As proof of stake blockchains become more common, the allure of staking and earning rewards is rising as well. That might sound a bit confusing, but essentially all it means is that there are cryptocurrencies out there today that allow holders to lock up, or stake, their cryptocurrencies and earn some interest on those holdings.
These blockchains incentivize users to stake their crypto by paying rewards, because proof of stake blockchains increase their security and decentralization when more people stake their funds. In reality the roles of staking and transaction verification on a blockchain are a bit more technical than described, but that's a conversation for another day. What's most important is recognizing that there is an opportunity to put your crypto to work and generate some passive income.
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The beauty of staking
You shouldn't expect to retire off of these rewards, but when they add up, they can be a good chunk of change. You could compare staking to a crypto version of a stock that pays dividends, except the payment is in the form of the cryptocurrency being staked.
Staking your cryptocurrency can be a great strategy for long-term investors because it offers a consistent way to earn passive income on funds that you don't plan to move in the short term. In addition, it lets investors benefit from the beauty of compound interest -- rewards are typically added to the existing staked reserves, so as your staked reserves increase, the interest paid out rises as well. Ideally, the underlying value of the crypto you are staking also rises, and when this happens, returns are amplified even further because the rewards are worth more too.
What to look for
When it comes to evaluating which cryptocurrencies are best suited for staking, there are a few things to look for. First would be the reward rate. They usually range from 4% to 12%. Second would be the frequency of pay outs. Cryptocurrencies pay rewards on varying schedules. Sometimes they are paid out by the day, while others pay out every few days. Another important factor to consider before staking is ensuring that you are choosing a cryptocurrency with a large market cap and proven track record. When staking cryptocurrencies that lack these characteristics, the staked funds are potentially at greater risk of losing value.
Last and most importantly, it is crucial that investors take into account the inflation rate -- or pace of supply growth -- of each cryptocurrency. An example might help. Say a cryptocurrency offers investors a 5% reward rate for staking but also has an inflation rate of 5%. This staked crypto is only keeping pace with the inflation, and the real, adjusted reward rate is 0%.
It should be noted that there are some cryptocurrencies out there that offer adjusted reward rates as high as 25%. While attractive, these are the cryptocurrencies you should avoid most; they are typically the most volatile cryptocurrencies and the ones without any proven track record. The better option is to find a cryptocurrency that might have a lower reward, but with a history of growth and stability.
With all of this in mind, here are the three best cryptocurrencies to stake that offer investors a combination of all the factors discussed.
The top 3
Staking on Ethereum (ETH 0.83%) is relatively new, but thanks to an update known as The Merge that launched last September, Ethereum holders are now able to earn generous rewards. With an adjusted reward rate of 8.47% and the largest market cap of any proof-of-stake cryptocurrency, staking Ethereum is a no brainer for long-term investors.
Another cryptocurrency investors should consider staking is BNB Chain (BNB 0.56%). As the second-most-valuable proof of stake cryptocurrency and the native cryptocurrency of Binance, the world's largest cryptocurrency exchange, BNB not only has a proven track record, but also boasts an adjusted reward rate of 8.48%.
The last crypto to make this list is Polkadot (DOT -2.29%). Despite a relatively high inflation rate, its adjusted reward rate is about 7.8%. And as the sixth-largest proof of stake cryptocurrency by market cap, Polkadot shouldn't be overlooked by investors.
Best ways to start staking
After all this you are likely wondering where and how you can take part in staking. The best options for the experienced investor are through a staking pool or a staking service provided by exchanges.
A multitude of crypto wallets allow users to participate in staking pools. Look for a staking option in your wallet and there should be instructions to start earning rewards. These wallets will automatically ensure you are paid, and typically add the earned rewards back to your staked reserve.
Another option is staking through an exchange such as Coinbase or Binance. These options are likely even simpler for the average investor. But there are some things to consider. First, by using these options you are trusting the exchange to hold your cryptocurrency. Hacks can and do happen in the crypto world, so it's advisable to only use highly reputable platforms. Furthermore, to be compensated for their services these exchanges take a cut in of the stake rewards. They often aren't too much to worry about, as they do make the process of staking easier, but it's at least worth noting that you won't be getting 100% of the profits.
No matter the path taken, staking is a novel and unique function of cryptocurrencies that should be used to investors' advantage. For those maintaining a long-term investing goal, staking not only lets compound interest work on your behalf -- but should the cryptocurrency's price increase as well, then some considerable profits can be made.
