Cryptocurrency Staking: Passive Income for Beginners

What is Staking?

Cryptocurrency staking is a way to passively grow your coins by supporting the operation of blockchains with a "Proof of Stake" (PoS) mechanism. It's similar to earning interest on savings accounts in banks, but instead of banks, you earn interest in coins on crypto exchanges or decentralized protocols

How Staking Works

To understand how staking works, you need to grasp the basics of how blockchain networks function. Here's what you need to know.

Blockchains are decentralized systems with no banks or other intermediaries to verify new transactions and check them against history. Instead, users collect "blocks" with the latest transactions and submit them for addition to an immutable historical ledger. If the block is accepted, the user receives a reward - typically a fee in cryptocurrency.

Staking is a way to protect the network from errors and fraud. Users who propose a new block or vote for its acceptance put their tokens up as collateral, ensuring the security and accuracy of transactions.

The more you stake, the higher your chance of earning transaction fees. However, if errors are found in the block, you could lose part of your stake - this is known as "slashing."

Types of Staking

In staking, there are two main approaches:

Active

You lock your tokens in the network and participate in its operations. You verify transactions, create new blocks, and earn rewards. This requires time and effort but brings in more cryptocurrency.

Passive

You simply lock your tokens, helping the network operate steadily and securely. It requires no time, but the rewards are smaller.

In addition to these, staking can be divided into the following types:

Liquid Staking

LSD or Liquid Staking Derivatives. You earn staking rewards while retaining access to your tokens in wrapped form, allowing you to use them in DeFi. This offers more flexibility and opportunities but may seem confusing for beginners. For example, Tonstakers offers users the ability to delegate their TON to validators, pooling resources to maximize annual percentage yield (APY). The minimum participation amount is just 1 TON, and withdrawals are instant, ensuring convenience and flexibility.

Delegated Staking

This is the simplest form of staking. Delegation is a popular choice for those who don't want to manage a validator. Instead of making large investments, you hand your coins over to a validator (e.g., an exchange or staking platform). The validator pools the resources of several investors and does all the work for you. Your profit depends on how much cryptocurrency you delegate and what share it constitutes in the validator's overall stake. For example, for delegated TON staking, there are platforms like TON Validators by TON Foundation and TON Whales.

Pooled Staking

Several people pool their resources to increase their chances of staking rewards. The more tokens in the pool, the higher the chances of earning. This method is more complex than delegation but more interesting and potentially more profitable. All earnings of the group are divided proportionally among its members.

Validator Nodes

The most complex and advanced way is to become a validator. This involves running your own staking node, using technical skills and equipment that must always be online. The advantages are high rewards and voting rights in some blockchains. For beginner validators, TON offers an excellent guide.

Yield

APY

APY is the annual percentage yield, which shows the real profit, including compound interest over the year. It is more accurate than simple interest and is used in banks and crypto staking to assess profitability.

APY in crypto staking shows how much you can earn on cryptocurrency by participating in staking. It takes into account the reinvestment of earnings, thus reflecting the real profit over the year.

How to Calculate APY

The easiest way to calculate APY for crypto staking is by using a special calculator. But if you want to dive into the details, here’s an example of how it can be done.

First, you need to understand how rewards work in your staking protocol:

Reward Rate: The percentage of your staked cryptocurrency that you receive regularly (e.g., daily or monthly).

Staking Period: How often rewards are credited.

Example: If the blockchain pays 0.01% every day, and you stake 5,000 coins, your daily reward will be 0.5 coins.

Compound Interest

In staking, you can reinvest your rewards to earn even more. The more often you reinvest, the higher your final yield. For example, if you reinvest your 0.5 coins daily, it increases your APY.

The formula for calculating APY, which considers compound interest:

APY = (1 + periodic rate) ^ number of periods − 1

If you reinvest daily at an interest rate of 0.0002, then over a year (365 days), your APY will be calculated as:

APY = (1 + 0.0002) ^ 365 − 1

Factors Affecting APY in Crypto Staking

• Network Inflation: If the network issues new coins, APY may increase, but in the long run, the value of the coin may decrease.
• Number of Stakers: The more people stake tokens, the smaller your slice of the pie. Fewer stakers mean more profit.
• Validator Reliability: If validators perform well and stay online, your chances of earning high rewards increase. If there are failures, APY drops.
• Reinvestment Frequency: The more often you reinvest, the higher your APY. The power of compound interest is strong.
• Lockup Period: A long lockup of assets can raise APY but reduce your liquidity.
• Network Changes: Updates and new network solutions can drastically change APY. It's important to stay informed.
• Market Volatility: During a market boom, APY usually drops due to an influx of stakers, but in a downturn, you can catch a high APY.

Risks

Like any investment, especially in crypto, there are risks you should be aware of.

Volatility

Cryptocurrencies are volatile. Your rewards can easily be eaten up by a drop in prices. Staking is a game for those who are ready to hold assets for a long time and don't panic over price fluctuations.

Validator Penalties

There’s a risk that the staking pool operator might mess up. If the validator makes a mistake and gets penalized, you might end up without rewards.

Hackers

Staking pools can be hacked. If this happens, you could lose all your staked funds. And since crypto is uninsured, you can’t count on compensation.

How to Start Staking

Basic Steps

1. Choose a Cryptocurrency for Staking
   Pay attention to APY, the minimum staking amount, lockup periods, and other characteristics of the asset. Do your research before choosing rare or lesser-known cryptocurrencies.
2. Decide on a Validator or Delegator
   Validators require serious skills and equipment. For beginners, delegation is easier. The key is to choose a delegator with a good reputation.

On an exchange or custodial wallet

1. Sign up on an exchange, link your existing cryptocurrency wallet.
2. If you don't already have the coins you need, purchase them on an exchange.
3. Find the steaking page on the selected exchange.
4. Select the amount, steaking options, and pool. Different pools may have different terms and APYs.
5. Allocate coins to the steaking and track your rewards, which can be calculated right in the app.

On a Staking Platform

1. Choose a staking platform and register.
2. Go to the staking page, select the cryptocurrency from the list of supported coins.
3. Link the wallet where your cryptocurrency is stored.
4. Confirm the amount, check the reward rate, and start the staking process.