Crypto staking is a popular way to earn passive income from cryptocurrencies; billions of USD are locked in various staking platforms today. But staking is not without its risks. This article explores crypto staking, crypto staking risks, and how you can minimize them when staking your crypto assets.
What is Staking Crypto?
Staking in cryptocurrency is locking digital assets on a platform to act as a blockchain validator on a decentralized crypto network. The staked assets are used to ensure the network's integrity, security, and continuity via the Proof-of-Stake (PoS) consensus algorithm. The stakers are rewarded mining rewards when they successfully validate transactions.
Staking is possible because of the PoS algorithm, a modern improvement on the Proof-of-Work (PoW) algorithm. PoS, unlike PoW, requires no hardware but crypto assets locked on a platform following a specific mining protocol. The immediate advantage is that the network uses far less energy than Bitcoin's energy-intensive blockchain.
So, what are the risks of staking crypto? Although staking was originally a network activity, crypto users sometimes treat it as an investment, and so there are associated risks of staking crypto. You'll learn these risks here.
Staking Cryptocurrency: Main Risks
Volatility is arguably the biggest crypto staking risk. For example, a staking protocol that delivers 15% APY (annual Percentage Yield) should be a good venture for stakers, but if the price of the asset drop by 50% in a year (which is entirely possible), the staker still loses some value. Volatility is one of the risks of staking crypto that stakers must carefully plan for. The best course of action is to choose the assets they stake and spread their investments to minimize the risk.
A lack of liquidity is another factor when considering what are the risks of staking crypto. Liquidity refers to the ease of selling or exchanging assets on the market. If you stake an asset with a low market cap, you run the risk of low liquidity, and you may find it difficult to sell the asset on any exchange. Most stakers convert their assets to Bitcoin or stablecoins for easy spending, but illiquid assets may be difficult to convert due to the low trading volume. Staking liquid assets with high trading volumes on exchanges can mitigate liquidity risk.
Some assets, such as Tron and Cosmos, have a lockup period during which you cannot unstake or withdraw them. While this ensures the integrity of the blockchain, it is one of the significant risks of crypto staking, especially when prices become volatile. If you stake Tron, for example, and the price dips, you might experience a heavy loss since you cannot unstake your assets to mitigate loss. It is better to stake on assets without lockup periods, so you have unrestricted access to your funds.
What are the risks of crypto staking that could cause losses? Some staking protocols do not payout rewards daily but use a monthly, quarterly, or annual payment schedule. This is risky for several reasons. Stakers have to wait for their rewards, leading to short-term delays. They may also be unable to reinvest. This is advantageous to HODLers, but if the price falls below certain levels, stakers may experience significant losses. Staking on protocols that payout rewards daily is an excellent way to avoid this risk.
Another example of cryptocurrency staking risks is the validator costs. All mining methods involve some fees, either PoW or PoS. PoS mining involves costs of staking, third-party services, and others, which may significantly impact profits. You can get around this by using a bitcoin mining website service for hosted mining. Running your validator node will incur hardware and electricity costs while staking with a third-party provider typically costs a few percentage points of the staking rewards.
Loss or Theft
Enjoying crypto alongside the risks calls for vigilance. In staking, you run the risk of loss due to losing your wallet's private keys or theft due to hackers or unscrupulous founders. There's always the risk of losing your funds, so you must take adequate measures to protect your assets. First, secure your private keys online and offline, and ensure to read the whitepaper of any staking program you want to join. It is advisable to use custodial third-party staking platforms so you have access to your assets.
Validator nodes must be 100% working to ensure maximum staking returns, as disruptions could interrupt the staking process. This requires specific technical knowledge, the absence of which creates significant staking cryptocurrency risks. These risks are possible slashing of your overall staging returns leading to permanent loss of assets and deductions as increased fees. You could mitigate the third risk by using a node provider such as Trust Wallet to delegate your stake to a third-party validator.
Cryptocurrency staking has gained popularity as a way to earn passive income. Thanks to the PoS algorithm, staking allows crypto users to lock up their funds to validate transactions and receive mining rewards. Solana, Cardana, and Ethereum 2.0 are popular staking platforms today offering PoS cryptocurrencies for mining returns.
But there are risks associated with all platforms that users must be aware of.
Volatility is the most significant crypto staking risk as it affects the price of assets and potential profits or losses. Lack of liquidity, theft, and validator costs are other risks. Is staking a good investment? It is left to you to research the platforms, but you should stick with reputable exchanges with stable staking platforms.