Proof-of-stake (PoS) is widely considered as the future of cryptocurrencies, as proof-of-stake has been overtaking proof-of-work as a preferred consensus mechanism. PoS is generally more scalable, with lower transaction fees, and better energy efficiency.
Apart from its many benefits, PoS coins also allow investors to earn passive “interest” income through a process called staking. In this article, we will look at the basics of staking and highlight the best staking coins you may want to add to your crypto portfolio.
|Digital Asset||APR||APY||Market Cap||Staking Ratio||1-year ROI|
(Jan - Dec 2021)
|1-year ROI (Aug 2021 – July 2022|
Market Cap: $215.12 billion
Staking ratio: 10.79%
1-Year ROI: 420% (Dec 2021), -30% (July 2022)
In our view, Ethereum is the blockchain project with the best long-term prospects. With its rich ecosystem of smart contracts, DeFi apps, and developers, it has the potential to dethrone Bitcoin and become the world’s most valuable cryptocurrency.
Ethereum’s transition from a proof-of-work token to a proof-of-stake model in 2022 has already attracted the attention of investors who have pumped in $26 billion worth of tokens into the ETH2 staking.
If the anticipated merge is successful and without any incidents, Ethereum as a PoS coin could become the most valuable crypto for long-term staking. However, the requirements for solo staking are quite high – starting at a minimum of 32 ETH.
Thankfully, individual investors on a lower budget can look at ETH staking pools. Like many other cryptos, Ethereum enjoyed a strong bull run in 2021, with a projected annual ROI of over 420%.
While Ether has suffered from the subsequent bear market in 2022, it remains one of the best options for long-term staking due to the overall health of the blockchain and its projected growth rate.
- Immense future growth potential
- Token/blockchain with high utility
- Staking Pools are easily available
- Token has an unlimited supply
- Solo staking is very expensive
Market Cap: $18.26 billion
Staking ratio: 70.56%
1-Year ROI: 2723% (Dec 2021), -59% (July 2022)
Cardano was one of the original PoS tokens in the industry. At a time when Ethereum was struggling with high gas fees and scalability issues, Cardano held the title of “Ethereum killer” alongside other alt-coins like Solana.
Although it made major gains in 2021, Cardano has been caught in a bearish grip for quite a while now. Although it is a very innovative blockchain with smart contracts and constant new features added via updates and hard forks, the future of Cardano remains quite unclear at the moment.
With ETH merging into PoS, Cardano risks constantly remaining in the latter’s shadow. On the plus side, it is still a vibrant project with a heavy focus on sustainability. Since it largely tracks the wider crypto market in its prices, ADA could be a great option for long-term staking.
- Innovative and feature-rich blockchain with constant updates
- Token available at a low price point
- Has the potential to grow
- Huge focus on sustainability
- Could face a sustained bear market
- Faces competition from Ethereum and other PoS blockchains
Market Cap: $8.18 billion
Staking ratio: 64.79%
1-Year ROI: 865% (Dec 2021), 95% (July 2022)
Another contender for the title of “Ethereum killer,” Avalanche rose to prominence with the claim of being the fastest blockchain network in the world. It used a native protocol called Snow, as well as sub-networks to achieve high transaction speeds and low latency while retaining scalability.
At one point in 2021, its AVAX native token was in the top ten list of crypto assets by market capitalization. The coin is a favored option for staking due to its finite supply, which has the potential to increase prices.
Although it has fallen heavily in 2022, AVAX could still prove to be an excellent long-term investment. The blockchain is heavily backed and has partnerships with mainstream firms like Deloitte.
- Has a finite supply of 720 million coins
- Popular project with mainstream visibility
- Partnerships with Mastercard and Deloitte
- Token price has fallen sharply in 2022
- Was linked to the Terra-Luna project
Market Cap: $14.98 billion
Staking ratio: 76.22%
1-Year ROI: 4202% (Dec 2021), 25% (July 2022)
Perhaps a direct rival to AVAX and Cardano, Solana is a PoS blockchain with a heavy focus on scalability. One of the fastest blockchains in the world, this Ethereum competitor also boasts extremely low gas fees.
The Solana ecosystem is also quite robust and diverse, with DeFi projects, Web3 apps, NFTs, and more. The SOL token enjoyed a wild ride in 2021, reaching an all-time high of $260 in November.
Although the price has corrected sharply in 2022, Solana remains a decent option for long-term staking with excellent APY offered at all major staking platforms.
- A diverse ecosystem with DeFi, NFTs, and Web3 apps
- Very low transaction fees
- One of the top 10 most valuable blockchain project
- Frequent network outages are a major concern
Market Cap: $10.59 billion
Staking ratio: 51.85%
1-Year ROI: 92% (Dec 2021), -63% (July 2022)
Polkadot is unique among PoS blockchains, with an ultimate aim to connect many different blockchains on a central platform. Each “para chain” would be a purpose-built blockchain.
Unlike Ethereum and other major blockchains, Polkadot does not suffer from the highly divisive “fork” model of upgrades. Instead, the individual blockchains inside the network can upgrade on their own.
With its innovative premise, collaborations with other projects, and strong market capitalization, Polkadot is a great PoS blockchain for staking. The native DOT token is also the staking and governance token.
- Unique blockchain design among its PoS peers
- High market capitalization
- Potential for high staking returns
- The mission to unite all blockchains seems too ambitious/unrealistic
Market Cap: $6.96 billion
Staking ratio: 32.6%
1-Year ROI: 15275% (Dec 2021), -9% (July 2022)
Originally called the Matic Network, Polygon was developed to provide scaling support for the Ethereum blockchain. It was created in 2017 to make Ethereum a fully multi-chain system. When ETH struggled with high gas prices, Polygon managed to provide the same features at a lower cost and with better scaling.
The staking and governance token on the network is called Matic. It has a finite supply of 10 billion, which makes it more attractive from a long-term staking POV. After seeing massive gains in 2021, the token devalued sharply in 2022 as part of the wider market trend.
At the same time, the network has announced various upgrades and expansion plans, including a green initiative to battle climate change, expand a global payout system, and bring stablecoins and NFTs to the platform.
- Blockchain with many features and high market capitalization
- Has some of the highest APYs
- The Matic token has a finite limit
- Blockchain is still in the early stages of evolution
Market Cap: $2.56 billion
Staking ratio: 85.13%
1-Year ROI: 4560% (Dec 2021), -56% (July 2022)
A Layer-1 blockchain just like Ethereum, Algorand was designed to provide better features and efficiency than the ETH 1.0 blockchain. Unlike other PoS blockchains, Algorand goes one step further and uses a pure PoS or PPoS consensus mechanism.
With completely permissionless consensus, Algorand can process thousands of transactions per second. Its other main advantage is a forkless design – updates can be added seamlessly without the need for messy and divisive forks in the chain.
Although the token ALGO had some notable spikes in value in 2021, Algorand has generally struggled to find relevance over the last 1-2 years. With increasing competition from other blockchains and the ETH 2.0 merger on the horizon, ALGO faces a bearish future.
- Very easy to become a validator
- Forkless blockchain with fast transactions
- Unique Pure PoS mechanism
- Token facing pressure from other PoS tokens and ETH 2.0
What is Staking?
Staking is the process by which investors can earn rewards by pledging certain cryptocurrencies for a preset amount of time. The crypto assets are selected for staking and locked away and earn passive income that is similar to earning interest income on a bank account.
Not all cryptocurrencies earn staking rewards. Only those tokens that use a “proof-of-stake” consensus mechanism are suitable for staking. Notable examples include Solana, Cardano, Polkadot, and Polygon.
Staking is an attractive opportunity for cryptocurrency owners to earn extra income. It is popular due to the following reasons:
- Most crypto investors hold assets for a long period, often several years. Staking allows you to put those idle funds to work.
- The annual yield from staking is often much higher than that you would earn from keeping fiat currencies in fixed deposits, bank accounts, and even treasury bonds.
- Staking is quite flexible, with the option to lock away funds for weeks, months, or years.
- Any rewards you earn from staking can be put back into the account/node to earn compound interest.
That is the simple explanation from the perspective of crypto owners and investors. To understand why staking is necessary for certain cryptocurrencies, and how it works, we need to take a deep dive into the difference between the two consensus mechanisms in crypto:
What is Proof of Work?
Cryptocurrencies are decentralized – they don’t have a central authority like a bank or credit card company to provide security and prevent fraud. Instead, a blockchain network relies on something called a consensus mechanism.
The earlier cryptos like Bitcoin and Ethereum 1.0 used a “proof of work” mechanism. Here, transactions on the blockchain are securely validated by individuals/entities using huge amounts of computer processing power to solve complex puzzles.
These individuals are called miners. To become a fully capable miner, you need to spend a considerable sum on the computer hardware needed to solve the blockchain puzzles. The first miner to successfully solve a puzzle gets the chance to write/validate the next block of transactions on the blockchain. And importantly, if they are chosen to write the next block they also receive the block reward, which can be worth tens of thousands, or even hundreds of thousands of dollars.
While quite effective at maintaining network security and preventing unauthorized transactions, mining is not a very sustainable or efficient process. It is also unsuitable for complex blockchains that involve smart contracts and other applications.
This is why an alternative consensus mechanism was developed – proof of stake. In proof of work, transactions are validated by miners who earn the right to do it by spending a tremendous amount of money and energy on solving math equations.
In proof of stake, the system is further simplified – validators are network participants who invest their funds in the blockchain via staking. The crypto staked by these individuals acts as a guarantee for the legitimacy of transactions.
How Does Staking Work?
Staking is generally a democratic process. Although the finer details can vary widely depending on the blockchain, the basic process is the same – anybody can stake funds as long as they have the following things:
- The appropriate cryptocurrency. Some blockchains have a minimum qualifying limit to become a validator.
- A specialized computer system to perform validations without any interruptions, ideally 24×7.
- Technical knowledge to set up and optimize the validator node, reduce downtime, and ensure network security.
Most of these requirements are out of reach of the average individual investor. For example, to become a validator on the ETH 2.0 network, you need to commit 32 ETH (over $56,000) to the blockchain. And then there are the technical considerations of running a node.
Thankfully, there are other simpler ways to get into staking. Major exchanges usually run staking pools – server nodes that aggregate investments from multiple smaller investors to improve the chances of validating a block and earning crypto rewards.
Staking pools have low barriers to entry. You can start by investing just a handful of the relevant token. They also come with various lock-in periods, ranging from a few days to several months. You don’t need any specialized technical knowledge to join a staking pool.
When you join a staking pool, you have the option to select the tenure – typically, a longer tenure will come with the promise of greater yields. Some pools have a lock-up period – you will be unable to access or withdraw your coins until the end of this period.
The network will start paying out your staking rewards at a predetermined time. You may get the rewards on a daily/weekly/monthly/ or quarterly basis, depending on the rules of the blockchain/staking pool.
You have the option to withdraw these staking rewards or add them to the existing ones to increase your future earnings. This is called compound interest and it can play a powerful role in augmenting your income from staking.
What to Look for in PoS Coins
If you take a look at the current cryptocurrency market, you will find numerous coins that operate with a PoS consensus mechanism. When considering an investment in PoS coins, you need to choose your investment carefully. Pay attention to at least the following five factors:
- Market capitalization and trading volume: Well-established blockchain projects like Ethereum, Solana, and Avalanche are less likely to be abandoned down the line when compared to obscure projects with a low market cap and trading volume.
- Minimum staking requirements: becoming a solo validator is not easy, especially in some of the bigger blockchains like ETH 2.0. You may be required to stake close to $100,000, depending on the market price of the crypto. Such a setup is not for everyone.
- The simplicity/intricacy of the setup: Some staking setups require investors to install expensive hardware, or have advanced technical knowledge of the network systems. For example, you need at least 256GB RAM and 16 Core systems to run a Solana node.
- Staking Yield: Whether you are interested in running a validator node or joining a staking pool, the expected yield is often a decisive factor. Perhaps the most obvious metric involved in staking, yield determines how much you stand to earn on your investment.
- ROI: Yield percentages alone do not tell the whole story. The ROI is a vital metric that tells you the projected dollar value of your staking returns. ROI is usually calculated across a specific period, like one year.
Unfortunately, ROI in staking can be hard to pin down, as it is tied to highly unpredictable factors like the future price of a crypto. The basic rule of thumb is this – you do not want your earnings dependent on an asset that is likely to go to zero with the next market downturn.
Why ROI instead of APY?
If you take a look at the table at the top of this page, you will find cryptos with a wide array of Annual Percentage Yields or APY. In crypto staking, APY is a major factor that influences investor decisions.
It is considered superior to the Annual Percentage Rate or APR, which only takes into account simple interest. APY includes the additional income that may come from compound interest, which is something anyone interested in earning passive income from crypto should look at.
However, you should never pick a staking token purely based on the promise of high APY. This is due to the factor of price volatility. You have to spend fiat currency like dollars to buy a PoS token. That is your original investment.
If the value of that token stayed the same throughout your staking tenure, you can base your decision on APY alone. However, this rarely happens in the highly volatile world of cryptocurrencies. Prices can increase or decrease drastically within a matter of days.
Here is an example of how it can affect your returns down the line – consider two tokens, A and B, with the following characteristics:
- Token A costs $10 per coin and has an attractive APY of 30%.
- Token B costs $10 per coin and has a lower APY of 5%.
You buy 100 coins apiece of Token A and B, spending $1000 on each. At the end of the staking period (one year), you will have 130 “A” tokens and just 105 “B” tokens. But imagine a situation where both tokens have changed asking prices:
- If Token A grew modestly in price to $15, you now have $1950, a profit of nearly 100%.
- But if Token B took off in value and now sits at $30, you will have coins worth $3150, giving you a profit above 200%.
At the end of the day, your crypto investments are only worth the money you will get when you sell them at an exchange. This is why you need to look at ROI, which takes token price variations over time into consideration.
If you have the nominal APY of a PoS token, as well as its historical pricing, you can do some ROI calculations on your own. The basic formula is:
ROI = [k * (1 + RR) -1] * 100
Here, k is the price change coefficient and 1+RR is the nominal yield coefficient. Here is an example to help explain it further:
Ethereum has a nominal yield of around 4.08%, not including compound interest. To calculate the price change coefficient k, let’s look at the price of the token 12 months apart:
- ETH price on August 1, 2021 – $2530
- ETH price on July 31, 2022 – $1695
k= 1695/2530 = 0.669
If the nominal yield is 4.08%, RR is 0.0408, and 1+RR is 1.0408
Now using the full formula, we get:
ROI = (0.669 * 1.0408 – 1) * 100
= (0.696 – 1) * 100 = -0.304 * 100 = -30.4%
Some Other Staking Coins to Consider
This is not an exhaustive list of all the top staking coins the crypto market has to offer in 2022. There are several other options in the staking top 15 lists that are well worth a look if you want to invest in PoS tokens. BNB Smart Chain, owned by Binance, is one of the top 5 staking coins by market cap.
Tron and Cosmos are two other highly popular projects inside the top 10 list of PoS tokens. Going purely by market cap considerations, NEAR Protocol, Cosmos Hub, FLOW, Tezos, and ICP are the remaining options with billion-dollar staking caps in 2022.
Remember: While it is an easy way to earn interest, staking can result in losses, mainly due to a sharp decline in the prices of the tokens. As always, you should perform due diligence and further research before investing in staking tokens.