Whether markets are up or down in the short run, there are easier ways to make with your existing crypto assets than risking them on volatile trading on sketchy centralized exchanges. The answer to achieving smart investing success? Crypto staking- the (nearly) risk-free and guaranteed way to grow your HODL portfolio by using your assets to earn passive income that compound over time.
But what is crypto staking all about, how can you get started with it, and what are the risks and benefits? In this article, we’ll explore crypto staking and the options for earning passive income through CoolWallet App and CoolWallet Pro in safe cold storage in 2023 and beyond.
What is Crypto Staking?
If you read our previous Crypto Staking guide, you’ll know that crypto staking is a process that rewards individuals in exchange for holding certain cryptocurrencies that use a proof-of-stake (PoS) consensus mechanism.
By staking their crypto assets in a wallet or platform, users participate in a blockchain network’s consensus mechanism and help to secure it. In return, they are typically rewarded with a share of the network’s transaction fees or a new issuance of tokens. This incentivizes users to hold their tokens and support the network, rather than simply buying and selling the assets for short-term gains.
While the original cryptocurrency, Bitcoin, uses an energy-intensive proof-of-work (PoW) consensus mechanism, virtually all newer cryptos use the more eco-friendly PoS model, including Ethereum, which last year successfully completed its Merge event to transition from PoW to PoS. Now 99.95% more energy efficient, Ethereum is now being seen as a solid eco-friendly asset to hold for institutions that need to meet ESG requirements.
A more risky and much trickier form of staking is yield farming, where users are rewarded for helping to add liquidity and therefore price stability to a DeFi trading pair or new token’s reserves. While returns can be massive, this can also backfire due to a number of risks that we cover further down.
How Crypto Staking Works
Crypto staking normally requires users to lock up a certain amount of their assets in a staking wallet for a period of time. The assets are then used to validate transactions and help to secure the network. The longer the assets are staked, and the more assets that are staked, the higher the potential rewards. With networks that use a PoS consensus mechanism, the chances of validating a block and earning rewards are supposed to be proportional to the number of assets staked.
Benefits and Risks of Crypto Staking
Crypto staking provides both new and experienced crypto users the opportunity to make a fixed passive income on their investment that comes with relatively low risk, as long as you adhere to the Not Your Keys, Not Your Crypto ethos of self-custody and don’t hand your assets over to centralized custodians who can go bankrupt or scam you. This article explains why.
The beauty of staking can be summed in two words: compound interest.
Let’s take a look at an initial investment of $1000. If you earn 10% interest per year by staking your principal, you will double your initial investment within 7 years!
Go and play around with NerdWallet’s calculator and see for yourself.
Of course, with anything in crypto, it’s important to be realistic when it comes to what you can earn. If it’s too good to be true, it usually is. Be wary of firms and projects that offer really high returns, such as now-bankrupt Celsius and its 18% rate on stablecoin deposits, and if you do invest, make sure to not put all your eggs in one basket.
When you’re staking cryptocurrencies that range in price, there are 3 scenarios to consider in regard to the value of your portfolio at the end of your staking period:
1) You can lower your average purchasing price by staking
Let’s say you stake a cryptocurrency for a year and earn 20% in interest on your investment as reward. This means that you now hold 120% of your initial investment. Let’s say you paid $6 for 1 x Crypto A token. Now that you hold 1.2 x Crypto A token, you’ve effectively only paid $5 per token. Drinks are on you!
2) The value of your earned crypto can also go up
if you’re staking a valuable cryptocurrency like Ethereum that is now environmentally friendly thanks to its proof-of-stake upgrade and also becoming deflationary thanks to its EIP-1559 update, the new ETH you’re earning might be worth a lot more in the next bull market than its present value.
3) The value of your earned crypto can go down
Sadly the opposite is also true. Choose the wrong crypto to stake and you may find that while you earned a healthy interest on your principal investment, your combined investment is now worth less than it.
This is due to an inflation of the token supply that’s caused by emissions from staking and yield farming. Remember, if you’re earning 20% or more to stake a token, those tokens are now entering the market supply and diluting the value of existing tokens. This is fine during a bull market where everyone’s buying, but in a bear market, this unwanted growth in a cryptocurrency’s supply can lead to a steep drop in value that can cause event the most fervent supporters to dump their bags.
Therefore, be careful around protocols and coins that offer really high staking or yield farming rewards, and consider additional data such as current circulating supply, fully diluted value, unlock schedule for early investors and then weight these against the current price of the asset and the staking lock-up period for your assets.
If you expect your asset to appreciate or remain stable in value in the long run, that’s fine, but if it’s still new and untested, be careful. Staking has a lot of appeal for most crypto holders, but it’s not for everyone.
Got it? OK let’s review and add a few more of the pros and cons quickly.
- Passive income: Staking allows users to earn a steady flow of income without the need for active trading or management.
- Capital efficiency: Liquid staking allows users to earn staking rewards while also keeping their assets liquid and able to be used in DeFi protocols.
- Lower barriers to entry: Some staking models, such as pooled staking, allow for smaller holders to participate in the network and earn rewards.
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- Potential loss: Staking assets in a wallet can expose them to the risk of hacking or other security breaches, potentially resulting in a loss of assets.
- Missed opportunities: By staking assets, users may miss out on short-term price gains if they are unable to sell their locked assets quickly.
- Risk of network centralization: Some staking models, such as DPoS, may lead to network centralization, where a small number of validators control the majority of the network.
Different types of Crypto Staking
There are a few different types of crypto staking, each with its own unique characteristics and benefits.
This is the most common type of staking. In a PoS system, the chances of validating a block and earning rewards are proportional to the amount of assets staked. This means that users with a larger stake have a higher probability of earning rewards.
For most people looking to stake, the financial threshold of running an actual validator combined with the hardware requirements to do so are too high. In a delegated proof-of-stake (DPoS) system, users can delegate their staked assets to a validator in exchange for a share of their rewards.
Leased proof-of-stake (LPoS) is similar to DPoS, but with a unique twist: Instead of delegating your tokens to validators, you “lease” them out. This way, you can earn rewards without having to give up control of your assets.
Pooled staking is a mechanism where multiple users combine their resources to achieve a higher probability of validating blocks and receiving rewards. This is a way for small holders to pool their resources together to increase their chances of validating blocks and receiving rewards.
Liquid staking allows users to earn staking rewards while also keeping their assets liquid. This is achieved by creating a liquid staked derivative token that represents the user’s staked assets. This token can then be used in decentralized finance (DeFi) protocols, allowing the user to earn yield on their assets while also keeping them liquid.
After Ethereum’s Shanghai Upgrade, which will allow users to unstake their ETH, it is expected that more people will turn to liquid staking in order to make their assets more capital efficient.
Cold staking is a method in which you earn rewards while keeping your coins in cold storage, such as in a hardware wallet like the CoolWallet Pro. This allows you to secure your coins offline and avoid the risks of hacking or theft.
Staking with CoolWallet
Users stake Tezos (XTZ), Solana (SOL), and Cosmos (ATOM) directly through the CoolWallet Pro with the highly regarded third-party service provider Everstake as a partner, with more to come. Users can also use other 3rd party applications to stake their assets and earn interest or yield.
Please note that we have unfortunately terminated the partnership with our original service provider and thus users cannot create new stakes of DOT or TRX on the CoolWallet App for the time being. CoolWallet is now in discussion with other service providers to offer more staking options and has made it a priority to bring DOT staking back.
Everstake is a validator service provider that allows users to delegate their staking assets to professional validators, who then perform the staking on their behalf. By using Everstake, users can earn staking rewards without needing to run their own validator nodes or manage the technical details of staking themselves.
The CoolWallet Pro is the dream solution for crypto users looking for top-notch security and convenience. It boasts an upgraded secure element chipset (CC EAL 6+ standard) and an enhanced memory module. Its credit card-sized portability, bendable and water-resistant design, and tamper-proof features make it the slimmest and most stylish cold wallet available today.
Yield Farming with CoolWallet and Wallet Connect
Seeking a higher return and ok if it comes with a higher risk? You may consider yield farming your tokens through the CoolWallet App’s integrated Wallet Connect feature, which allows you to connect via QR code to nearly any EVM-compatible DeFi protocol.
Warning: Yield farming is very volatile and carries several risks such as rug pulls, impermanent loss, and flawed code. Only try it if you are an experienced user and willing to run the risk of losing all your funds.
What is Yield Farming and how does it work?
Yield farming refers to a process where an individual holds and stakes their cryptocurrencies in a particular smart contract on a blockchain network. In return, the user earns rewards or “yield” in the form of interest or additional tokens.
In yield farming, the user needs to deposit their crypto assets into a liquidity pool on a decentralized finance (DeFi) platform like Aave, Uniswap, PancakeSwap or Curve. These liquidity pools are smart contracts that allow users to trade cryptocurrencies without having to go through a centralized exchange.
By depositing assets into these pools, users are essentially providing liquidity, which is rewarded through the form of interest and additional tokens, usually the DeFi protocol’s governance token. The specific interest rate and rewards for yield farming vary depending on the project and the assets being staked. While newly launched liquidity pools may offer insane Annual Percentage Yield (APY) returns at first, this soon drops to normal ranges once enough liquidity’s been secured.
Risks and Benefits of Yield Farming
The main benefit of yield farming is the potential for high returns on investment. As more users deposit their assets into the liquidity pools, the value of the pool increases, leading to higher interest rates and rewards for the users. However, yield farming also comes with a significant amount of risk.
Due to the highly speculative nature of yield farming, the value of the assets being staked can rapidly fluctuate, leading to potential losses. Additionally, the DeFi space is still relatively new and unregulated, leading to an increased risk of hacks and scams.
How Does Impermanent Loss Work?
Impermanent loss is a risk associated with yield farming where the value of the assets in the liquidity pool can fluctuate, leading to a loss in the value of the staked assets. This occurs when the price of one of the assets in the pool increases while the price of the other decreases.
As a result, the overall value of the pool can decrease, leading to a loss for the yield farmer. To mitigate impermanent loss, users need to carefully consider the assets they are depositing into the liquidity pool, and monitor the value of the assets in the pool to ensure they are still generating a positive return on investment.
We hope you found this CoolWallet Crypto Staking Guide useful and that it will enable you to put your crypto assets to some good use while you HODL over the long term. Remember, just like traditional investments, it’s important to try and increase the value of your assets while minimizing risk in the process. Stay safe out there!
This article doesn’t constitute or try to constitute financial advice of any kind and is for educational or entertainment risks only. Crypto staking comes with its own risks based on different situations, and readers should educate themselves in full before investing any funds.