What is staking and what should every crypto investor know about it?

The world of crypto-assets is evolving rapidly, and investors’ expectations have grown along with it. In addition to maintaining their assets, they are increasingly interested in using them to generate additional income. One of the most popular ways of doing this is staking, which has become an integral part of a competitive crypto service.

LHV became the first bank in Estonia to offer crypto investors the option of staking, which can be done conveniently via both the mobile app and the internet bank.

What is staking?

Put simply, staking is the process of putting one’s crypto assets to work, whereby the investor contributes to the secure operation of the blockchain network.

Many modern blockchains use a consensus mechanism called Proof-of-Stake to maintain the network and authorise transactions. With this solution, it is the investors who have locked their crypto assets in the network for a certain period who help to ensure network security and the validity of transactions. In return for their contribution, investors are rewarded in the same cryptocurrency that they locked for a certain period for staking.

How do crypto investors generate a return?

Staking returns consist mainly of the following two components.

• Issuance of new tokens. Crypto networks are constantly creating new tokens, which are distributed as rewards to investors who help to keep the network secure. This is generally where the majority of the revenue from staking comes from.

• Network service fees. The user pays a service fee for every transaction carried out on the blockchain. Part of this goes to the transaction validators, and on some networks, it also reaches the staking investors.

What does the staking reward depend on?

Staking rewards depend primarily on:

• The issuance of new tokens. Each blockchain determines for itself how many new tokens are created and how often. This may also change over time.

• Activity of use of the specific blockchain. The more transactions are made in the network, the more service fees are collected. If an application or crypto asset created on a particular network gains popularity – that is, if the level of activity on that network increases – the investors’ potential returns also increase.

• The popularity of staking. The rewards are distributed among all staking participants. The more crypto assets are locked up in staking on the network, the lower the reward tends to be, and vice versa.

• Market cycles. Crypto market, like the economy, is cyclical, which is why the size of rewards fluctuates constantly.

At LHV, you can earn staking returns of up to 7 % per annum on selected crypto assets.

Who might staking be suitable for?

Mainly for someone who believes in the development of a specific blockchain and the crypto sector as a whole, has acquired crypto assets as an investment rather than for trading, and has no plans to sell them in the near future. Also for people fascinated by the world of blockchains who want to play a part in the functioning of decentralised networks.

What should you keep in mind when it comes to staking?

Investors should keep in mind that during the staking period, their crypto assets are locked and cannot be traded. Although an active position can be removed from staking, the time it takes to release the asset depends on the conditions of the specific network.

It is also important to keep in mind that staking does not protect investors’ crypto assets against a fall in the market price of the underlying asset in fiat currencies, such as euros or dollars.

It is also important to emphasise that in Estonia, rewards earned through staking are subject to taxation. Under the regular system, a reward is taxed when it is received. In the case of an investment account, tax liability arises when withdrawals exceed deposits. The system for taxing crypto assets that have already been declared cannot be changed. You can choose a different system for new purchases. More information about this can be found here.

How exactly does the LHV solution work, and how to make staking work for yourself?

Staking is now available securely and conveniently at LHV, directly via the mobile app and the internet bank. This is facilitated through LHV’s international and trusted partners, Coinbase and Bitstamp.

Initially, the solution will cover Ethereum and Solana crypto assets, but LHV plans to extend the options to other crypto assets in the future.

To start staking, you must first have a crypto asset investment agreement with LHV, and hold Ethereum or Solana crypto assets.

In the mobile app:

• Open ‘Investments’
• If you have several accounts, swipe across the screen to the account where your crypto assets are held
• Select “Crypto staking”

In the internet bank:

• Open “Growing funds” and select “Staking”
• Select the crypto asset, enter the amount, and confirm the transaction

Find out more: lhv.ee/en/staking

 

The provider of crypto asset services is LHV Bank AS. Learn more about the terms and conditions and risks at lhv.ee, and consult an expert for advice.