12 min read
Exploring Crypto Staking Options
One of the staples of wealth creation is passive income earned from compound interest. And that's what crypto staking is all about
Published on12 Dec, 2023
One of the staples of wealth creation is passive income earned from compound interest. And that's what crypto staking is all about—passive income.
This article will explore three crypto staking options: Native, Pooled, and Liquid. It will also compare the benefits and risks associated with each. More importantly, after reading, you'll have enough information to decide which staking option is best for your investment goals.
Remember that crypto staking is only available for proof-of-stake (PoS) networks. Since Ethereum is the largest PoS blockchain, we'll use ETH in our examples.
Crypto staking is an excellent option for long-term investors and those with a "buy-and-hold" mentality. Staking will be less appealing for active traders who are averse to locking up their tokens for more extended periods. Nonetheless, it's always a good idea to diversify a trading portfolio and dedicate at least a portion of it to a staking position if your risk tolerance affords it.
By staking your idle tokens, you can receive rewards in the same token you invested. Further, since rewards accrue to your staked position, you'll earn compound interest at a rate depending on the annual percentage yield (APY) your staking platform offers. Ethereum's annual percentage yield (APY) for staking hovers between 3% and 5%.
More importantly, for the "cryptoverse" at large, your staking activity will help ensure the network's security. This net positive effect also helps your investment grow because a robust, secure network is better for your token's long-term appreciation.
Are you ready to play a crucial role in securing the Ethereum network? If so, participating as an active validator might be your path. Native staking is available to those with the funds to invest in multiples of 32 ETH. Moreover, becoming a validator node will allow you to propose and validate blocks of transactions to help maintain network consensus. Consensus refers to how nodes verify transactions on a blockchain network.
The good news is that you'll receive a higher percentage of staking rewards paid in ETH by acting as a validator. And you don't have to share them with others as you would in pooled staking (below). This option poses the least risk in the staking ecosystem because you're not dependent on third-party services.
Explore your crypto staking options now with Luganodes!
You have two options when it comes to native staking:
Firstly, all native staking solutions require a 32-ETH deposit. Even with today's lower prices, it's still a hefty sum of roughly $67,000 to participate. Additionally, solo staking has a higher entry barrier because you'll need the required technical know-how to run a validator node.
Before embarking on any native staking venture, remember that your ETH gets locked up for a period. That means you won't have access to your funds during this time. If the base price of ETH spikes, you can relax. If it tanks, however, you'll have to ride the storm out until the staking period ends. This situation is acceptable for buy-and-hold investors. But for more active traders, it can be painful to sit on your hands watching prices drop.
The same goes for a validator's entry and exit times. There's typically a cooldown period after you "unstake," which means you can't trade your crypto. You won't be earning rewards when waiting in a withdrawal queue to get your stake back.
One thing to know is that the GRR is not a fixed rate. It can fluctuate depending on ETH's price volatility and other market conditions. This means that periods of feast and famine will exist for individual validators. At the same time, there is always a chance of landing a lucrative block. There's also the chance of opportunities passing you by with juicy rewards slipping into another validator's pocket.
New validators might overlook this fact about GRR when calculating their expected future rewards. While long-term reward rates tend to regress to the mean hovering around the network average, even if you’re doing everything right, you can expect fluctuations in the short term due to things like luck and variance.
So, successful validators must keep their emotions in check while riding out periods of market volatility and bad luck. The trick is to persevere while keeping the long-term rewards rate front and center to soften the blows of short-term fluctuations.
As mentioned, consensus refers to how nodes verify transactions on a blockchain network and is a crucial step to prevent invalid data from finding its way onto the ledger. Therefore, validators who violate the consensus protocol can see their bonded ETH getting slashed. Slashing occurs when a portion (or all) of the validator's stake gets taken away as punishment.
It all depends on the severity of the infractions, ranging from too much downtime to more severe actions like double signing or coordinated attacks. These penalties can seem harsh but are necessary to incentivize honest behavior from all the validators.
You won't need to run the node yourself when using Staking-as-a-Service (Validator as a Service). However, you have to be aware of platform risks. Staking through a centralized exchange (CEX), for example, involves handing your tokens' custody over to a third party you must trust implicitly. The risk comes from the exchange getting hacked, becoming insolvent, or facing new regulations.
Moreover, trusting an inefficient validator can result in your node getting passed over for rewards. Extensive downtime hinders network reliability. Thus, a third-party validator asleep at the wheel can cost you.
A staking pool is a fantastic option for those who can't hustle up 32 ETH. This option allows you to pool your staking power with others with any amount you want. Together, you'll reach the 32 ETH deposit requirement. So, no matter how tiny your stake is, you can mix it with others to reach the goal.
The nice thing about pooled staking is it opens the door to a broader range of participation. Staking rewards now becomes possible for those who would otherwise be priced out.
However, Ethereum does not support pooled staking. Hence, this option resides in the domain of third-party service providers. Pool operators manage staking pools and activate and deactivate validators as necessary based on corresponding deposits and withdrawals.
Operators generate rewards by validating blocks of transactions and maintaining consensus as any validator would. Additionally, during high-selling periods when stakers make withdrawal requests that exceed the amount of ETH available, pool operators will need to exit validators. In such cases, processing times will take longer than usual.
You won't own an individual validator with this option. But you can earn rewards with a minimal deposit and without the challenge of managing anything.
One advantage staking pools offer is immediate rewards. In other words, you don't have to wait until the end of a bonding period to get your tokens out, like with native staking. You can request total or partial withdrawals at any time. You merely have to wait out the processing times.
Another difference with this option is that the rewards get distributed on a percentage basis. So, if you deposit a small amount into the pool, you'll own a smaller percentage. However, if you keep your stake locked, its value compounds as rewards accrue. So, when you decide to withdraw from the pool, you'll get your original stake back plus any accumulated rewards.
Another plus is that pools maintain an orderly entry and exit queue process to prevent chaotic stampedes of participants either "apeing in" during bull markets or panic selling during downswings.
To sum up, the benefits of pooled staking are:
There are disadvantages and risks to pursuing this option, however.
Firstly, pool rewards earn less than native staking. Another downside is that new entrants dilute the pool rewards. Furthermore, gross reward rates are not guaranteed when joining a pool. Luck and variance can influence what kind of returns you get. Like the other staking options, your account's value may rise or fall with short-term market fluctuations.
Worse yet, unless you've done your due diligence in qualifying pool operators, there is no guarantee they will act appropriately. In other words, they can damage your rewards. These are some reasons pooled staking is riskier than native staking.
Lastly, you'll need to be on guard for scammers. As the staking market heats up, more fly-by-nighters will be attracted to the space. So, would-be stakers need to exercise caution when picking pool providers. Rug pullers will no doubt try to entice users with promises of outrageous staking rewards, hoping to fleece hapless newbies into depositing into their dodgy platforms.
That's why it's even more important to seek out solid staking firms with good reputations like Luganodes rather than slick marketers with grandiose promises of riches.
This innovative staking option affords you the similar benefits of participating in a staking pool, but you get liquid staking tokens (LSTs) in return for your deposit. You can move these tokens around while your underlying asset is staked.
You can then put these LSTs to work in places like DeFi yield-farming protocols to earn other rewards in parallel with your pooled staking rewards. So, liquid staking allows you to stake crypto, but you receive a representation of the underlying asset in return.
The LST represents several things:
You can think of LSTs as virtual funds, and the setup process is as follows: First, you lock your digital assets on a liquid staking platform. The platform then issues you LSTs. You might have seen locked-asset replicas floating around like stETH (staked ETH). These tokens are pegged on a 1:1 basis to the original ETH asset, and you can withdraw them from your staking protocol to use elsewhere.
Liquid staking brings other opportunities unavailable to those using native or pooled staking. The benefits of liquid staking include the chance to transact on different platforms and develop multiple income streams. And like pooled staking, this option offers a more inclusive approach than native staking.
Many consider liquid staking to be the riskiest type of staking there is. Because the tokens are transferable, they bring further counterparty risk. Additionally, LSTs can lose their pegs, causing their value to drop below the digital asset linked to them. This can happen if too many users try to redeem their staked holdings simultaneously. Therefore, these platforms try to release staked assets at specific time frames.
But with greater liquidity comes risk. For one thing, you could lose your LST tied to your staked ETH. It would be the same as losing your ETH since your proof of ownership has disappeared. One way this could happen is if you make poor trades on a DeFi lending protocol that results in your token getting liquidated.
Nonetheless, it's a way to accrue more wealth for those with a higher risk tolerance who don't mind untangling the complex web of DeFi protocols and yield farming options.
As you can see, the best options for crypto staking will depend on how much you’re willing to stake, your risk tolerance, and how long you’re willing to tie up your funds. Each choice has its risks, so it's up to you to decide. The main takeaway is that whichever route you take, you’ll want to work with a reputable staking firm that provides the best security possible while helping you earn rewards.
If you hold cryptocurrency tokens, you can enhance your portfolio by staking to earn rewards. Leverage Luganodes' institutional-grade infrastructure to stake your holdings and create a passive income. Staking with us ensures ease of use, support, and safety while you earn attractive APRs, contributing to the security of various blockchain networks.
Luganodes is a world-class, Swiss-operated, non-custodial blockchain infrastructure provider that has rapidly gained recognition in the industry for offering institutional-grade services. It was born out of the Lugano Plan B Program, an initiative driven by Tether and the City of Lugano. Luganodes maintains an exceptional 99.9% uptime with round-the-clock monitoring by SRE experts. With support for 36+ PoS networks, it ranks among the top validators on Polygon, Polkadot, Sui, and Tron. Luganodes prioritizes security and compliance, holding the distinction of being one of the first staking providers to adhere to all SOC 2 Type II, GDPR, and ISO 27001 standards as well as offering Chainproof insurance to institutional clients.
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