Stake and Earn: The Benefits and Pitfalls of Crypto Staking
In Brief
Staking is a popular strategy for staking tokens, allowing passive interest without touching the main capital. However, understanding the full picture is crucial before incorporating it into your portfolio.
There are lots of ways to make good money in the crypto world that mostly revolve around selling your assets for a profit.
Given the notorious volatility of the market, making such profits is surely easier said than done. This is why safer strategies, like staking, have become quite popular in recent years. Staking allows you to “deposit” your tokens in a pool and earn passive interest without touching the main capital, much like a high-yield savings account.
But, is it all high and no low? No. If you’re planning to incorporate it into your portfolio, you need to get the full picture. Let’s start on a positive note.
The Rewards
William Miller, CEO of OkayCoin, recently said that cryptocurrency staking “can be highly rewarding,” but the risks and pitfalls can confuse even the most experienced traders.
With staking, blockchain networks and investors may work together in perfect harmony, streamlining the block validation process while simultaneously allowing users to reap the rewards of their network efforts.
Traders like staking because of three factors:
Earning Passive Income
One other great way to make money in the cryptocurrency market without actively doing anything is via staking. It is a lot like banking savings accounts in that it lets users earn interest on their money.
Since cryptocurrencies are becoming a bigger part of the world’s trade market, many buyers have extra crypto assets to trade. Without staking, these valuable holdings would either sit there doing nothing or even lose value as prices changed.
The exact rewards may vary based on the platform. Some platforms cut a piece for themselves, while others hand over the whole pie to you.
Claudiu Minea, CEO and co-founder at SeedOn, points out that while some exchanges set a specific return and a “specific lock-up term,” others may implement a daily yield mechanism.
Simple & Intuitive
The crypto world is known for having a lot of complicated technology. But in the last few years, a huge number of easy-to-use options have come onto the crypto market. Blockchain tools like NFT markets, trade platforms, and digital wallets are all made to be as easy to use as possible.
The staking process is at the heart of this trend and gives users some of the easiest ways to interact with it. The staking process is at the heart of this trend and gives users some of the easiest ways to interact with it. The staking process is quite similar to creating a deposit account. However, validators’ roles are complicated and need an extensive understanding of blockchain. In this way, there are almost no hurdles to getting into the staking process.
Eco-Friendly
This is while a PoW asset like Bitcoin requires about 15.45 GW every day. It equals 132 terawatt-hours per year, which is more than Pakistan, Ukraine, and many other countries.
PoS systems don’t need a lot of computing power, which makes them better for the environment and more long-lasting in the long haul. Compared to Bitcoin, a PoS currency like Ethereum 2.0 only consumes 661 kW, equaling about 5.80 GW per year, which is strikingly lower than Bitcoin.
The Risks
Even though crypto staking seems like a no-brainer in terms of earning money, you should be aware that there are serious risks to consider:
Strict Regulations
Last year, the US government issued a comprehensive framework, demanding direct action from existing entities like the SEC and the CFTC. On top of that, the recent bankruptcies of big names like BlockFi and the crumbling of FTX forced these regulators to take a more aggressive approach towards the entire sector.
Perhaps one the biggest actions was against the former Binance CEO and founder, Changpeng “CZ” Zhao, who was charged with offering unregistered derivatives in the market. He received a 4-month prison sentence from the US District Judge Richard Jones, which was a rather lenient sentence considering that there was “no evidence” to suggest that Zhao committed this act knowingly.
So, there’s no telling how strict the regulations will be in the future, and the challenge is that it’s hard to keep up with their changes and updates, which is quite often.
Slashing
Slashing is simply when a validator violates platform rules and protocols by either signing off on two divergent histories or halting activities for an extended period of time. To penalize such violations, the platform usually takes away the staked assets, hurting both the validator and the investor who had trusted their holdings with the validator.
We’re not talking about a small amount here. For example, Bitcoin users lost 1 ETH during a recent slashing, which is equal to about 3% of their 32 ETH stake account.
Extended Lock-ups in a Volatile Market
Short-term changes in the value of cryptocurrencies can have an effect on the profits that can be made through staking. As we already said, if there’s a dramatic dip in your token’s value, it could cancel out any benefits you get from staking.
You might have to “vest” your coin for a certain amount of time when you stake it. Therefore, you can’t move or cash out your crypto right now, even if you need your money right away. (If the asset’s price suddenly drops, you may wish to cash out your investment to prevent more losses.) Also, buyers won’t be able to sell their tokens during the vesting time, so if prices go up or down, they won’t be able to benefit from these changes.
A former researcher at Tastylive, Eddie Rajcevic, touches on this very point, suggesting that in staking, “the biggest risk is price movement,” and the potential downside is usually more destructive than any yield you may plan for.
But, to gain staking rewards, one must be willing to withstand the cryptocurrency’s possible drop.
Security
There is always a chance that someone will hack into your trading pool and steal your stake or cause the value of the coin to drop. Since buyers don’t have insurance, there isn’t much chance that they will get their money back. Keeping your coin on an exchange is the same. Actually, hackers break into markets and steal money; that’s why self-custody is so important.
Minea also points out the severity of this issue, stating that even the most established staking platforms are “prone to hacking threats,” which is why many traders prefer to “stake their tokens on hardware wallets.”
So, What’s the Verdict?
Those who aren’t concerned with the ups and downs of the market in the near term but would nonetheless want to earn returns on their investments over the long run can consider staking. It is not a good idea to lock up funds for staking if you may want them quickly before the staking time ends.
This is what Tanim Rasul, COO of National Digital Asset Exchange, recommends. He suggests that before you opt to withdraw your funds at the conclusion of the staking time, you need to clearly understand the staking period’s length and also the turnaround time for withdrawal.
Also, all experts advise traders to only stake in platforms with a stellar reputation and up-to-date security protocols. Just like any other investment decision, only stake what you can afford to lose.
Disclaimer
In line with the Trust Project guidelines, please note that the information provided on this page is not intended to be and should not be interpreted as legal, tax, investment, financial, or any other form of advice. It is important to only invest what you can afford to lose and to seek independent financial advice if you have any doubts. For further information, we suggest referring to the terms and conditions as well as the help and support pages provided by the issuer or advertiser. MetaversePost is committed to accurate, unbiased reporting, but market conditions are subject to change without notice.
About The Author
Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
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Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
