Varnish is a great sealer for making wood coasters waterproof. When compared to other finishing solutions, it has a high solids ratio. Spar varnish can be used to protect the coasters from scratches, as well as to waterproof them. You can also consider using Polyurethane, which has both water or oil-base. Oil-based polyurethanes are more durable, but they can also give a slight tint to the look of the coasters. Polyurethane coats can protect coasters from heat, which is especially useful if you use them to hold coffee or other hot drinks. One downside of polyurethane is it takes a long time to cure.
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Most stain is applied with a brush, a roller, or spraying. The manufacturer's instructions will advise the best method to suit your chosen stain.
Your wood must be clean and dry. That means all dirt and residual paint should be removed by washing and scraping. If you want a smoother surface, you can sand the wood, which helps remove dirt and...