I think we can all agree that leaving money on the table is the worst! That doesn’t change with something like crypto staking. Where the APRs may vary depending on the methodology that you’re using to stake, as well as the APR that you’re actually getting.
Let’s say you were staking a cryptocurrency and you were getting 5% APR. Now, if you did that for ten years, you get around $16,288 if it was compounded annually. Well, if you shopped around a little bit for rates or use a different methodology and got 7%, that could have ended up being $19,671 after ten years.
That difference can be magnified if there’s a longer time period for it to compound or you’re dealing with more money.
For those of you that need a quick update on what staking is, it’s part of the consensus algorithm of Proof of Stake (POS).With Bitcoin, you have proof of work where you need expensive hardware in order to solve these hard puzzles. Whereas Proof of Stake, you lock your crypto assets, and this is known as staking in order to secure the network as well as verify transactions. In doing so, you get paid interest (those are the rewards that we’re talking about).
Proof of Stake is often considered more sustainable for the long term. If you’re wondering which crypto projects run on Proof of Stake, you can go to CoinMarketCap.com scroll down, and on the filter algorithm, pick POS for Proof of Stake.
So if you’re staking, for example, Ether 2.0, how can you be getting paid a different amount compared to everyone else?
There are different methodologies that you can go to Staking, and we’re going to cover those. While I am using Ethereum 2.0 as an example for this article, it’s good to know that this can be applied to most cryptocurrencies that use Proof of Stake.
The first methodology we’ll be talking about is running your own validator. The thing about Ethereum is not everyone can be a validator. If you own any amount of Ethereum, you need a certain amount. To even become a full validator, you need at least 32 ETH. On top of that, you do need to meet certain hardware requirements in order to run the full node validator. You can’t just be running this on a 2010 MacBook.
If you go to the launchpad.ethereum.org, there’s actually a whole checklist that tells you the requirements when it comes to hard drive, CPU & RAM, and the Internet. There’s a whole checklist of how to set it up, how to make sure that you configure everything correctly in order to make sure that you’re setting up yourself for success as a validator.
For each Proof of Stake cryptocurrency, there are going to be different requirements regarding hardware, and there are going to be different requirements for the amount, that is needed in order to stake as a solo validator. Obviously, this is the hardest methodology to implement, but because it’s the most complex and there are no middlemen, your rewards for being a Validator are going to be on the higher end of all these methodologies.
One of the downsides of running your invalidator is slashing, which you can think of as a penalty for validators that aren’t acting like they’re supposed to. Whether it’s downtime or double signing, even if you’re not purposely doing things incorrectly, you can lose part of the stake that you put up as collateral.
The next option is actually joining a staking pool. If you have less than 32 ETH, you could use something like Rocket Pool.
Rocket Pool is a decentralized network of node operators in order for people to earn staking rewards with their ETH. So if you don’t have the 32 ETH, you can just go ahead and stake your ETH by using Rocket Pool. The average rewards around 4.33% APR, whereas if you want to stake and run a node, they make it possible for you to run your own node with only 16 ETH instead of 32.
Essentially you can increase your APR because you’re getting a percentage of the rewards that everyone else is supposed to get for staking. The people that are running nodes through Rocket Pool need to be compensated somehow, so they are taking a cut from everyone else that is just staking.
On average, the reward is slightly less than running your own Validator, but the risk goes down because you’re sharing the risk amongst a bunch of node operators. So if one makes a mistake, you don’t lose everything. The complexity is easy because the whole protocol like Rocket Pool is designed so anyone can join the staking pool and not have to be a technical guru.
Then you have Validators as a service. This is more of a centralized service that takes people’s ETH that are given to them and they set up the validators. Use the ETH that you give them and they give you a certain percentage back.
For example, with Stakes.us, if you use their service you can get around 5.1% as of now. Something else you want to be looking at for all these methodologies is the lock-up period.
For Ether 2.0 all of the methodologies are in the same situation (where there isn’t an exact known date yet for when you can withdraw Ether 2.0 because there needs to be the merge). So the upgrade for Ether 2.0 needs to be complete.
But for other cryptocurrencies like Solona (SOL), Cardano (ADA), you should also look at if there is a lock-up period, meaning that once you deposit, how long before you can actually withdraw your funds? So in a way, validator as a service is very similar to staking pools, but this is more of a centralized service.
The rewards for Validators as a service might be lower than a stacking pool just because there may be more middleman fees. Additionally, because someone is setting up and running a validator for you. There also may be a minimum amount of ETH, just like if you’re going to run your own validator.
The last methodology is the most straightforward, the easiest, and the most convenient, but you get the lowest rewards. Which is exchange staking. So think of Coinbase, Kraken and Binance. Basically, in any centralized exchange that offers the ability to stake that cryptocurrency, the reward tends to be on average lower than the other options.
If you look at Coinbase, the APR is around 4.5% for Ethereum, whereas Kraken is around 4-7%. So if you’re looking for an option so easy your dog could do it and you don’t mind trusting centralized exchanges… This is the move.
And that rate does change depending on how many people are staking. The more validators that come on, the fewer rewards everyone gets. Think of it as a pie in a way you don’t want other people to be validated if you are because your rewards do go down.
To get a base understanding of what your APR should be around, you can look at the launchpad.ethereum.org and look at the beacon chain to see how many validators are currently out there, as well as the current APR. So if the current APR is 4.9% and you’re getting 4.5%, think of the difference as the commission that’s getting paid out to whichever service you’re using.
If you’re getting way more (let’s say you’re getting 20%) for a service, that’s a huge red flag. you should be questioning how are they paying out 20% APR for Ethereum validators when the current APR is only 4.9%?!?
Again, that base APR percentage on average is going to be different for each cryptocurrency. Some may be 5%, some may be 2%, some may be 10%. So you’re going to have to research each individual project that you’re involved with staking in.
Like anything else in life, the rewards are lower if you’re using a service or something that’s making it convenient to get those rewards. The harder it is or the more work that you have to do yourself, the higher rewards you’re going to have. Looking at something like Ether 2.0, you can see the difference in rates between being your own validator and using a service is smaller, so the impact may not be as big.
But if you are staking some other coin that isn’t top five in market cap. You may notice that there are opportunities to make more money. For instance something like Cosmos which has a 5% APY for Coinbase but a 12% APY on Kraken. If you delegated Cosmos or ran your own validator you get close to 14% to 15%. So with the case of Cosmos, you can get a difference of 10%.
It’s just something that should be looked out for in order to maximize your rewards and make sure that you’re not leaving any money on the table!
This article was generated from the following Youtube Video: