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Common questions about crypto staking

Here we answer questions we often get about staking cryptocurrency.

What is crypto staking?

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.

Can you make money staking cryptocurrency?

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".

How can I create a staking account with Firi?

To create a staking account in the Firi app:

  • Go to My holdings, scroll down and find the crypto staking option.
  • Create a new staking account.
  • Follow our staking guide and confirm the terms.

How to start staking Ethereum (ETH) after creating your staking account:

  • Choose whether you want to stake ETH you already have bought or whether you want to buy more ETH to stake.
  • Select the amount you wish to stake
  • Activate by confirming the stake
  • The funds are then transferred to your staking account and you now start earning rewards!

Which cryptos can be staked at Firi?

You can stake your Ethereum (ETH) and Cardano (ADA) at Firi today.

Proof-of-stake

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".

  • In 2022, Ethereum has transitioned to a proof-of-stake blockchain, so now you can stake ETH. Launched in 2015, Ethereum is the world's second largest cryptocurrency based on market capitalization. Ethereum's associated cryptocurrency is called ether (ETH).
  • Cardano's cryptocurrency ADA can also be staked. Cardano was founded by Ethereum co-founder Charles Hoskinson and was made to “create a more balanced and sustainable ecosystem” for cryptocurrencies.
  • Solana is a decentralized blockchain that is programmable. This means that you can build smart contracts and decentralized apps on the blockchain, which makes Solana one of Ethereum's smaller but interesting challengers.
  • Polkadot's crypto DOT can also be staked. Polkadot works by connecting multiple blockchains in a unified network through a central chain known as the “Relay Chain.”

Why cant all cryptocurrencies be staked?

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.

Which cryptocurrency is best to stake?

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.

What is the difference between proof-of-work and proof-of-stake?

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.

Similarities and differences between PoW and 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.

What are the pros and cons of staking crypto?

Benefits of staking crypto

  • You can make money while you sleep. It is the crypto that works for you and all you need to do to get rewarded is to hold (lock) your crypto over a period of time.
  • Staking is more energy friendly than mining. It can also be cheaper to get started as you don't need computer equipment.
  • By staking, you participate in the blockchain ecosystem. Some blockchains also give you the "right to vote" if you participate in staking, which means that you can help decide what will happen to the network in the future.

Disadvantages of staking crypto

  • In some cases, you need to lock your cryptocurrency for a certain period of time. This means that for some cryptocurrencies you have to wait a while before you can sell or move funds that are locked. Some cryptocurrencies are not locked at all, while others are locked for a shorter or longer period.
  • Cryptocurrency is very volatile. Large price fluctuations can lead to both gains and losses. If you stake a crypto that goes down in value, the reward may not be as big as you had hoped for.
  • Some blockchains require you to stake a minimum amount which is quite large.
  • Staking cryptocurrency is never free, and you often have to pay a small fee to the platform or crypto exchange you stake with.

What are the risks of staking cryptocurrency?

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:

  • Errors at protocol level as a result of "bugs" or maintenance.
  • Actions or omissions of business partners.
  • Hacking or malicious attacks.
  • Force majeure events or events that are equivalent to this

Do you have to pay tax on staking rewards?

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.

Firis commission on staking rewards

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.

Linda Helén Skuggen08/02/2023