DeFi Education Series: What Are Staking Risks?

Who doesn’t like to earn passive income? We all want it, and this is what staking does. Staking has become the hottest trend in the crypto space. It not only allows users to generate extra income but also helps to secure the crypto ecosystem. But are there any risks associated with staking cryptocurrency? What are those risks?

In this article, we have covered the risks that come with staking.

What is Crypto Staking?

Cryptocurrency staking means locking cryptocurrency to receive rewards. It involves holding your funds in the crypto wallet to ensure the decentralised crypto network’s security, integrity, and continuity. Stakers are given incentives in the form of rewards for helping to secure the cryptocurrency network.

Proof of Stake (PoS) is a consensus algorithm that enables the transaction gathering in a block. These blocks are then joined to create a blockchain. It is an alternative of Proof of Work (PoW) which does not facilitate the consensus in the decentralized ecosystem.

Staking crypto has become possible due to the Proof of Stake algorithm, as it allows users to stake their holdings instead of contributing their computing power to secure the network.

Crypto Staking Risks:

According to a report, stakers can earn reward from 4% to 34% in one quarter, which is much better than merely holding the coins. But there are also many risks involved in this process. Some of which are given below:

1. Liquidity Risk:

Loss of liquidity is a risk that stakers have to face. If you are staking a coin with very low liquidity on the exchange, it will become challenging for you to sell your asset or convert the returns into any stable coin.

Choosing the liquid asset with high trading volume on the exchange for staking can help to reduce the liquidity risk.

2. Loss of Holdings:

Cryptocurrency investment is risky. There is a risk of losing your investment and staked assets. It may occur due to the negligence of users, hacking attacks or scams. Users share their private keys and end up losing their assets.

Invest only when you are ready to face the loss as well. Keep an offline backup of your wallet and only use reputable crypto wallets. Opt for decentralized staking platforms. Choose a platform with the best security practices.

3. Volatility Risk:

The rise or fall in the value of cryptocurrency is ubiquitous. The coins can lose or gain their values in a short time. Volatility risk is dangerous in a way that it can spread from one point to affect the entire industry. The price of Bitcoin is also a driving factor for the surge or decline in the value of staked coins.

Volatility will affect the staking even if there is not any problem with your coin.

In this case, you can either choose to sell your asset with a loss or if you believe in the future of the asset, you can continue staking.

4. Lockup Periods:

While staking your coins, there is a lock-up period of which you must be aware. It is the period in which you do not have access to your staked coins. Even if the prices drop, you cannot unstake it. You have to wait to regain access to your assets after the duration agreed for lock-up.

The better option is to stake coins without a lockup period to avoid the risk.

5. Unguaranteed Staking Rewards:

There are chances that the platform does not give the promised rewards and also that they do not pay even if they were supposed to pay. For example, Tron changed their staking rewards from 7% to 4%.

So always keep a record if you have received your promised staking rewards.

6. Wait to receive your Reward:

In some cases, you do not receive staking rewards daily and have to wait for receiving the staking rewards. It will not affect your HODL, but you have to wait longer to reinvest and earn more rewards.

It is advisory to choose the assets that pay staking rewards on a daily basis.

7. Counterparty Risk

Scammers surround the crypto market. There are also cases that a platform could not perform well and end with the project winding up. If the platform goes out of business and delists the coins, the counterparty risk will leave you empty ended.

You may lose all of your coins that you staked on that platform. Therefore, it is always better to analyze entirely and not go for the platforms promising to give the highest rewards.

8. Validator Risk:

For staking purpose, you must have good technical knowledge of running a validator node. The nodes must have 100% uptime; otherwise, you will have to suffer a penalty if validator nodes play up. It will ultimately affect your staking rewards.

You better use a third-party validator for allocating your staking.

9. Slashing:

The PoS model of blockchain motivates the honest stakers through rewards and also punish the canny actors. Just like in the real world, slashing is a punishment for dishonest validators in the crypto world. It is in the form of disincentivizing after finding out the fault.

Slashing can happen in any of the following cases:

Security fault: Validating twice or more the same blocks disturbs the network consensus. This is called double baking.

Governance fault: The same consensus process is voted many times by the validator, and votes contradict each other.

Liveness fault: It happens when a validator does not participate for a long time and misses the several.

So always play a fair game.

10. Server Risk:

The platforms which provide staking service use third parties to host their validator nodes. These third parties could break down or become vulnerable to hacking attacks.

The hackers may manipulate the system by discrediting the whole platform. The users end up losing their assets. A similar case had been observed with ICOs and cloud mining.

Minimum Holding:

Most of the platforms demand a minimum holding of the coins to become eligible for receiving rewards. You should read the terms and conditions and also if they have made any change to them. You will only receive rewards once you have met their requirement.

Tips for Staking:

Carefully choose the right projects to stake in, ones that apply real technology and are backed by a strong community.

Always research before staking a coin. Get enough information.

Apply security procedures to avoid losing your coins and rewards.

You can choose to use the SaaS platform to enjoy a hassle-free staking experience.

Try different projects of staking for quality diversification.

Future of Staking:

According to a report by Ethereum infrastructure, staking rewards on the Proof-of-Stake blockchain will almost double from $40 billion to $78.9 billion by 2022.

DeFi is also making tremendous progress in staking. Deepstake is the next DeFi staking project to offer increased staking yields.

Closing Thoughts:

Cryptocurrency has made many people millionaires and many left empty-handed. If you want to get gains from this industry, you need to do your research before taking another step. Locking up funds in the smart contracts are also likely to be hacked. It is always essential to use reputable smart contracts.

Cryptocurrency staking is a game of risk where you can both win and lose. The chances of winning are as high as the chances of losing. Only step into it if you are ready to face the loss as well.

Do not be afraid to take the risk, but NEVER without prior research.

InsurAce platform is a permissionless, blockchain-based DeFi insurance service. InsurAce provides insurance for your smart contracts against hacks enabling users to secure their investments. InsurAce gives incentives in the form of $INSUR to the participants who stake tokens such as ETH, DAI, and other stable tokens into the platform.

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