This DeFi staking guide explains how to get in on the latest passive income trend in crypto with nothing more than an internet connection.
Updated Feb 1, 2023
Many companies on MoneyMade advertise with us. Opinions are our own, but compensation and in-depth research determine where and how companies may appear.
DeFi
Crypto
Passive Income
When you hear about crypto mining farms, you probably imagine a bunch of tech geniuses operating hundreds of thousands of dollars worth of computing equipment—and you're not far off. While this isn't feasible for most people, with a little research and tech-savvy, you could start bringing in a significant stream of passive crypto income another way: DeFi staking.
If you've done any reading on how people are marking money in crypto nowadays, particularly now that major coins have been losing value, you've probably come across the concept of DeFi staking. All you need is some crypto and an internet connection, and the best part is that it's generally less risky than investing in crypto. In this DeFi staking guide, we'll explain what it is, the risks associated with it, and how to get started.
DeFi, or decentralized finance, is a financial system that operates on smart contracts instead of through a central institution such as a bank. DeFi staking, therefore, is essentially locking up your cryptocurrency in these smart contracts for a period of time to earn rewards or interest.
This might sound a little like parking your savings in a high-yield account to earn a little extra on it. However, whereas even the best savings accounts don't even earn you 1% right now, DeFi staking can easily earn you upwards of 10%—or even 100%, if you're willing to go with some riskier projects.
DeFi staking is one of the most popular ways to invest in DeFi because it's relatively low risk (for the crypto world, at least) and can yield generous returns with very little effort. And while you do need to have a good amount of knowledge regarding DeFi and crypto to do this properly, you don't need any special equipment like you would to mine crypto.
In crypto, there are various mechanisms for validating transactions, and two of the most popular are proof of stake (PoS) and proof of work (PoW). Bitcoin, the first cryptocurrency, operates on a proof of work mechanism, which requires the exertion of high levels of computational energy to mine new coins. The problem with this is that it's inefficient, expensive and environmentally questionable.
With blockchains that use a proof of stake mechanism, transactions are validated through coin owners who stake their coins for a specific period of time.
Staking turns you into a validator, which helps the blockchain validate new blocks and maintain its integrity. In return, you earn rewards as an incentive to stake your coins in the first place.
You can only stake coins that operate on a proof of stake mechanism—so you can't stake Bitcoin. However, you can stake a long list of other popular crypto coins and alt coins. Ethereum is moving to a proof of stake mechanism, so you can stake Ether.
The best stablecoins are popular staking options because they maintain a stable value, unlike other crypto currencies that can be extremely volatile. Plus, it's not hard to find high stablecoin interest rates with major crypto exchanges and crypto banks. If you're really gunning for those extra generous staking rewards, and you're willing to invest in the little guys, the best DeFi coins often offer the best interest rates.
When it comes to finding the best platform for DeFi staking, there are a number of different options. Oftentimes, the easier and more user-friendly the platform, the less generous the rewards. However, DeFi platforms with high staking interest rates can be complicated to use, and if you aren't familiar with the technology, you could be opening yourself up to risks like being scammed.
Many crypto exchanges and crypto banks now offer staking rewards, and they're extremely easy to use. For example, Crypto.com offers up to 14% interest on your crypto deposits, although the exact rate will depend on the currency you're staking, how much you're staking and how long you're willing to lock it up. As of January 2021, you can earn up to 6.5% APY on Ether and 12% on Dai if you lock them up for three months.
With BlockFi, you can earn up to 8.6% APY for storing your crypto with this popular crypto lending marketplace. Some of their highest rates are offered for stablecoins like USDC, PAX, USDT, and BUSD.
A number of different types of crypto wallets allow you to earn staking rewards now. For example, you can now stake up to seven different coins in the popular hardware wallet Ledger. Major crypto exchange Binance also owns Trust Wallet, a mobile wallet for DeFi staking. Exodus, one of the most popular crypto wallet apps, also supports taking for a number of different crypto currencies.
While using a centralized and popular crypto platform is the easiest way to go, there are ways to earn staking rewards well into the double (and sometimes even triple) digits. For the most potentially lucrative DeFi staking rewards, you'll often have to stake DeFi coins on a decentralized exchange or application—like staking CAKE on PancakeSwap or staking Chainlink on Aave.
This is a little more complicated than staking with a centralized exchange like Crypto.com, but it's also what's bringing some investors monthly passive income streams in the hundreds, or even thousands of dollars.
If you want someone else to take care of the technical side of staking your DeFi coins while still earning healthy rewards, staking-as-a-service platforms will do this for you for a small fee, charged as a percentage of your rewards. Platforms like MyContainer, Stake Capital, and P2P Validator often support dozens of different crypto currencies, making them a more flexible option than some of the easy-to-use centralized exchanges without the learning curve of going the DIY route.
DeFi staking is generally safer and less risky than trading crypto and mining crypto. However, it's not without risk, and it is possible to lose money with DeFi staking.
One of the biggest (though less likely) risks is that the staking platform you're using has a bug or is otherwise vulnerable to cyber attacks. In this case, you could potentially lose your entire investment. That said, this is always a possibility in the crypto world, whether you're holding crypto on an exchange or in your own crypto wallet.
If your coins lose value during the staking period, your investment would lose value as well. This is one risk of DeFi staking—if you agree to lock up your coins for three months, and suddenly the price dips and you want to sell, you can't. This "impermanent loss" can be balanced with trading fees, which go to you for providing a platform with liquidity through staking your crypto. Or, if you're staking less volatile crypto such as stablecoins, the chances of you suffering a loss in price that's greater than the rewards you're earning are slim.
Finally, watch out for scams. These abound in the crypto world, and DeFi staking is no exception. If you learn about a new DeFi staking opportunity that sounds too good to be true, make sure you do your research on it, because it's very possible that a 200%+ APY is too good to be true. While rewards are sweet, pay attention to more than just interest rates—opt for older, well-established platforms over brand new, shiny ones you don't know anything about.