What is Staking? What to Know and How to Get Started

Staking is another way to earn profits from your crypto investments. But what is staking and how can you get started?

What is staking?

Staking is a means of using your cryptocurrency to earn more cryptocurrency. Or having your cake, and eating it too! Typically, with crypto, you don’t earn any profit (or losses) until you sell. But with staking, you can hold onto your crypto, and earn an income at the same time.

To fully understand staking, you first need to understand Proof of Stake (PoS).

What is Proof of Stake?

Because cryptocurrencies are decentralised and rely on a network to authorise transactions, there needs to be a way for this network to reach consensus. With Bitcoin, this is done through Proof of Work (PoW). Proof of Work involves miners competing to solve cryptographic puzzles for the right to validate the next block of transactions.

If that sounds confusing, you can read more about it here:

Learn more: What is Bitcoin? A Beginner’s Guide to Bitcoin

Proof of Stake is another consensus protocol. With Proof of Stake, not everyone is competing to validate the next block of transactions. Instead, just one is selected from a draw. To be in the draw to validate the next block of transactions, a validator has to put up, or stake, its own cryptocurrency. For example, Ethereum 2.0 (which uses PoS as opposed to PoW on Ethereum) requires users to stake 32 ETH to become a validator. At ETH’s current price (as of 17/03/2022), that’s roughly a US$88,000 stake.

This is used as collateral, to ensure validators do a good job. If they validate fraudulent transactions, they risk losing part, or all, of their stake for failing to perform a smooth validation, or trying to cheat the system. And because this stake is larger than the reward, they’d lose more money than they’d make, effectively incentivising validators to remain honest and accurate.

How do you begin staking?

If you want to start staking, you have two options:

  • Become a validator/node
  • Delegate your stake to a staking pool/service

Becoming a validator requires a sizeable amount of crypto (for example, 32 ETH), plenty of hardware power and technical know-how. And, you’re tasked with keeping your node on 24/7 and helping to maintain the ledger.

This is beyond your average crypto investor.

However, delegating your stake to someone else is a relatively simple way to get among the profits, without the need for a sizeable investment or expensive, complicated hardware.

What is stake delegating and staking pools?

Stake delegating is, as the name suggests, delegating your stake to someone else for them to stake on your behalf. The easiest way this can be done is through an exchange. Certain exchanges have their own validators, and you can opt to delegate the crypto you store on the exchange for staking.

Another option is to join a staking pool directly. Staking pools are groups of individuals who pile all their crypto together to improve their staking power, and then share any rewards.

Whatever option you choose provides the benefit of having someone stake on your behalf. So you don’t need to have the equipment or knowledge to run a node yourself. And you don’t need to have large amounts of crypto.

Which option is best?

That depends on what you’re looking for.

Staking on an exchange is the simplest option for investors who aren’t tech-savvy. You just need to give your exchange your coins and let them do the rest. This does mean you have no control or say over how your coins are used, and your exchange will also most likely charge fees for providing the service.

With a staking pool, you get to select who is using your crypto and how. But, you’ll need to do more research to understand the validity of the pool, the fees they charge, customer support, and the size of the pool.

With both options, you are delegating your stake to a staking pool. It just depends whether you’d rather do that directly yourself, or let a middle man (like your exchange) do it for you.

It’s also worth noting that an exchange isn’t the only middle man available. There are now specific staking services, like Kraken and Aqru, as well as certain cryptowallets offering staking services. The level of input and control you have over your investment will vary depending on the service and provider. So some further research is required.

Learn more about cryptocurrency here

The benefits and risks of staking

The biggest benefit of staking is the opportunity to make passive income from your investment. But it’s not without risk. For starters, staking typically requires you to lock away your funds for a certain amount of time. During which, you can’t do anything with them. So if there are large price fluctuations (which there often are) you can’t sell any of that locked away coin. That could lead to you missing out on big gains, or avoiding big losses.

If you make 5% profit from staking, but your crypto’s value drops by 40% in the same time frame, then you’ve still made a loss.

Learn more about cryptocurrency here

Do I need to pay tax on my staking profits?

As staking is a profit-making scheme, you need to pay tax on any money you make staking, as well as any profit you make from selling your crypto stake further down the line. Two separate profits, two separate tax obligations.

You can read more about your crypto tax obligations here:

Learn more: Cryptocurrencies: How are Crypto Assets Taxed in NZ?

Where to buy Crypto in NZ

The display order does not reflect any ranking or rating by Canstar. The table does not include all providers in the market. 

Provider Fiat Currencies Bitcoin Other Currencies Est.
Easy Crypto NZD, AUD Yes 100+ 2018
Independent Reserve NZD, AUD, USA Yes 24 2013
Kiwi Coin NZD Yes No 2014
Swyftx NZD, AUD Yes 228 2017

This information is not an endorsement by Canstar of cryptocurrency or any specific provider. Canstar is providing factual information supplied by providers. Cryptocurrencies are speculative, complex and involve significant risks. Canstar is not providing a recommendation for your individual circumstances or in relation to any particular product or provider.

Learn more about cryptocurrency here

author andrew broadley

About the author of this page

This report was written by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.

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