that token you own. You are confirming new transactions taking place on the blockchain and helping add new copies of the transactions to a block, that is deployed onto the blockchain in the future.
The amount you receive in staking rewards varies on a few factors:
- Depends on the token you invest in.
- The exchange you lock up your cryptos on.
- The amount of tokens that you own.
Obviously the more tokens you own and stake, the more rewards you will receive in that token.
For example: You might own 10,000 ADA or Cardano tokens and you want to stake those to earn more Cardano/ADA. You can do this by going to an exchange that allows you to stake Cardano such as Kraken or Atomic Wallet. Below, you can see from Atomic Wallet you could stake a specific amount of Cardano, by Clicking on (Staking) which takes you to the screenshot below. From there, if you had 10,000 Cardano/ADA, you could stake 10,000 Cardano/ADA at a 5% APR or Annual Percentage Rate. This would give you a payout in more Cardano/ADA tokens of an additional 500 Cardano/ADA tokens.
10,000 * .05 = 500 Tokens.
There are other options for earning passive income with cryptos that are available to you such as Yield Farming, becoming a LP or lending provider but those require more advanced knowledge as an investor in crypto and require platforms built on Decentralized Finance.
These options come with more RISK associated due to security factors on the platforms still being built out by developers. This is why we only touch on staking at the moment. It exposes you to less RISK and it’s the most user friendly way to get started earning passive income with Cryptos.
Staking Rewards Tool:
You can check out the site below for staking rewards APR rates. It also allows you to monitor which exchanges offer which tokens at the current moment for staking cryptos.
Common questions about staking:
- How often can I stake my tokens?
Answer – You can stake tokens at any time you would like 24/7/365 days a year.
2. What is a UN-BONDING/BONDING time?
Answer – A un-bonding time is the period of time you have to wait to actually get back the tokens you staked in your own possession. If you staked 50 ETH you would have a bonding time, where you (unstake) your tokens and then you may have to wait say 9 days or 21 days, before your tokens are sent back to your wallet or show as an available balance on your exchange. Exchanges have different un-bonding times and sometimes are referred to as BONDING periods as well.
** If you want to avoid BONDING/UNBONDING periods you can take a look at Kraken Exchange as they don’t have any UNBONDING or BONDING period.
3. Do I OWE TAXES on staking cryptos?
Answer – Yes, you owe taxes on staking. You will want to use a tax service for cryptos such as cryptotrader.tax to file taxes on things such as staking. You file it is a form of income so it will be treated as income and you must file each reward as a individual transaction payed out to you. The reward will be filed come tax time at the market price when you received it. YOU MUST file this even if you hold onto the reward of crypto and do not sell it. Think of it as if you received a paycheck from your company but didn’t spend the money. You would still have to file that as income on your taxes.