If you hold certain cryptocurrencies, you can earn passive income from staking. Canada has become one of the world’s leading innovators in crypto and many Canadians are turning to staking to increase their crypto holdings. In this article, we will explain what staking crypto involves, how to do it, and why it’s not a scam. So, what is crypto staking?
What is Crypto Staking?
Putting it simply, crypto staking is when you receive rewards for holding certain crypto.
Since blockchains are decentralized, they rely on a number of validator nodes to verify transactions and add new blocks to the public ledgers. A blockchain is made up of blocks with each one containing hundreds of transactions. These blocks get added to the blockchain either by miners or by stakers depending on the consensus mechanism of the blockchain. In the case of Proof of Work (PoF) blockchains like Bitcoin, the miners who solve computational puzzles get rewarded in bitcoin for adding new blocks to the blockchain.
Cryptocurrencies that use a Proof of Stake (PoS) consensus to validate transactions rely on people to put their crypto on the line for a chance to add new blocks to the blockchain. The more crypto you have the more likely you will be chosen to add a new block and receive rewards. For example, to be in with a chance of adding blocks to the Ethereum blockchain you need to run a validator node which costs 32 ETH. That is too expensive for most people, so what happens is, you can “stake” your Ethereum, essentially delegating it to somebody running one of these validator nodes. Rewards received from that node will be shared amongst everybody who delegated their crypto.
How Can People Make Money While Staking?
With staking crypto, you can earn high interest rates on your crypto. If staked, it often means you cannot touch your crypto for a certain period of time. In exchange, you will receive more of that same crypto. The more you stake the more rewards you will receive. There are varying reward rates depending on the crypto you stake. For example, the average yield for staking Tezos (XTZ) is 6% per year and the average yield for staking Polkadot (DOT) is 12% per year.
How to Stake Crypto in Canada?
Staking cryptocurrency first requires you to buy an eligible crypto. You will need to purchase a Proof of Stake cryptocurrency from a crypto exchange. You can see our recommended Canadian crypto exchanges in our previous article.
Next, you must decide how you will stake. Some cryptocurrencies can be staked on crypto exchanges, which is a convenient method. Once you buy your crypto you won’t need to transfer it anywhere else.
Another way to stake is by using an official wallet of your preferred crypto. You can stake Tezos, Polkadot, Algorand, Cosmos and Tron directly through the Ledger hardware wallet. Simply keep your crypto in the Ledger wallet and choose to stake with just a few clicks on the Ledger Live app. Your rewards will be deposited on an ongoing basis directly to your Ledger wallet. You will simply see your holding increase over time.
Staking crypto in Canada is also possible through staking pools.
What is a Staking Pool?
Since only those with large holdings of crypto are chosen to validate transactions on a PoS blockchain, this alienates a lot of crypto holders. A staking pool is a way for individual crypto holders to “pool” their holdings together in order to have a better chance of being chosen to validate a block and receive the corresponding rewards. Rewards are shared amongst everybody within the pool. Usually, these staking pools will have a “lock-up” period in which you will not be able to trade, sell, or move your crypto until the time is up.
A staking pool offers the benefit of a “set it and forget it” approach. It also gives consistent rewards for passive income. Downsides are the lock-up period, and the potential for the crypto losing value in the market. If the price drops significantly since you bought and staked it, by the time you withdraw from the staking pool, your coins could be worth less than your initial investment. But this is a risk of holding any crypto and is not exclusive to staking pools. Crypto exchanges offer staking pools, but you can also find them on decentralized exchanges such as PancakeSwap. Decentralized staking pools often offer much higher rewards but come with more risk.
Why Do Only Some Cryptocurrencies Have Staking?
Only some cryptocurrencies are eligible for staking because not all cryptocurrencies use the PoS consensus. PoF coins like bitcoin need miners to validate transactions. To be a miner you need specialized computer equipment to solve complex puzzles. Stablecoins also do not require proof of stake. Stablecoins are pegged to fiat currencies, and while you can earn interest on your stablecoins, you are not actually staking them you are lending them. The most popular staking coins are:
Bitcoin, for instance, doesn’t allow staking.
Pros and Cons of Crypto Staking for Canadians
The advantages of staking crypto outweigh the disadvantages. Staking crypto can give you passive income simply by holding crypto. In some cases, the rewards can be very generous. You also don’t need to run a validator node yourself, you can simply receive rewards by putting your crypto in a staking pool, delegating your crypto, or using an exchange to stake.
One disadvantage is the lock up period. This will vary depending on where you stake, but usually a lock-up period is three months. During this time you will not be able to transfer or trade your staked crypto. You can often lock up for shorter time periods but this will generate fewer rewards.
Another disadvantage is that you must pay tax on your staking rewards. Although there is no specific guidance on crypto staking, it’s widely believed that the CRA treats staking rewards as income. When you sell your rewards for fiat, or trade the rewards for another crypto, this can incur capital gains tax.
What are the Major Risks in Crypto Staking?
Of course, all crypto trading comes with risk and staking is no different. When you stake crypto, you are betting on the price of that crypto staying the same or increasing. While you will receive rewards which will add to your total holdings, if the price drops to zero, then it will not matter how many rewards you receive. If you have your staked crypto in a time lock up, then you may watch your crypto value drop and drop without being able to trade it.
While you won’t necessarily lose your staked crypto, you have to have good faith that the staking pool, exchange or delegate you’ve chosen acts in good faith and pays you the rewards you are supposed to receive. If lending crypto such as bitcoin or stablecoins, then you must trust the lending platform that you will receive your coins back at the end of the lending period.
If using a decentralized exchange to stake crypto, then you must put trust in the exchange that it won’t be exploited by hackers or the creators of the exchange. A centralized exchange such as Binance will usually have insurance for its customers should it get hacked. Plus, they have their reputations to uphold. A decentralized exchange offers no safeguards.
Staking crypto offers holders the chance to earn more crypto passively. The staking rewards will be lower the less risk you take. For example, staking the second most valuable crypto – Ethereum – will offer relatively lower interest rates than if you were to stake a crypto that is far higher up the rankings. The longer you stake, the more rewards you will receive as well. Therefore, more risk equals more potential rewards. The easiest way to stake is simply by using a crypto exchange. They may offer slightly lower rewards than if you were to use a decentralized staking pool, but big exchanges offer a better sense of security and trustworthiness. If it is your first time staking, then staking via a Canadian crypto exchange is a good way to test it out.