In the previous article, we explored what staking is and the different types of staking available. In this article, we will visually examine how it works and how you can earn from it in the long term.
To start staking, you need to buy tokens on an exchange. Some projects require a specific number of coins. For example, Ethereum transitioned from PoW to PoS, and to stake Ethereum, you need at least 32 coins. Other projects allow you to stake from 1 token and above.
In the case of Ethereum, there are pools where users who do not have the required amount of coins can contribute to a “pool,” and the profit is shared equally among all participants. However, in our opinion, handing over your tokens to be managed by others in a pool carries the risk of not only failing to earn profits but also potentially losing your coins.
Moving on, let’s say you’ve chosen a coin and are now staking it on an exchange. On exchanges, this function is called EARN. There are different levels and staking percentages: flexible and fixed.
Flexible Staking
Flexible staking usually allows you to unfreeze your coins at any time while retaining the rewards earned in tokens. However, such staking options typically offer low annual percentage rates.
Fixed Staking
This is a staking contract for a fixed term (from 15 to 180 days). The longer the term, the higher the percentage return. If you decide to break the contract early, keep in mind that usually, you will only be able to withdraw your tokens after 24-48 hours, and during that period, the rewards will not be accrued.
Which Option Should You Choose?
First, don’t forget about risk diversification. Keep part of your assets in a wallet and part on the exchange (e.g., 30|30|40). This will reduce the risk of losing all your assets, especially considering that everything held on the exchange technically belongs to the exchange. (If the exchange is scammed, there is an 80% chance you won’t be able to retrieve your assets.)
Second, with the tokens on the exchange, you can also divide your assets, for example, 50% in flexible staking and 50% in fixed staking. However, in my opinion, this is not necessary. If you’re a holder or investor, you’ll be in the market for the long haul, so the more coins you accumulate, the better your price and volume will be. Staking for holders is an excellent way to secure a better entry price. As Robert Kiyosaki says, the best price isn’t the selling price — it’s the buying price.
Illustrative Example
You bought 100 coins for $100 (at a rate of 1 = 1).
Over the next 3-4 years, you accumulated another 30% of coins. Now you have 130 coins, but your total investment remains $100.
$100 ÷ 130 coins = $0.77 per coin. So, essentially, the price of your asset has decreased to $0.77 per coin, and at the original price of $1, you’ve already made a 30% profit.
Of course, in these calculations, we are not factoring in the current market price or the overall market conditions; we’re simply showing how staking can improve your position in the market.
Conclusion
In conclusion, staking is a passive income in the form of cryptocurrency. If you are an investor and plan to hold assets on the market for the long term, staking is what you need. Today, the returns in dollars may be modest, but during a bull market, you could potentially earn much higher profits.
The risks include price volatility, exchange scams (like FTX), project scams (like Terra Luna), and of course, never forget the importance of diversification—spreading your positions across different coins.
