Common questions about crypto staking
Here we answer questions we often get about staking cryptocurrency.
Here we answer questions we often get about staking cryptocurrency.
The simplest explanation of staking is that you hold your cryptocurrency in order to receive rewards in the form of more crypto.
Staking crypto is often compared to putting money in the bank to earn interest, yet there are big, fundamental differences. By staking, you receive a reward because you contribute to securing and operating the blockchain to which the specific cryptocurrency belongs.
Yes. Staking is a great way to use cryptocurrency to earn passive income. How much you can earn depends on how much you stake and how long you stake the cryptocurrency.
Here is a very simplified example of what this might look like:
Lets say you stake DKK 10,000 in ETH with an APY* of 5 percent.
This means that you will earn DKK 500 annually as a reward. Maybe you also stake the reward, which means you will also earn money from the reward.
*APY means annual percentage yield. You can also say "annual percentage return".
You can stake your Ethereum (ETH) and Cardano (ADA) at Firi today.
In general, there are many cryptocurrencies that allows staking. In fact all cryptocurrencies that use the "proof-of-stake" consensus mechanism can be staked. Here are some examples of cryptos that use "proof of stake".
Because not all cryptocurrencies use the "proof-of-stake" technology which allows staking. Staking is an important part of the functionality in proof-of-stake blockchains. But there are other cryptocurrencies that use the proof-of-work mechanism, which includes "mining".
Bitcoin, for example, does not allow staking. This is because Bitcoin is not a proof-of-stake blockchain. Bitcoin uses proof-of-work to verify transactions, and therefore does not need participants to stake crypto. Instead, Bitcoin uses "mining" to secure the network, and the Bitcoin-miners can earn a revenue by mining bitcoin in a similar way that stakers can earn revenue by staking ethereum.
Our advice is that you do your own research and choose based on this which coin you want to stake. Only choose projects that you believe in. Please look at these three factors when doing your research:
The value and stability of the cryptocurrency.
In general, it is good to choose coins that are relatively stable. That is, crypto that has a high market value, a good reputation and that is held by many different investors.
How many coins exist in total (or will exist)?
If the number of coins is predetermined, scarcity and increasing demand can affect the cryptocurrency's value.
What are the areas of use of the project and the cryptocurrency?
If a project can show real use cases and has a utility value, there is a higher probability of higher demand.
Both proof-of-work and proof-of-stake are consensus mechanisms that various cryptocurrencies use to verify transactions. You can also say that there are different mechanisms to secure the blockchain for cryptocurrency. For example, PoW or PoS must ensure that only one person can use one coin at a time.
Proof-of-work is one of the most common consensus mechanisms in cryptocurrency, and is used by Bitcoin. In short, miners must solve a mathematical calculation, and in this way validate the validity of the block. The first computer that finds the solution to the calculation is assigned the next block and receives a "block reward" with, for example, bitcoins and then starts the process all over again.
Mining uses computing power to process transactions, secure the network and keep all systems in sync with each other.
The mines secure the network by costing a possible attacker enormous resources to manipulate or destroy the network. It therefore becomes practically impossible to carry out a successful attack, because you have to control enough computing power to overpower the network - and this in turn will cost more money and resources than what you would potentially earn from a successful attack.
Proof-of-stake is also a common consensus mechanism, but instead of solving a math problem, users must stake some of their cryptocurrency to validate the transaction.
Staking works by storing your cryptocurrency on the blockchain, in what are called staking pools, in exchange for earning a reward. Validators, as they are called, therefore offer their cryptocurrency as collateral for the possibility of validating blocks. Whoever is chosen to validate the block, and thus get a reward, is drawn based on who has locked the most crypto for the longest time in the staking pool. The blocks are validated by several different validators, and when a specific number of validators have verified the block, the verification is complete. Staking is often compared to having a high-interest account where you deposit a certain amount and receive a return that resembles interest.
If a validator tries to attack the network, or similar, it can be penalized by losing a percentage of its crypto holdings. Therefore, the only rational thing is to make decisions that are also in the best interests of the network as a whole.
Cardano and Ethereum use PoS.
Both consensus mechanisms have financial consequences as punishment for trying to manipulate or attack the network. For miners (proof-of-work), the penalty is that you use a lot of computing power, energy and time, something that costs money. For validators (proof-of-stake), it is the cryptocurrency that you have staked that is at stake.
An important difference between the two consensus mechanisms is the energy consumption. Proof-of-stake is claimed to be 99.95% less energy-intensive than proof-of-work because no computing power is needed.
When staking cryptocurrency you sometimes have to accept that your funds are locked up for a period of time. During this period, you may run the risk of ending up in a situation where you would like to withdraw or sell your cryptocurrency. This will not be possible if you have committed to strike during this time period.
There is therefore a risk that the cryptos you stake, and thus have locked, fall in value during the period. We recommend that you never stake cryptocurrency for higher value than you can afford to lose.
Another risk is if you, or someone you stack with, is dishonest and tries to manipulate the network. Some blockchain networks penalize staked assets if the transaction validator representing those assets mistakenly produces a block. This is called "slashing". Firi will take the necessary measures to prevent staked assets from being "slashed", but should this happen against expectations, Firi will replace your assets at no extra cost to you. However, this does not apply if the reason for slashing is:
Yes. You are taxed on the value at the time you receive the staking reward, and also if you have a profit when you sell in the end. In the Firi-app, you can easily see your tax on staking under Tax calculation.
There are no fees to stake crypto. Firi takes a commission based on the rewards from the network. This is to cover our costs. From January 1, 2023, our commission is up to 25%. Expected annual return for each cryptocurrency always reflects the reward you receive after our commission.