How to Earn “Interest” On Your Cryptocurrency
by Audrey Petrash on Nov 2, 2020
The aphorism “time is money,” made popular by Benjamin Franklin, can be interpreted in many ways. We can apply it to the concept of earning interest on physical currency. And we can also apply it to the notion of staking a cryptocurrency. While this may deviate from Franklin’s original intentions, it is a fitting adage for the scope of this article.
What is Interest?
Put simply, interest is the income that is received for lending out money and normally accrues daily or monthly. On the flip side, interest is the fee that is paid for borrowing money.
Savings accounts are a great example of earning interest on your money. When you have money in a savings account, the account will generally pay you a specific amount of interest on a specific schedule.
But why is your bank paying you interest in the first place? Well, when you have money sitting in a savings account you are in essence “lending” your money to the bank. The bank then takes that money and uses it to loan money to other customers.
Basically, the time you spend leaving money in your savings will yield you more money and that yield is called interest.
What is Staking?
When you stake your cryptocurrency, you are lending it out to support that cryptocurrency’s network by validating transactions. In exchange, you will receive crypto in the form of an “interest” payment. This is called a staking reward. The amount of transactions a person staking can verify is proportional to the amount of crypto they hold.
Staking a cryptocurrency requires certain stipulations to be met and not all cryptos run on a proof-of-stake network. The general provisions to be able to stake your cryptocurrency are the following:
- You must own the minimum required amount of the cryptocurrency
- You must hold the cryptocurrency in an online wallet that supports staking
- Exchanges like Coinbase will automatically stake your cryptocurrency for you
- You must meet the holding period before being able to stake the cryptocurrency
Staking vs. Mining
There are two main consensus mechanisms used to support a cryptocurrency network and verify transactions: Proof of Work (PoW) and Proof of Stake (PoS).
When you mine for a cryptocurrency, you essentially are using a high-powered computer to verify transactions on the network. As a reward for your efforts, you receive crypto.
When you stake your cryptocurrency, you are essentially lending out your crypto to verify transactions on the network. And as a reward you receive crypto.
(Please check out my last article for more in-depth coverage on the cryptocurrency mining process.)
What does Staking mean for Cryptocurrency Investors?
Staking cryptocurrency can provide additional income to investors as well as incentives to hold their crypto long term. The staking rewards have the potential to attract new investors and therefore strengthen the acceptance of the asset class. Additionally, proof-of-stake cryptocurrencies promote network security.
Environmentally speaking, proof of stake significantly helps cut down on the energy consumption and costs that a proof of work network faces. This allows for greater price stability since miners of a crypto network, like bitcoin, generally need to sell some of their crypto to cover the cost of that energy each month.
Coming Soon: Ethereum 2.0
Maybe not that soon. The second largest crypto has announced plans to convert their network from proof of work to proof of stake. You will need to hold at least 32 ETH to be able to stake initially and the holding time has yet to be disclosed. While this a huge undertaking with many hurdles, if successful, could drive other cryptocurrency networks to follow suite, namely Bitcoin.