So many have wondered what it will be like to go on vacation, lying next to the pool, living off the passive income that comes from staking reward.
This dream can be true, but you must understand what stake rewards are, how they are paid and the crypto assets that gives them out.
This beginner guide will help you started in the world of stake interest investment.
What are staking reward?
Crypto assets that uses the proof of stake consensual mechanisms depend on staking to validate transaction.
Staking is done by locking in some coin over an extended period of time. This coin will serve as machine that will create a new digital coin which is similar to the one that has been locked and verifying the legitimacy of cryptocurrency transaction on the blockchain.
Still do not understand?
Staking enables the production of new coin in a blockchain with the help of existing coin (that has been locked) this is done right after a transaction has been verified.
So technically staked coins produce new coin and verify transaction.
When this process is completed, a fraction of this new coin is paid out to the staker also known as validator, the payment is known as stake reward or APY.
The stake reward or APY is a sign of gratitude to staker or validator from the coins developers for helping the company grow.
Staking reward or APY % must be declared by the crypto asset developers.
As discuss above, in order to receive staking reward, you need to be a staker or validator which require you to be available online all the time.
For some investors who can not afford to be online all the time delegates this duty to a company who are eager to shoulder the responsibility. In return, they charge for their services, which will be deducted from your staking reward.
These are the three important things to remember regarding APY or staking reward
Declared APY %: the declared APY % is the amount the team of developers announces to pay for stakers or validators after they’ve launched the staking program for the assets
Exchange or validator APY: Exchange APY % is the APY % remaining after service charge has been deducted. This depends upon how much exchange are ready to charge for performing the work of validator. This explains why APY of a coin differs across different exchanges
APY % payment date:this is the day the staking reward will be given to investors. Payment date for every staking pool or exchange varies. Your payment date should be made known to you before investing on any platform.
A vast majority of staking pool or exchange distribute staking reward to investors when a staking cycle is completed which can take days or weeks.
Staking reward can only be withdrawn after the agreed staking tenure has expired, or you choose to unstake.
However, in most cases the first staking cycle usually takes longer than the following ones.
When you stake cardano for the first cycle, you need to wait 25 days for staking reward to arrive in your staking balance. After you’ve claimed the first cycle stake reward, the next cycles stake reward come at time interval of 10 days.
Different types of staking to earn staking reward
In a broad spectrum, we have two types of stake reward
- Decentralized staking
- Centralized staking
With both option, you can earn a return, that is, stake reward. Stake reward for either of the two varies and certain risks are associated to them.
This is what we discussed earlier. It works by locking up your assets on a network. Token locked are used to produce a block, generate new tokens, which in return you will receive a reward for.
The rate of your staking reward A.K.A. annual per yield % will be declared, bear in mind, it can fluctuate. This fluctuation depends on how much other investors locked up for staking purpose.
A practical example of APY fluctuations
Ethereum, one of the leading cryptocurrency in the last five years, announced that they will be switching from proof of work to proof of stake last year.
With not many token holders staking, the company declared APY of 21.6%, quite huge, huh?. However, the APY drops rapidly to about 5% as many investors join the program. At the time of scripting this article, Ethereum locked up is worth over 25 billion dollars.
Regardless staking reward fluctuations, it still offers a higher APY compare to what traditional institution offer today which is roughly 1% interest
In this type of staking, you give up your right to access your funds over a period of time, in an aim to earn a higher rate of return.Centralized staking is commonly known as lending.
To get involved in lending, you transfer your crypto assets into a lending services protocol wallet such as Blockfi, crypto.com or Nexo, the lending service you selected connect you with a borrower, in return for their services, they remove a fraction of your profit.
Although lending service is not really a staking, since you are not supporting any network to growth.But in a brighter view, you aren’t restricted by a network needing to be a proof of stake consensual mechanisms.
There is freedom to lend any assets, your lending service offers. For example, you can lend out Bitcoin, Litecoin, Monero and among others proof of work cryptocurrency
Risks of centralized and decentralize staking
staking reward might be alluring, but one needs to be cautious before making financial decisions.
1) Prone to cyberattack: this is one glaring risk of both methods of staking, your assets is no longer in your control, it’s kept in an online storage. This exposes it to hacks or attacks.
2) Company not backed by insurance: The Majority of company that offers these service are not fully backed by insurance companies. So if anything goes wrong, you might lose your funds. However, crypto.com has insurance in case of cyberattacks or loss of assets when you loan your assets
3) Price fluctuations: Just to be clear, It’s totally not advisable for you to stake an asset that you not confident of holding for long term. Volatility often occur in crypto market, if your assets is locked up or loan out, you have no chance of selling in a bearish market. Investor can end up losing more than earning as a result.
4) Service are not well regulated: Centralized staking is a new sector in cryptocurrency market. Most lending services providers tax implications are not clear and there is no law that govern these companies on dealing with crypto assets. As a result, there are higher chances of default at such an earlier stage.
Cold staking reward
Cold staking reward are reward distributed to offline crypto stakers. This is the safest way to stake because you will be staking directly from a hardware wallet.
For instance; you can stake polkadot ‘DOT’ directly from a ledger hard wallet.Staking from a hardware wallet prevent your crypto assets from cyberattacks.
Here, are two leading hardware wallets
Hot staking reward
This reward is earned by staking via a hot wallet. This implies, staking your token in an online based storage system.
This is the most common form of staking, and It’s easy to start up
However, it attracts more risks than cold staking. If you consider staking numerous tokens, it’s strongly recommended that you should cold stake, or you opt in with exchange that are insurance backed.
Soft Staking reward
These rewards are earned without ever locking up your tokens.
Users are rewarded on a daily basis. You don’t have to wait for days or week to claim your reward. This method provides flexibility to sell your crypto assets, if the market is going on downward trajectory.
However, staking reward are much lower than normal staking reward. You can soft stake in Binance exchange, Kraken, etc.
A common example of staking reward
Staking reward is a lot like interest banks pay on a typical savings account. This interest are actually gotten from lending your money behinds the scenes. This interest rate is little fraction of the income banks receive from lending your money. The concept of staking is not new to finance systems
Staking reward on staking reward
Why are staking reward reinvestment plans conducive to wealth building? Remember Erik Finman story, a bitcoin millionaire bought 1,000 dollar of this assets in 2012. At today prices, it is worth over $17 million. An annual staking yield of 5% will generate $800 k income. Imagine the wealth you can see as staking reward turns to investment which staking reward and so on and so on
Read to go further with staking reward ‘APY’?
That is only a begging of staking reward, one you have gasped these concept, you are ready to move on to ‘Get rich from staking: The mathematics of compounding’. There you will learn the tips on how to build wealth with staking reward.