Updated: Mar 10, 2021
Cryptocurrency continues to be a source of mystery and fascination for many. Most investors who get into this market understand there's a lot of upside and potential for healthy gains. In addition, the volatility in the price of crypto offers many opportunities if you're a trader. But did you know there's a great way to make easy money simply by holding your crypto in a wallet and doing absolutely nothing? It's called staking. This post will help you understand what that means and how to achieve this new, lucrative form of passive income.
Crypto-Mining: The Old Method
During the first decade or so of Bitcoin’s existence, there was really only one true and tested way to make passive income. And that was through mining. Since the origin of cryptocurrency, this has been the most popular method of extracting coins as a source of payment.
Mining involves solving complex mathematical problems by computers that have a high computational capacity. Doing so requires high amounts of electricity (and therefore, power costs) as well. This whole method is called the Proof-of-Work consensus. It is necessary to secure the blockchain network, by verifying and sequencing bitcoin's transaction history- ensuring only accurate bitcoin transactions are ever created. At this time, Ethereum also uses POW.
Staking Coins: The New Method
Proof-of-work has many problems. Although it is effective at securing a blockchain network, it is poor at scaling upward when a blockchain becomes popular. It becomes increasingly costly and slow. The network grows congested and transaction fees skyrocket. The recent DEFI boom caused Ethereum transaction costs to hit new highs.
While there are other new forms of consensus, Proof of Stake consensus (Staking) is the most popular at this time. Staking coins is much easier, more environmentally friendly and less costly way to secure a network than Proof of Work. Not to mention, an easier way to earn passive income. This all results in faster transactions and less bottlenecking.
Being a modern concept, it is not supported by all coins. Proof-of-Stake consensus involves staking your cryptocurrency in an online wallet that's connected to the network. In the simplest terms, by holding your coins in this wallet, you are securing the network and preventing fraudulent transactions. In return for staking, the holder receives rewards in the form of more crypto. The more you stake, the more rewards you receive. It's not much different than receiving dividends by simply holding a stock.
Centralized and Decentralized Wallets
The wallets that let you stake your digital assets are either handled by a third-party like Binance and Coinbase (Centralized wallets), or handled entirely by you (Decentralized wallets). Centralized wallets are basically Crypto exchanges, where you can buy and sell your digital assets. At the same time, these exchanges let you stake coins when they remain idle in your wallet.
Decentralized wallets are a bit more cumbersome. They often require you to download software and record keys. If you're a newbie to cryptocurrency, it may be in your interest to stake your coins on the centralized exchanges mentioned above. This way there is no need to keep track of wallet addresses and private keys. The internet is loaded with stories of newbies losing millions of dollars worth of crypto for the simple reason they lost that information.
Having said that, a decentralized wallet I often use is the Atomic Wallet. It is a collection of over 300 wallets, where you can easily manage, swap assets and stake coins for rewards. You can do this all without a centralized service. However, even with the app's assistance, I'd recommend recording your addresses and private keys in a safe, private place.
Coins Available for Staking on Binance.us
Binance is the best centralized exchange to offer staking capability. You can put your funds in their online wallets and get rewarded. In addition, Binance doesn't charge a fee for their staking operations. On top of that, you can sell or withdraw your coins at any point if you wish to do so.
At the time of this writing, here are the coins available to stake on Binance.
1) Vechain: Estimated Annual Reward: 1%-3%
2) Atom: Estimated Annual Reward: 6%-9%
3) Algo: Estimated Annual Reward: 8%-10%
4) XTZ: Estimated Annual Reward: 6%-7%
5) Cardano: Estimated Annual Reward: 5%
What to Expect From Ethereum 2.0?
It's been in the works for years, but apparently Ethereum 2.0 will be ready by the end of 2020. There are many changes coming with this upgrade, but among them, the consensus mechanism will shift from Proof-of-work to Proof-of-Stake. After this long-awaited transition, the transactions would no longer solely depend upon computational power. The upgrade would make the platform more secure and faster, capable of handling more transactions with increased scalability. Lastly, you'd be able to create instant passive income by staking Ethereum.
With the ever-evolving cryptocurrency market, there are always new ways to earn income. However, none is more passive than staking cryptocurrency. While the knowledge needed to stake crypto may be a bit challenging for some, there are plenty of centralized services to support you. POS will likely be the future consensus mechanism of all cryptocurrency. And I believe in the future, staking crypto will be a common source of income for many, not much different from creating rental income from property you own.