Learn Academy Crypto investing: Fundamental conceptsLesson 6: An Introduction to Staking

Lesson 6: An Introduction to Staking

After completing this lesson, you will be able to:

Understand what staking is.

Know how staking can be a source of passive income.

Know which blockchains support staking.

Understand locked and unlocked staking accounts.

Understand that a good return on staking does not guarantee an increase in the value of your crypto holdings.

Welcome to the sixth lesson in Kriptomat Academy’s guide to investment strategies. In this lesson, we’ll focus on the how and why of staking.

One goal of cryptocurrency staking is to give investors a way of generating passive income

Technically, there are three kinds of staking.

With blockchain staking, crypto is locked in place to increase the user’s odds of being selected as a validator for a block of transactions.
With yield farming, users earn crypto by locking crypto assets into liquidity pools managed by software apps called automated market makers, or AMMs. The liquidity pools allow DeFi apps to exchange and lend crypto.
With liquidity mining, users earn a DeFi app’s native token by staking crypto that is needed to perform particular swaps or trades.

From the investor’s point of view, all three forms of staking are like placing funds into a savings account or buying a certificate of deposit or “CD” at a bank.

With a CD, the bank may offer a 4% return, for example, on deposits of 1,000 euros for one year.
The person who buys the CD has an insured investment with a modest but guaranteed return rate.
The bank is essentially borrowing the investor’s funds.
The investor cannot withdraw cash from the CD (or must pay a penalty for withdrawing cash) until the CD reaches maturity at the end of the year.
CDs are a conservative way of generating passive income from banks.

When an investor stakes crypto to a blockchain or a dApp, the result is much the same

The investor earns a defined return at a rate that is better than banks offer for simple savings accounts.
In the crypto world, it’s possible to earn good returns on staking even if the staking program is “flexible,” which means the investor’s funds can be removed at any time.
It’s also possible to engage in “locked” staking, in which the pledged crypto remains locked away until maturity is reached – the end of 12 months, in our example.
For a simple but competitive passive-income alternative to staking, consider Kriptomat’s KriptoEarn, which delivers rewards of up to 13.5% annual percentage yield (APY) on selected cryptocurrencies.

Let’s take a look at a simple example.

Let’s say you put 1,000 euros into a bank savings account with a 2.5% APY.
You invest the same amount by putting a stablecoin like USDT into KriptoEarn with an APY of 8.5%.
At the end of five years, your bank account holds 1.133,00 euros. Your KriptoEarn account holds 1.503,66 euros’ worth of USDT – a difference of 370.66 euros.

Staking can have additional benefits

Some DeFi applications and other dApps allow investors who hold the most of their crypto to vote and propose measures on the project’s future. Staking can earn the investor a seat on the decentralized autonomous organization, or DAO, that manages the project.

On proof-of-stake blockchains, staking can earn investors newly minted coins as they validate transactions and add new blocks to the chain.
Staking isn’t for everyone. Becoming a validator on Ethereum requires a minimum investment of 32 Ethereum coins, for example. That’s where staking pools come in. You can stake a smaller amount to a 32 ETH pool and earn a fractional reward in return.

So – what have we learned?

Staking is a way for investors to earn a return on the crypto they own.
A staking investment is similar to a certificate of deposit issued by a bank.
A staking period can be flexible, in which case you can withdraw your crypto anytime, or locked, which means you can’t retrieve your crypto until the maturity date.

That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!

Which of these is a true statement about staking?

Crypto cannot be swapped or sold while it is staked.

Staking crypto is a way for individual investors to get access to large liquidity pools.

Staking delivers small returns to the DeFi apps that operate them – equivalent to the interest payments on a savings account.

Staked crypto is burned: removed from the crypto market as if it had never been minted.

The answer you selected is not correct. Please try again.

Which of these is most like staking for the individual investor?

Shares in a high-growth exchange-traded fund.

An interest-bearing savings account or certificate of deposit.

A temporary freeze or hold on financial transactions.

Investing with identical purchases every week or month.

The answer you selected is not correct. Please try again.

Which term best describes the money crypto owners earn by staking funds?

Windfall profits.

Negative cash flow.

Passive income.

Enhanced liquidity.

The answer you selected is not correct. Please try again.

What is the difference between locked and unlocked staking accounts?

Locked staking pools offer the same percentage return every month until the end of the contract, while returns vary according to market conditions with unlocked accounts.

Locked staking requires committing staked funds until a defined date, while the crypto lent to unlocked liquidity pools can be removed at any point.

Locked staking guarantees that staked crypto will have exactly the same market value when withdrawn, while funds committed to unlocked staking can vary in value based on market conditions.

dApps that set up locked liquidity pools cannot access the funds staked by users and investors. With unlocked staking, the funds are available for the dApp’s use.

The answer you selected is not correct. Please try again.

Which of these is a true statement about staking?

If you stake all your Ethereum to a staking pool, you will earn returns but the value of your total Ethereum holdings could go down.

Your funds can be bumped out of a staking pool if a significant number of users agree to stake funds for a lower return.

The value of your staked funds is frozen during the staking period.

Staking returns are always paid in the same currency you staked.

The answer you selected is not correct. Please try again.

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