Staking can be a powerful way to earn yields on certain crypto investments. It's a bit like holding dividend-paying stocks -- investors benefit from regular staking rewards as well as any accumulation in value.
Proof-of-stake blockchains use staked coins to validate transactions and keep the network secure. Stakers earn rewards in return for tying up their coins. This makes it a relatively safe way to put your crypto to work. It's different from other -- riskier -- ways to earn interest on your holdings, such as crypto lend-earn schemes.
Staking is back in the spotlight this summer after a few years in regulatory purgatory. Uncertainty over whether the interest-earning aspect made staked assets into securities meant some exchanges were reluctant to offer staking services. However, the Securities and Exchange Commission (SEC) has now confirmed that, for the most part, staked cryptos are not securities.
If you want to take advantage of the SEC's clearer stance and add some staking cryptos to your portfolio, here are three to consider.
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1. Ethereum
Ethereum (ETH +1.18%) is sometimes referred to as Bitcoin's little sister, or the silver to Bitcoin's gold. But neither of those descriptions does credit to the second-largest crypto by market cap. Ethereum is a smart contract blockchain, meaning that other projects can be built on its ecosystem.
Ethereum has come under some criticism because the network can be slow, and fees are higher than those of some of its competitors. However, per DefiLlama, it still dominates decentralized finance (DeFi). With almost 60% of the total locked value, it has significantly more assets in its ecosystem than any other crypto. That includes over 150 stablecoins, which may take off after the passing of the Genius Act.
Ethereum is also noteworthy because it made a massive technological leap in switching to proof-of-stake a few years ago. The merge was akin to changing an engine on a moving car, and the successful switch is a testament to the skill of the developers in the Ethereum community.
Coinbase staking rewards (July 2024): 2%
CRYPTO: ETH
Key Data Points
2. Solana
Solana (SOL +2.59%) came to fame in 2021 when it grabbed investor attention as one of the fastest blockchains. Its speed is still one of its big attractions, boasting a potential of over 65,000 transactions per second (TPS). To put that in context, Ethereum processes less than 30 TPS. Even so, CoinGecko points out that Solana has only ever achieved a fraction of that speed in practice. Its non-theoretical TPS is between 1,000 and 2,000.
Cost is another key feature: Solana says its transaction fees are only $0.00025. This makes it a popular choice for developers as they can be confident of not racking up huge bills when working on a new project. Similarly, DeFi users won't find they're spending a fortune in transaction fees when, for example, moving assets from one platform to another or exchanging cryptos.
On the downside, Solana has faced its share of technical issues -- particularly in 2021 and 2022. It grew so fast that critics worried the network had sacrificed security for speed.
Coinbase staking rewards (July 2024): 5.1%
3. Avalanche
Avalanche (AVAX +1.41%) is another proof-of-stake, smart contract ecosystem that's similar to Solana and Ethereum. It uses three interoperable blockchains, each with a different purpose. The creators say this gives developers more flexibility, while also keeping the network scalable and speedy.
Avalanche has not grown as fast as Solana, but it's still in the running. Moreover, Avalanche excels in interoperability -- allowing blockchains to talk to one another. If stablecoins and decentralized finance take off in the coming years due to regulatory clarity, then the ability to move assets easily from one ecosystem to another will be essential. Without interoperability, crypto networks would be siloed. It's a bit like having funds in one bank account and not being able to move them to another.
Coinbase staking rewards (July 2024): 4.5%
Staking isn't right for everyone
Staking can be a great way for cryptocurrencies to build community, enhance security, and generate yield for investors. Proof-of-stake also consumes less energy than Bitcoin's power-guzzling proof-of-work mechanism. You can stake directly on top crypto exchanges, or -- if you're more confident -- do it through some digital wallets.
However, don't choose a staking crypto only for the rewards. Research the projects carefully and consider how they might perform in the long term. If you move beyond big hitters like Bitcoin and Ethereum, bear in mind that cryptocurrency becomes even riskier with less-established projects. It's also worth thinking about diversification within your crypto collection. Ultimately, staking is just one element to consider.
