How to bet crypto

In the world of traditional finance, investors can generate returns in a number of ways. The most common is to invest in bonds. Most buyers are guaranteed fixed coupon payments over time, while others pay variable amounts. Websites like TreasuryDirect.gov facilitate this process between the US government and investors.

Functionally, crypto-annuity-bearing strategies are similar to bond purchases because an investor locks in an asset to receive a stream of payments in return. However, the mechanics of these payments are very different. There are various approaches to earning interest on digital assets, but this article will focus on staking, which is the process of posting assets as collateral to the network to gain the right to add transactions to a blockchain and receive token rewards.

What is Proof-of-Stake?

Blockchains are managed by multiple computers called nodes, whose owners are compensated for adding and verifying transactions. Instead of having a central authority to maintain ledgers, all nodes must reach consensus to place new transactions on the blockchain. Node operators are paid in the blockchain’s native currency – ether on EthereumETH
network for example – every time new data is added. Different blockchains compensate nodes in different ways. For BitcoinBTC
, the process is called proof-of-work (PoW). Although it is seen as the more robust and egalitarian consensus mechanism, Bitcoin’s network uses more energy every day than medium-sized countries like Israel or Argentina. For that reason, among others, newer blockchains tend to use proof-of-stake (PoS).

With PoS, i-node owners must deposit – or stake – a specified amount of cryptocurrency to be allowed to validate transactions. For Ethereum, 32 Ether (ETH) is required. If a node owner acts against the interests of the network or does not remain connected to the platform, that entity may lose its stake. Consensus mechanisms rely heavily on game theory to ensure that the blockchain remains secure and decentralized. Playing by the rules gives you rewards, while breaking them incurs costs.

Although 32 ETH seems like a high entry point (roughly $50,000 in early 2023) to become a validator, it is possible for small investors to lend or delegate their crypto to established operators in exchange for a proportional share of the returns. A newer approach is called liquid staking, where stakers stake their token on a platform that pays the stake dividend and gives them a 1:1 copy of their original tokens that can be freely traded or lent. This brings the entry barrier to almost zero for large PoS chains like SolanaSUN
PolygonMATIC
CardanoADA
LandslideAVAX
and PolkadotDOT
.

Newbies are often encouraged to start by delegating their crypto to an existing validator to avoid the complexity of running the hardware and meeting governance requirements.

How much profit?

The first question a potential validator is likely to ask is “what is the ROI?” Sites like stakingrewards.com are a quick and efficient way to see annual percentages of staked crypto. This data is collected in real-time from blockchain information. Prices vary by chain. They can be as low as 1% and as high as 20%, depending on several factors.

(source: stakingrewards.com)

Investors should not automatically chase the highest price. Investors should think of betting as a long-term strategy rather than a quick way to achieve high returns. Oversized dividends are likely unsustainable and as we saw in the TerraUSD/LUNA collapse, there may be nothing more than fragile artificial mechanisms to produce demand. Once you’ve chosen a PoS chain and are comfortable with the ROI, the next step is to start staking. There are three methods: on centralized exchanges, on the blockchain and with derivative platforms for floating stakes.

Bet on exchanges

The easiest way to stake your crypto is through an exchange that offers this service. Exchanges such as Binance and Huobi Global allow users to bet on certain digital assets. This is not to be confused with lending programs offered by crypto finance companies that are not exchanges. It’s worth pointing out that, at least in the US, regulators are taking a closer look at striking. The SEC recently reached a settlement with crypto exchange Kraken to permanently shut down its crypto betting service under the belief that it was an investment contract governed by securities laws.

Blockchain Staking

Many decentralized cryptocurrency wallets allow users to bet directly on exchanges. For example, on Solana’s Phantom wallet, users can select the “Start Earning SOL” option to see a list of validators, with information such as total delegators, validator fees, and total assets staked. Sites like validator.app show performance ratings to help users make this decision, but you typically want a validator that offers a good mix of low commissions, high uptime, and a reliable track record.

For other networks, the process is similar. One just has to find the wallet or the service to start betting. Daedalus is a popular desktop wallet on the Cardano network, which allows users to stake the network’s ada currency. Avalanche and Polygon have their own wallets. The process is the same in that users must select a validator from a list of options and delegate their tokens to earn rewards. Below is the staking matic interface through Polygon’s official betting page.

(source: staking.polygon.technology)

Liquid Staking Derivatives

When you stake your crypto, it is locked in a smart contract and inaccessible until it is formally unstaked, a process known as unbonding. For many, that is not a problem because they are content to sit back as the crypto returns. For others, this is a big problem because they cannot use that crypto as collateral for lending and borrowing in decentralized finance (DeFi).

Liquidity betting derivatives offer an alternative. Users stake crypto on a DeFi application and receive a receipt token that can be used for other purposes. Staking ETH on the Lido liquidity service will provide returns and generate Staked ETH tokens (stETH) for the user. If you lose your stETH, you lose your share of the stake pool.

Decentralized applications such as Lido and Rocket Pool are at the forefront of DeFi with their crypto derivatives. However, there is still risk involved. The price of stETH is not linked to ETH. Heavy selling pressure on stETH led to a dislocation between the prices of the two tokens in the 2022 bear market.

Risks

Any return-bearing strategy involves risk. Although bonds are considered one of the least risky asset classes, a buyer will no longer receive payments if the issuer becomes insolvent.

In crypto, a user will stop receiving stake rewards if delegation to a validator that stops working. Fortunately, you can get your crypto back if this happens. If your validator tries to approve fraudulent transactions or makes a technical mistake like running two validator nodes with one identity , your assets will be cut and you will lose a percentage of your crypto. That is why it is important to find validators with documented track records and high uptime.

Conclusion

The safest thing to do with your crypto is to keep it in a hardware wallet that is not connected to the internet (cold storage) because there is no counterparty risk. But staking is a strategy worth exploring for many reasons. If you are a long-term believer in a blockchain and have a large number of tokens, staking can be an easy and efficient way to put them to work and earn interest.