Staking has become a popular way to passively earn an income by putting the digital assets sitting idly in your wallets to work. It corrected the perceived weakness that has haunted the crypto industry for a long time – the unavailability of compound interest gotten passively on token investments.
Traditional investments like stocks earn compound interest over time through dividends paid to their holders. Investing in cryptocurrencies wasn’t as exciting as this because there was no way to yield returns on your crypto assets. To make money, you had to sell for more than the price it was bought.
In recent times, this has begun to change with the advent of Proof-of-Stake cryptocurrencies which naturally led to staking pools. Just like stocks, people can now hold their crypto tokens for a period of time and earn passive dividends on them without trading. In this post, we’ll dive deep into how to generate passive income on your cryptocurrencies by using staking pools.
What Is Staking In Simple Terms?
Staking is simply participating in a Proof-of-Stake (PoS) blockchain where you commit your cryptocurrencies in a wallet to help validate transactions in the blockchain. Every time your crypto assets are used to confirm transactions, you automatically earn additional crypto tokens.
It is the easiest way to earn passive income on your cryptocurrencies, a lot easier than mining because you don’t have to do any work.
All you have to do is purchase a PoS cryptocurrency and deposit it in a wallet that supports staking, and then you’ll start getting dividends on your crypto assets whenever they’re selected to validate network transactions in the blockchain.
How Does Staking Work?
Staking is only supported by cryptocurrencies that operate on Proof of Stake (PoS) blockchains. Not all cryptocurrencies can be used for staking. In the same vein, not all crypto platforms support staking or use PoS blockchain.
Network transactions on PoS blockchains are carried out using the staked cryptocurrencies of its users. The higher the amount of cryptocurrency put up for staking purposes, the higher the chances that your crypto coins get selected for validating network transactions out of many others.
Every time a cryptocurrency that you stake is used to confirm network transactions, you’re rewarded with an additional token in the same crypto you’re staking. This is a really passive way to acquire more cryptocurrencies.
There are mostly three ways to stake cryptocurrencies. Let’s go over them quickly.
Staking via centralized platforms
Centralized platforms support staking since they are used to buy and sell cryptocurrencies. True to its name, such platforms like Binance, Coinbase, and Kraken are controlled by a single unit.
This is a convenient and cost-efficient option especially if you stake a small amount of cryptocurrencies.
You won’t have to use a web wallet or meddle too much with a smart contract, as the centralized platform will handle most of the process for you. The downside of this is that you’re forced to give up control of your cryptocurrencies while keeping your private keys.
Staking via decentralized platforms
Staking through decentralized platforms is an option for users who need more control over their cryptocurrencies. In this way, users acquire a web wallet called Metamask or a desktop wallet called Exodus to connect directly to decentralized applications or networks for staking purposes.
Though you’re likely to earn more and get a higher cut on decentralized platforms, it’s a more difficult process because you’ll need technical knowledge on how to run nodes. Running your own equipment to validate network transactions is an expensive venture that has kept people away from decentralized platforms.
Join a staking pool
What if there was a way to earn on decentralized platforms without the financial strain and requirement for running technical equipment? Fortunately, there is a way, and it just involves joining staking pools.
Aside from the financial demands of staking in a decentralized platform, you’re not likely to have your staked cryptocurrency selected to validate network transactions because other users might have more staked tokens than you.
And you know that the PoS blockchain selects only users with the highest amount of cryptocurrencies for staking to confirm transactions.
In order to always have the highest cryptocurrencies for staking, a group of individuals combine their staked resources as one through staking pools, so they’ll always be selected to validate network transactions and earn staking rewards in the process.
The best part of this is that those in the staking pool split the cost of running node equipment among themselves, so it won’t be as capital-intensive as it would be if they went at it solo.
You can join a staking pool because they already have the node equipment and the technical knowledge to run it. The only thing you’ll do is submit your crypto resources to the staking pool and receive rewards whenever the staking pool gets selected to confirm network transactions.
How cool and convenient is that?
The only cost you’ll bear is the minimal staking fee shared with every member of the staking pool to maintain the equipment used in validating transactions. By joining a staking pool, you drastically increase your chances of earning rewards.
How to Generate Income By Using Staking Pools
Joining a staking pool in a decentralized platform is the ultimate way to enjoy the benefits of using node equipment and the increased chances of earning token rewards since you’re in a large staking pool.
All of that for a little staking fee, without the huge financial and technical constraints required if you were doing it by yourself. The only thing you need to do to earn income through staking is to join the largest and strongest staking pools.
The bigger the staking pool, the more chances that their resources get selected to confirm network transactions, and the more you’ll earn rewards on your staked cryptocurrency. Let’s take a look at how to find the right staking pools.
Find a staking pool that uses your desired crypto
Not all staking pool uses every kind of cryptocurrency. Most staking pools support a couple of cryptocurrencies, so it’s best to find one that allows you to stake the crypto tokens you want.
Research on the pool’s trustworthiness
The right staking pool will leave a clear track record of positive user reviews on forums and discussion groups in the crypto community. Do research to find out what crypto enthusiasts are saying online about that staking pool before diving in.
Examine the staking fees
Staking pools share the operational costs of running the technical equipment used in validating network transactions among its members. Some fees can be lower or higher depending on the pool you find yourself in.
While analyzing the staking fees of different staking pools, note that a lower staking fee doesn’t necessarily translate to better returns on your staking investments.
Staking pools that tend to validate network transactions more and generate rewards for their members might have a higher staking fee. So, decide if the staking fee is worth it and won’t eat into your rewards.
Assess the pool’s payout and reward structures
Each staking pool you’ll find has different payout structures, so it’s important to analyze them and find the one that works best for you.
You can start by analyzing the pool’s Annual Percentage Yield (APY) which is the yearly return you would make on your staked cryptocurrencies, the minimum crypto staking requirement, the lock-up period before you can withdraw the returns on your staked crypto, and the frequency of payouts.
Find out the pool’s security measures
Security is a big deal when it comes to staking crypto coins. Analyze the security measures put in place by the staking pool such as two-factor authentications, cold storage, and multi-signature wallets to protect the assets of users.
Compare your staking returns with other staking pools
After spending enough time in a staking pool to earn rewards, regularly analyze the performance of the pool and your staking returns, then compare it with other staking pools to see if you might need to change pools.
Final Thoughts
Staking pools are a way to consolidate staking resources and earn extra cryptocurrencies on your staked assets, something that would’ve been near impossible if you staked your coins alone. Find a staking pool today and boost your chances of generating passive income while doing virtually nothing.
