How To Set Up Your Own Staking Operation: A Step-by-Step Flow

Are you willing to learn blockchain technology and are open to earning yields higher than traditional financial instruments? At the same time, you may not be into cryptocurrency trading or buying into meme coins. If so, staking is a great way to realize your financial goals.  In this guide, we’re going to show you how to set up your own staking operation.

What is a Staking Operation?

A staking operation refers to the process of participating in a blockchain network by either running a validator node in staking consensus mechanisms such as Proof of Stake (PoS) or Delegated Proof of Stake (DPoS), with the primary goal of validating transactions, securing the network, and earning rewards.  The staking process is a fundamental component of PoS blockchain systems and contributes to network security and decentralization

What is solo staking?

Solo staking, also known as self-staking, refers to the practice of independently operating a validator node on a Proof of Stake or Delegated Proof of Stake blockchain network without delegating your cryptocurrency holdings to an existing validator or utilizing a staking as a service provider.  In a solo staking context, the staker is responsible for setting up, maintaining, and operating the staking node, as well as committing their own crypto assets to secure the network. This requires proficiency with computers which can run nodes as well as the financial ability to meet the minimum crypto staking requirement. For the purposes of this article, we'll be focusing mostly on solo staking.

Step by Step Guide to Create a Solo Staking Operation

If running an independent staking operation sounds appealing to you, then here’s a detailed process on how you can create your own staking operation:

Choose the Right Cryptocurrency

When researching which cryptocurrency to stake, consider the crypto rewards structure, the team behind the project, the community support, and the long-term viability.  Let’s assume that you’ve decided upon the Ethereum network, a Proof of Stake (PoS) blockchain and the 2nd largest cryptocurrency by market capitalization.  

1. Setup Node Hardware 

Nodes are computers which operate and store a copy of the Ethereum blockchain. Nodes contribute to the overall decentralization of the network by having various machines worldwide store a copy of the network’s data. To set up a node, it is recommended that you have a computer with the following specifications:

1. 1. Fast CPU with 4 cores
2. 2. 16GB + RAM
3. 3. Fast SSD with 2+TB
4. 4. Internet with speed greater than 25MB/seconds

 The entire hardware can cost up to USD1,000.

 2.  Setup Node Software 

While it’s recommended to access the Ethereum client using a command line prompt, fortunately Ethereum also supports DAppNode, a free and open-source software. This software eases the technical requirements of setting up the node as it makes the process appear seamless like an application.

3. Generate and Manage Keys 

Do note that there are several keys that you will need to manage. Validator keys which are used for on-chain transactions such as block proposals, and withdrawal keys which are used to retrieve staking rewards and your crypto deposit. You’ll have to manage and safekeep both.

4. Start Staking

Creating a node doesn’t automatically give you staking rewards. For ETH staking, you need to turn this node into a validator node by committing 32 ETH into the network. 

5. Monitor and Maintain the Node 

To monitor the performance of your node in terms of connection to the Ethereum network, and CPU optimization, you will need to download another set of software. Keeping your node running virtually 24/7 is recommended to experience the full rewards and avoid any penalties. While solo staking is the most secure and rewarding method, it's also the most complex. Computers' high capital entry and comfortability may bar some people from pursuing self-staking.

How Do People Make Money From Staking?

While some staking participants get involved solely for the tech or to contribute to the security and operations of a blockchain, many people get involved to earn passive income. Once you’ve set up a staking operation, you can relax and let the blockchain do its thing while you receive staking rewards. Here are some of the main financial rewards from staking:

Block Rewards

When a validator is selected to create a new block, they collect and validate transactions and bundle them into a new block. This process ensures the smooth operation of the network and the recording of new transactions on the blockchain. Validators who successfully create and validate blocks are rewarded with a portion of the newly created cryptocurrency tokens, called block rewards. Staking rewards vary widely depending on the cryptocurrency. Ethereum generates around 3.5% per year while Solana doubles that performance at 7.1%.

Compounding

As you receive regular rewards, you can let these sit in your wallet or take advantage of yield-bearing options. Since these rewards are much smaller than the amount you’ve staked, you can search for a staking pool or multi-asset / multi-chain staking products to earn a yield on your rewards. How long you hold the rewards in your crypto wallet depends on your investing strategy and risk appetite. Some stakers will convert rewards on a regular basis to cover the costs of staking (electricity and WiFi) or for monthly essentials such as groceries. Others will hold on to these until eternity.

Market Appreciation

Perhaps the biggest gains to come from staking are not from the rewards itself but from the capital appreciation of the staked tokens. To meet the Ethereum staking requirements, you would need 32 ETH. That’s worth approximately USD 50,000 in today’s prices. However, there’s no telling what the price of 1 ETH would be 2 to 3 years from now. It could double, and it could easily be lower as well. Many crypto holders made their wealth through the growth of their crypto investments.

Are Staking Rewards Taxable?

Cryptocurrency taxes change depending on country regulations.    Singapore possesses one of the friendlier crypto-tax regimes. Buying and holding cryptocurrencies long-term do not incur tax; however, if one earns more than SGD 300 (USD 220) per annum, then these rewards are subject to tax.   Meanwhile in the United States, the Internal Revenue Services (IRS) taxes staking rewards as income tax for the period in which the staker obtains full control of the rewards. This applies regardless of the amount earned from staking.   In other countries where regulations are unclear, individuals choose to not report gains from cryptocurrency trading and staking.   Please check with your local tax regulations for more guidance.

Benefits of Crypto Staking

If you’re keen on starting a crypto staking operation, then you’re in for a treat. Not only will you receive the financial rewards, but you’ll set off on a journey of technical learning and engaging with other crypto community members.

Full Control of Your Crypto

As a solo staker, you have complete control over your staking operation, including the hardware, software, security measures, and staking decisions. You can set your own rules and make changes as needed. Most importantly, you have full access to your crypto as you’re directly connected to the blockchain.

Self-Learning

Running your own validator node provides an opportunity to gain valuable experience and knowledge about blockchain technology, network maintenance, and security practices. You will definitely be placed outside of your comfort zone, and that’s where growth happens.

Building a Reputation with the Community

Especially in a Delegated Proof of Stake (DPoS) setup, you must build your reputation within the community as only a select number of validators are chosen to secure the network. In order for stakers to delegate their vote to you, they will have to know you first.  In your journey as a self-staker, you’ll most likely interact with other community members. Either through asking and sharing guidance on staking or conversations on governance processes and where the network is headed.

Earn Passive Income

The yields from crypto staking can often surpass the gold standard of passive income - high-yield savings accounts or U.S. Treasury products, which often provide returns of 4% - 5% per annum. That's the rate you can get by holding USD in cash. However, don't confuse the risk profiles of crypto assets from the U.S. Treasury, as the latter is seen as one of the safe havens of the investing world while the former is a nascent and volatile asset.

Challenges of Solo Staking

While solo staking is often touted as a passive income option, a lot of time and effort is needed to set up the operation. Like any sound business, you will need to hand-hold your staking operations during the early stages. A staker also needs to study the technical requirements and often engage with the community for discussions.  

Technical Complexity

Setting up and maintaining a validator node requires technical knowledge and experience. You need to understand blockchain technology, computer hardware, validator software, and network security. The concept of command lines can scare the non-technical person. There’s a reason why many companies started to make this experience easier for beginners.

High Costs

The cost to run your own set of nodes and validators can quickly add up. Picture a high quality computer that supports staking. The said machine runs 24/7 with a fast and stable internet connection. Furthermore, you need a minimum staked funds. To stake Ethereum, you need a 32ETH deposit (approx. USD 50,560 worth) to participate in validation activity. Having USD 50,000 is no joke.  In the United States, households with heading members under 35 years of age, have a median net worth of USD 76,300. That would mean they would have to devote more than half of their wealth to a staking operation. This high concentration into a single asset-type could be risky.

Downtime Risks

You need to place your own node in a stable environment. And that can manifest in various ways. Having reliable access to electricity, internet, and weather. God forbid, a storm frequents your location and knocks down trees and electric poles. Your node could be taken down for days.

Stiff Competition

Each Ethereum validator is limited to staking 32ETH. You cannot increase your chances of getting selected and earning rewards by staking more on a validator. However, you can run as many validators per node as supported by your computer’s specifications. Other wealthier people run several validators or a staking pool. Furthermore, institutions could act as stake pool operators and pool others' staked assets.

Interest Rate Risk

While solo staking is often touted as a passive income option, the returns are also non-guaranteed. Unlike a time deposit with the bank or bond that offers a fixed interest rate, staking returns depend on several factors. The number of stakers, network activity to generate fees, and the price of the token (if you’re computing rewards on a USD basis) can heavily influence rewards. Take for example Ethereum staking which has dropped from a peak of 6% per annum in 2023 to 3.5% as of writing. 

There’s no Better Time to Start Staking

Staking technology continues to improve and more blockchain networks are being developed under staking consensus mechanisms. This provides stakers with multiple blockchains to which they can deploy their resources. And as crazy as it sounds, cryptocurrencies provide a way to diversify your holdings away from fiat money.   If you believe that blockchain will be part of the future of the financial world, then there’s no better time than now.   Happy Staking!  

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