Avalanche is a blockchain that allows developers to launch multi-functional decentralised applications (dApps) and enterprise blockchain solutions. The network targets the limitations of similar development blockchains, like Ethereum, with its highly scalable, interoperable and efficient transaction ecosystem. Developers deploying their solutions on Avalanche can easily create secure, reliable and powerful applications.
Avalanche's native cryptocurrency is called AVAX. AVAX is used to pay fees, provide a unit of currency between different subnets of the Avalanche network and secure the Avalanche blockchain through staking.
In this guide, we will go through the different ways users can earn interest from their AVAX tokens.
What is AVAX staking and how does it work?
Staking is the process of depositing and locking up cryptocurrency tokens to participate in a blockchain's Proof-of-Stake (PoS) consensus mechanism. Staked tokens are used to validate transactions and secure the associated network. There are several cryptocurrency blockchains that implement this mechanism, including Avalanche. Staking rewards are offered to utilise users to lock up their coins.
Any person who wishes to support the Avalanche Proof-of-Stake mechanism can do so by locking a specified amount of the blockchain's native cryptocurrency AVAX. The staked cryptocurrencies cannot be moved or used during the locking period. The deposit of staked AVAX tokens ensures that validation nodes are committed to the development and stability of the network.
There are two ways users can stake AVAX tokens: become a validator or become a delegator.
Validators can be thought of as active nodes in the network that validate transactions and secure the blockchain. The more tokens that a validator has staked, the more frequently a validator will be asked to participate in the network, which means increased rewards.
Delegators are those who wish to stake but want to remain relatively passive. Delegators trust an existing validator node through the delegation of their staked tokens. Delegators are subsequently rewarded for their support.
Validators
To become a validator in the Avalanche network, a user must stake a minimum of 2,000 AVAX tokens. These tokens must be staked for a minimum of 2 weeks and a maximum of 1 year.
To ensure the decentra of the system, each validator holds a maximum weighting. The maximum weighting is composed of the validator's stake plus the stake delegated to them. The maximum weight is the minimum out of 3 million AVAX tokens or 5 times the amount staked by the validator. For example, if a user staked 2,000 AVAX to become a validator, they can only be delegated 8,000 AVAX. This safety mechanism is implemented to prevent validators from creating multiple rogue nodes that act like delegators. This would defraud the system through a Sybil attack.
To receive staking rewards, a validator must be online and correct at least 60% of the time. Alongside collecting rewards, validators can set their own delegation fee that they charge to delegators for their services.
Delegators
To become a delegator in the Avalanche network, a user must stake at least 25 AVAX tokens. Like validators, these tokens must be staked for a minimum of 2 weeks and a maximum of 1 year.
When delegating staked tokens, a user must choose to allow a validator node to process transactions on their behalf. Choosing to delegate AVAX tokens does not put your AVAX at risk. A validator cannot spend staked AVAX tokens and a user will always receive the original staked amount plus staking rewards at the end of the locking period. Rewards collected by the validators are distributed back to delegators proportional to the number of staked tokens.
Note: Delegators are charged a delegation fee by validators due to the increased effort validators must employ. This delegation fee is usually not less than 2%.
Now that you know what Avalanche staking is, let's look at the specific ways a user can stake AVAX tokens.
How to stake AVAX
Staking in the Avalanche network can be completed through a digital wallet or via an exchange.
Here we will run through the steps to become a delegator.
1.Access the official AVAX wallet – The first step when staking Avalanche is to access the platform's official wallet. You have two options: access an existing wallet or create a new one. If you already have your AVAX funds in an Avalanche wallet, proceed to step 2. If you have AVAX funds in a cryptocurrency exchange or external wallet, click "Create New Wallet" and follow the guidelines.
2.Transfer the amount of AVAX you wish to stake to your P address – If your funds are still in your X address, you must first transfer them to your P address (read above). To do this, click on "Earn" on the right sidebar. The transfer to the P-Chain requires a 0.001 AVAX transaction fee for processing. Ensure that you add 0.001 AVAX to the amount you wish to stake and click "TRANSFER" to confirm.
3.Add delegation to a validator – Now that your funds are in your P address, you are ready to stake. On the "Earn" page, click on "ADD DELEGATOR"..
On the next page, you will receive a list of validators ordered by the total amount staked. Choose one validator by clicking on the "SELECT" button
You will be presented with the delegate page where you must choose your staking period, the amount you wish to delegate, and specify the address you want to receive your rewards. You cannot stake for a longer period than the validator node you choose.
4.Confirm and submit – Once you have entered the information, click "CONFIRM" and then click "SUBMIT" to process the delegation. You are now delegating and will start earning staking rewards.
The method for becoming a validator is similar to becoming a delegator but requires slightly more technical expertise. As a validator, you will be responsible for keeping the node online 24/7 and you will need to stake a minimum of 2,000 AVAX. By becoming a validating node in the network you will validate new blocks and mint new AVAX tokens.
How much can I earn by staking Avalanche (AVAX)?
According to the Avalanche website, at the time of writing (September 2021) the average AVAX staking yield is approximately 10% APY. The maximum yield is 11% APY. To earn the maximum amount, a user must be correct over 60% of the time and stake every day throughout the year.
Ultimately, how much a user can earn staking AVAX is dependent on a few factors:
The amount of AVAX tokens being staked
The locking period of AVAX
The validator selected to validate transactions on behalf of a delegator (delegation fees will vary)
The total amount of AVAX staked on the network. If there is an excess of AVAX, the incentive to stake will be marginally lowered, and vice versa
In terms of real-world value, it will depend upon the market at the end of the locking period. If the price of AVAX increases during the locking period, the cumulative total of AVAX tokens, plus interest, will be worth more. However, if the price of AVAX decreases, the cumulative total may be worth less than at the start of the staking period.
Is staking AVAX safe?
Staking AVAX tokens through the Avalanche wallet is a relatively safe process as the wallet is an offline application, even though it runs inside a web browser. The wallet is a JavaScript app that leverages web technology for the front end which means it appears in the browser but does not connect to a server.
For extra safety, a user can double-check they are using the Avalanche network by unplugging or disconnecting the computer from the Internet. When a user enters their secret key or mnemonic phrase for wallet access, the process should still work.
So far, many investors have used the Avalanche wallet to stake AVAX without any major security complications.
Staking AVAX tokens through an exchange such as Binance adds an extra level of uncertainty to the process due to dealing with a third party. While Binance and other cryptocurrency exchanges are extremely secure, they are inherently at more risk due to being connected to the Internet.