In traditional finance, a popular way to earn passive income is to keep funds in bank deposits or low-risk investments in bonds. This approach allows for capital growth and stable income in the long term. Digital asset owners do not have access to these options; however, they can earn through staking — a mechanism that allows rewards through participation in the security of a particular network.
What is Proof-of-Stake (PoS)😎?
Proof-of-Stake (PoS) is a consensus algorithm that ensures the operation of the blockchain, confirmation of transactions, and protection of the network from malicious actors. It was designed as a more energy-efficient and scalable alternative to Proof-of-Work (PoW), where network security is provided by computational power.
In PoS, the primary resource for participating in consensus becomes tokens. Participants lock their assets to become validators, and the network selects those who will verify transactions and add new blocks. The chances of becoming a validator depend on the number of locked tokens, as well as other factors, such as staking time and an element of randomness.
To ensure validator loyalty, the PoS algorithm uses a penalty mechanism — slashing. If a network participant violates the rules, their assets may be partially or completely confiscated.
Due to its features, Proof-of-Stake has become a core element of modern blockchains, offering an energy-efficient solution for supporting consensus and making network participation accessible to any token holder. And at the heart of PoS, as mentioned earlier, lies staking.
What is native staking?
Native staking is the process of locking cryptocurrency directly in the blockchain to ensure its operation and receive rewards. Participants in native staking can also become validators and help confirm transactions, create new blocks, and maintain network security. To participate in native staking, a special wallet and a minimum number of tokens defined by the blockchain's requirements are usually needed.
However, locking assets in staking does not automatically grant validator status — these network participants also need to run their own node, so for users who do not want or cannot do this, there is an option to delegate their tokens. They transfer assets to one of the validators through special platforms and receive part of their reward for the work.
Liquid staking and restaking
Modern approaches to using tokens to support the blockchain besides native staking include two other key directions: liquid staking and restaking. They expand the possibilities for using staked assets, making the process more flexible and profitable.
Thus, liquid staking allows users to lock their funds to support the network, and in return, they receive liquid tokens representing their assets. These tokens can be used in DeFi protocols for earnings, trading, or investments. In this way, liquid staking addresses the issue of asset freezing that is characteristic of classic staking.
Restaking is a mechanism that allows for the reuse of assets that are already locked in staking. It is applied to secure additional networks or protocols.
For example, in the EigenLayer project, Ethereum validators can provide their staked tokens to secure new decentralized applications, cross-chain bridges, or oracles. In return, they receive additional rewards.
However, restaking also carries increased risks: validators may face penalties if they violate the rules of additional protocols, which can lead to asset loss.
Difference between staking, farming, and mining
Staking, farming, and mining are three different approaches to earning in the crypto industry, differing in goals, requirements, and risks. However, beginners often confuse them, perceiving them as similar methods for earning passive income through digital assets.
It is important to remember that staking is considered a more environmentally friendly solution for securing the blockchain compared to mining. In both cases, users can be active participants in the network; however, mining requires powerful equipment that consumes significant amounts of electricity. In PoS networks, on the contrary, validators only need to lock their tokens to participate in the operation of the network.
Farming (or yield farming) has a different nature but often involves 'staking,' meaning locking up assets. In this case, users freeze their tokens in smart contracts to provide liquidity to decentralized protocols, such as exchanges or lending platforms.
The reward for farming is often expressed in governance tokens or percentages of transactions. Unlike staking, farming is not related to supporting network security. Instead, it is used to provide liquidity or other purposes in DeFi. However, farming comes with additional risks, including impermanent losses that occur due to changes in the prices of assets locked in pools.
This comparison allows for a better understanding of which method is suitable for specific user goals.
What are the benefits and dangers of staking?
Main advantages of staking:
passive income. Locked tokens continue to work for the owner, bringing rewards without the need for active actions. This makes staking particularly attractive for long-term investors;
network support. Through staking, users ensure the security and stability of the blockchain, becoming an important part of its ecosystem;
accessibility. Earning through staking does not require expensive equipment. It is enough to have cryptocurrency and use appropriate software.
Risks and disadvantages of staking:
market volatility. The value of tokens can drop sharply, resulting in losses that may outweigh the rewards received;
technical risks. Asset loss is possible due to errors in smart contracts, hacking attacks, or loss of access to wallets. Risks increase when using intermediary providers;
inaccessibility of tokens. During the lock-up, assets cannot be used, which limits their liquidity and the possibility of quick sale. An exception is liquid staking platforms.
slashing risk. In case of errors or misconduct by the validator, part of the staked assets may be confiscated as a penalty. This can apply to both the user and the validator to whom they delegated funds.
Many risks can be minimized with the right approach, for example, by choosing reliable providers or delegating assets to responsible validators who have a good reputation and provide a high share of rewards. It is also essential to monitor the state of the crypto market and the price dynamics of the chosen asset.
Top 10 cryptocurrencies for staking
The main indicator when choosing a network and platform for staking is APY (Annual Percentage Yield), which reflects the annual yield considering the reinvestment of rewards. It is important to maintain a balance between rewards, network reliability, and asset volatility.
Below is a list of the ten highest-capitalized cryptocurrencies for staking according to Staking Rewards.
Ethereum ($ETH ). Ethereum is the largest PoS blockchain with $132.4 billion locked in staking. The network offers an APY of 3.48% and is in demand due to its developed staking ecosystem, including LRT and LSD.
Solana ($SOL ). Solana is known for its high transaction speeds and low fees. At the time of writing, $91.2 billion is locked in the network, and the APY is 6.65%. Here, you can also find liquid staking and restaking platforms.
Sui (SUI). Sui is a next-generation blockchain that is rapidly gaining popularity. $33 billion is locked in staking, and the APY is 2.81%. The project attracts attention with its advanced architecture and active user base growth.
Cardano (ADA). Cardano is one of the earliest and most stable PoS networks. $26 billion is in staking, and the APY is 2.67%. The project is actively developing and continues to expand its ecosystem of decentralized applications.
Binance Coin ($BNB ). BNB is the native token of the Binance Smart Chain, which is also used for staking. At the time of writing, $21.5 billion is locked with an APY of 7.22%.
Tron (TRX). Tron is one of the oldest blockchains with staking support. Over $13 billion is locked in the network's smart contracts, and the APY is 4.65%. Due to its high throughput, Tron is actively used for transactions, primarily stablecoins.
Aptos (APT). Another promising network that is rapidly developing its infrastructure and competing with Sui. $12.5 billion is locked in staking contracts, and the APY is 7.00%. The project is focused on high performance and attracts developers with low fees.
Avalanche (AVAX). A popular ecosystem that combines high transaction speeds and convenience for developers due to EVM compatibility. $12.41 billion is locked in staking, and the APY reaches 7.79%. The network is used for DeFi, gaming, and enterprise applications.
Polkadot (DOT). A blockchain with a unique architecture supporting parachains. $8.65 billion is in staking, and the APY is 11.96%. The project is focused on cross-network compatibility and building the infrastructure for Web3, where the DOT token plays a key role.
Celestia (TIA). A modular blockchain launched on the mainnet in 2023. $6.12 billion is locked in the network, and the APY is 10.69%. The project focuses on scalability and simplifying interactions between developers and users.
Thanks to different yield parameters and usage specifics, each of these projects offers unique opportunities for users looking to earn through staking.
Conclusions
Staking is a way to earn passive income, as well as an opportunity to actively participate in supporting the operation of blockchains. Its popularity is explained by energy efficiency compared to mining, accessibility of participation, and the prospect of receiving stable rewards.
However, participating in the network infrastructure requires an understanding of the technical processes and associated risks. For beginners, staking can provide a simple and accessible way to earn, provided that they use providers that lower the entry threshold and technical complexities of the process. At the same time, it is important to carefully choose platforms and projects to minimize potential threats.
With the emergence of innovations such as liquid staking and restaking, users have gained even more tools for flexible asset management. These solutions make the process not only more convenient but also more attractive for both experienced investors and new participants wishing to integrate into the crypto ecosystem.
