Staking has become a popular trend in cryptocurrency over the past few years because it allows investors to make passive income on their cryptocurrency. It obviously gets much more complicated than that when examined from a technical perspective, but the basics of staking are that cryptocurrency holders can earn passive income on their holdings.
If you are only interested in earning a passive income on your holdings, then that’s all you probably need to know about staking. But it is a good idea to have a basic understanding of what is happening with your cryptocurrency before locking it away.
How does staking work?
Staking is actually a pretty simple process. First of all, it only works on proof of stake blockchains like Ethereum 2.0, Tezos, Cosmos, and Polkadot.
These protocols rely on validators to validate transactions on the blockchain without having to solve complicated math problems (ie. proof of work). The validators must put some cryptocurrency up as collateral. If the validators make too many mistakes, then the staked balance is taken.
The reward for successfully validating transactions is the passive income earned from the staked cryptocurrency serves as the motivation for validators to actually validate the blockchain.
To summarize, you should view staked cryptocurrency as collateral while validating a blockchain. Too many validation mistakes will result in forfeiture of the staked cryptocurrency.
Why do so few cryptocurrencies allow staking?
Not all cryptocurrencies have staking available on them. In fact, the majority of cryptocurrencies do not offer staking. This is because staking is only available on proof of stake blockchains.
Proof of stake is a far more efficient method of validating transactions on the blockchain compared to proof of work. It can scale much larger, uses less energy, is faster, and has lower transaction fees than proof of work. However, proof of stake blockchains often suffers from centralization problems.
Anyway, Bitcoin is proof of work, which means that staking is not possible on it. Most staking at the moment is done on Tezos, Cosmos, Ethereum 2.0, and Polkadot.
Pros and Cons of Staking
Staking has some positives to it and some pretty big downsides. This section will offer a fair explanation of both sides of staking.
Pros of Staking
- Staking cryptocurrency can earn passive income. If you plan on holding the cryptocurrency, then staking offers a way to earn some extra coins.
- Staking is easy if you use a 3rd party like Coinbase. It literally only takes a few clicks to begin staking on Coinbase.
- It supports the blockchain by helping to validate transactions.
Cons of Staking
- There is a risk that you lose your staked cryptocurrency if the validator has problems.
- The income can be inconsistent if your validator does not validate many transactions.
- It is complicated to stake cryptocurrency on your own.
- This problem can be avoided by using Coinbase, Binance, or any other 3rd party staking service.
- It often requires locking your cryptocurrency for a set amount of time before withdrawing it.
- It’s still possible to withdraw it, but a penalty must be paid and all earnings are forfeited.
Is staking on Coinbase a good idea?
Coinbase is a legitimate cryptocurrency exchange that does offer competitive rates for staking cryptocurrency. You have little to no risk of Coinbase running off with your staked cryptocurrency.
That does not mean staking is risk free!
Again, it is still possible to lose your staked cryptocurrency if the validator makes too many errors. Technical issues may also result in the loss of cryptocurrency.
With that disclaimer out of the way, staking is a relatively safe way to earn some extra cryptocurrency. We don’t recommend it for short term holders because there is a locking period, which can be bad if the price drops.
However, if you have no plans on ever selling your cryptocurrency, then staking is a great way to earn some extra coins. Just remember that there is still some risk, albeit small risk, that you lose your staked stack.
How much does staking on Coinbase pay?
Staking on Coinbase does not really pay that much money. You can expect up to ~5% per year if you stake Ethereum, Tezos, or Cosmos.
Again, staking only makes sense if you plan on holding your coins for a long time and have enough where an extra 5% is worth it.
Requirements to start staking
The requirements to start staking depend on how you want to stake. The requirements are rather steep to stake on Ethereum 2.0 on your own – around 32 ETH.
Fortunately, the requirements are far lower if you use a staking pool or stake with a centralized exchange like Coinbase. In fact, you can stake any amount of cryptocurrency on Coinbase.
Our recommendation is that you have at least $1,000, preferably more, in cryptocurrency that you are comfortable losing to begin staking. The returns simply aren’t worth it otherwise.
If you want to start staking without using a third party, then we recommend having a pretty solid tech background or hiring a service to help you set it up. It’s easy to lose money staking on your own if you don’t know what you’re doing.
That covers everything you need to know about staking on Coinbase. It’s really not that complicated of a process if you do it on Coinbase, but the somewhat small APY of 5% only makes it appealing if you already plan on holding for a long time.
We do not recommend staking to small time investors or short term investors.