Someone recently admitted to me that they don't know what staking is or how to go about it. I found that rather surprising, given that I assumed everyone in the cryptosphere already knew. So, for those of you whom somehow managed to miss that particular boat, let's take a look at it. All aboard who's going aboard!

What is staking?

Staking is when you collect a lot of Vampire Protocol (VAMP), it tanks at dawn and you feel a stabbing sensation in your heart. OK, folks, that was a joke (although Vampire Protocol is a real thing)! It's not that. I've got a bit of a Vamp fixation and I like bad puns ... (I blame Anne Rice and the Underworld films for the former.)

 Deepfake of Kate Beckinsale as a vamp tramp. Who'd want to stake her?

Right, distraction over, back to the topic at hand! Staking is essentially the practice of loaning out your crypto through a third party and receiving interest on it, pretty much like with TradFi (where a bank or loan shark offers the loan). However, instead of a bank lending your crypto to arbitrary people, it will be lent to particular projects/organisations which use it to maintain and run their blockchains.

There's more to it than that (such as fund/liquidity pools, which are where you stake your crypto), but that's essentially the gist of it. Staking is only an option for crypto that uses Proof of Stake (PoS) as opposed to Proof of Work (PoW).

What is Proof of Stake (PoS)?

Back in the old days of gold rushes, a prospector would be allocated (or claim) a piece of land by marking out the boundaries with wooden stakes and pieces of wire strung between them. That person would then do necessary paperwork to be granted a legal document (a proof of stake) declaring that land (and any ore extracted therefrom) as belonging to him (typically). PoS in cypto is perhaps similar, but only in concept: It's an electronic means of verifying that a certain wallet has staked a certain amount of crypto and is thus entitled to profit therefrom.

"Proof of stake is a type of consensus mechanism used to validate cryptocurrency transactions. With this system, owners of the cryptocurrency can stake their coins, which gives them the right to check new blocks of transactions and add them to the blockchain.

This method is an alternative to proof of work, the first consensus mechanism developed for cryptocurrencies."
 — The Motley Fool; What is Proof of Stake (PoS)

Why should you care?

The main difference to TradFi loans is that crypto staking potentially offers a higher interest rate (called "Annual Percentage Yield") than going the traditional route (which offers ~0.2-4% return, depending on the type of account). Depending on the particular cryptocurrency you stake and with which pool (the third party), the percentage yield (APY) can be anywhere from 5-20%. Obviously, the more crypto you stake and for longer, the better your returns/rewards are likely to be.

Plus, by choosing which crypto coins you do/don't stake, how much and with which third party, you have some choice in the process. While you can choose the bank(s) with which you have accounts, they typically don't give you the choice of where your money goes when they lend it out (which they do, up to 100% of it in some cases). ... And I thought crypto is risky ... Perhaps keeping as little money in your bank account (and as much cash in your wall safe behind that big ugly painting or in crypto) as necessary isn't such a bad idea, after all. You certainly don't want to be the next schmuck who loses money they put into "something safe" like Signature or SVB, do you? Centralised fractional banking is such a great idea, after all. What could possibly go wrong? Just a thought; use it or not (but certainly don't take it as financial advice).

 "It's people like you what causes unrest!" — Mr. Eric Praline (John Cleese); Monty Python's Flying Circus; "Fish License"

Pros, Cons and Scams

As with all things crypto and finance, there are both good and bad aspects and there is a degree of risk involved. Here are some points to consider:

Pros

• You can actually earn a passive income from your crypto, without trading it.
• You can claim your earnings/rewards at any time without unstaking the principle amount, provided they are above the minimum required.
• It is possible to reinvest your earnings in the same pool and thus earn more (compound interest).
• Some wallet software (such as Atomic and Exodus) has an inbuilt staking feature, so you don't even have to choose a pool; it handles that aspect for you.
• The more you stake, the more you earn. It also increases your chances of being selected as a validator (which can potentially earn you even more).
• The PoS model generally requires less energy than the PoW (mining) model. It is also more efficient and scalable. It is also not subject to halving/increased difficulty over time.

Cons

• Not all coins or pools provide the same APY as others.
• You can potentially lose your crypto if the pool shuts down or something bad (like the SEC) happens. (Here's looking at you, Celsius and friends!)
• You have to trust the pool with which you choose to stake your crypto. DYOR and verify before you trust.
• Some pools will take up to three weeks to release your crypto when you unstake it. During this time, your crypto is "locked" (unavailable) and won't earn any interest. (It's a bit like when you withdraw your earnings from Pub0x, except that you can still earn for new content.)
• Earnings don't start as soon as you stake your coins; you have to stake your coins for a minimum amount of time. What this is depends on the pool/provider, but it's usually a month or two.
• APY isn't guaranteed to be fixed; it can fluctuate from month to month.
• You usually have to provide quite a large principle (worth several hundred to a couple thousand dollars) in order to receive worthwhile earnings. (To make millions, invest billions.)

Scams

As with any other type of investing (and crypto in general), there are bad actors out to make a quick buck off the greedy and gullible people whom are out to make a quick buck. If you see something that seems to be too good to be true, it probably is. Anything offering you an APY of 35% or more (I've seen some in the 50-80% region) is highly likely to be new and unproven or, more likely, a scam. (The higher the APY, the higher the likelihood of a shark or two in the water. Even if the project is legitimate, it's still highly risky and unlikely to be sustainable.) Yes, some cryptos might reach such high peaks, but they're not going to stay there long-term. (Staking is definitely a long-term game; no quick bucks to be made here. Some pools don't even permit you to unstake in the first six months.) This is why DYOR is so important.

If you wouldn't be prepared to take the risk with a bank savings account, don't do it with staking; crypto doesn't automagically solve that particular problem just by using better/safer mechanisms and protocols. Basically, don't be an idiot; keep your wits about you and take reasonable risks when making financial decisions.

I hope that that's taught you something  and given you an option to consider when it comes to what to do with your crypto so that it works for you (or at least provided some weak-sauce humour at which to cringe). Personally, I'm staking Cosmos (ATOM), Ontology (ONT/ONG), Cardano (ADA), Tezos (XTZ) and Ziliqa (ZIL) since those give me the highest yields (in roughly that order). There are more cryptocurrencies that support staking; what you choose is up to you and YMMV. Stake your crypto so you can claim your steak!

Thumbnail image: A vampire drinking blood from a wine glass (poster's own image) // Speech bubble inspired by Dave Sawyer's FT Funnies Watch. if you haven't checked him out, I suggest you do; his writings are an experience like no other.

This post is now available on Medium.