Cryptocurrency holders often sell their investments when market prices increase to make profits. However, there are other ways to make money in the crypto space, such as staking.
Staking allows investors to put their crypto assets to work and earn profits without selling them.
Many crypto enthusiasts are becoming increasingly interested in staking, as it fundamentally is a way of adding digital assets to a high-yielding savings account to earn interest on the balance. But is staking crypto worth it?
In this guide, we will explain how crypto staking works and whether it’s safe. We will also present some of the precautions to take when staking crypto.
What is Cryptocurrency Staking?
Simply put, cryptocurrency staking is a process where crypto holders lock up their assets for a set period to help support a particular blockchain operation. In exchange for staking their crypto, users earn more cryptocurrency. Since its launch in 2012, many blockchains have implemented the proof-of-stake (PoS) consensus mechanism.
Under the PoS authentication system, the blockchain is still distributed across nodes. Still, participants in a specific network agree to support its functioning by confirming new transactions and adding new blocks, not with computing power but with staked cryptocurrency.
Through “staking,” the participants lock up sums of cryptocurrency and earn rewards for successful task completion.
This way, the users ensure that only legitimate transactions and blocks are added to the network.
Upon properly validating the transactions, participants get their rewards in the form of cryptocurrency under that particular blockchain. On the other hand, miners who improperly validate flawed or false data are penalized.
In that case, they may lose some or their entire stake.
Overall, staking works as a method to reward good behavior on a blockchain network.
Is Staking Crypto Safe?
In crypto staking, participants earn more cryptocurrency by locking up their coins or tokens. Blockchains using Proof of Stake reward participants for minting new coins and/or transaction fees according to the size of their holdings.
Users can also merge their holdings with other investors in staking pools. In that case, when the pool earns payments, holders are also rewarded according to their contribution to the pool.
The risks of crypto staking
While crypto staking is an effective way of earning passive income, it has its challenges. Here are some of the risks associated with crypto staking:
Crypto market volatility
The crypto market is quite volatile, which may be the most prominent risk with crypto staking. Market raptures and price fluctuations can affect staked crypto assets, leading to significant losses.
In 2022, most cryptocurrencies have been bearish, including Ethereum, which has lost almost 70% of its value in the first six months.
Staking is one of the ways to boost investment gains in the crypto space, but market volatility and price swings can outpace the yield and cause a negative return.
Liquidity and the lock-up period
The crypto market is a vibrant space with crypto exchanges constantly operating. Liquidity is the ability of an asset to be easily bought or sold, and cryptocurrencies are among the most liquid assets available. However, when participants stake their funds, it makes them less liquid because the funds are locked up for a set period.
Also, staking can be different from one blockchain to another. Some networks have a lock-up period, so users agree to have their funds staked for a predetermined time before being able to withdraw and sell their initial stake and reward. For instance, as Ethereum transitioned from Proof of Work to Proof of Stake, participants had to lock up their funds on the platform until the Merge was completed.
Additionally, staking may affect the liquidity of newer or smaller crypto assets. New blockchains may attract a massive crowd by offering high returns. Still, a lack of relevant investors may render them less profitable because they may not convert the rewards into mainstream cryptocurrencies such as Bitcoin or Ethereum.
Faulty network operation & errors
Faulty network operation and errors are a risk that can happen to any staker. From validator node errors to power outages or internet problems, these are all reasons that can lead to stake slashing.
In a Proof of Stake consensus mechanism, if a participant’s node cannot reach its online presence requirements and creates errors in the blockchain, the validator can face penalties that reduce not just their staking rewards but their initial stake as well.
Additionally, the network can lower the chance of selecting some validator nodes if they are marked for faulty behavior.
Safer and cheaper ways of staking crypto
Now that you know about staking and its risks, are there some safer and cheaper ways of staking? Importantly, not everyone can become a validator. This is due to the considerable value of crypto holdings a particular network demands and the lack of a proper hardware device with sufficient computational power.
Even so, here are some safer and cheaper crypto-staking options that beginners should try out:
Crypto Staking in Pools
Staking pools provide crypto staking solutions that work by “pooling” together crypto assets from many contributors. Consequently, the amount of crypto required to stake is reduced, making it more accessible than staking as an individual.
But more importantly, the risks are distributed across all participants by staking in a pool, reducing the possibility of getting the stake considerably slashed.
Staking on Crypto Exchanges
For beginners and most crypto holders, crypto exchanges are the cheapest way to get into staking. Mainstream crypto exchanges such as Binance and Coinbase provide their users with crypto staking services, which they can use to earn passive income.
In Coinbase, users can hold a sufficient amount of particular cryptocurrencies in given wallets. Payouts range from daily to quarterly. Notably, users don’t have to buy their staked crypto strictly from the Coinbase exchange, making it even easier for many investors to join.
On the Binance crypto exchange, users have more than 100 tokens for staking. Binance offers one of the most robust and comprehensive crypto staking solutions. Users can usually stake their funds for one to four months.
Ultimately, is crypto staking worth it?
Although it comes with a few more risks than traditional mining, crypto staking is worth it as the benefits still outweigh the possible problems.
Passive income generation
With crypto staking, users can earn yield-like rewards without selling their crypto assets. The return percentages range but the results come as passive income.
Low entry possibility
Opening up a node can be expensive. Yet, crypto staking is easy to undertake, with just a few simple clicks. With more crypto exchanges like Binance, Coinbase, and Kraken offering staking services, it’s easy for most users to get started without a significant investment.
Green and energy-efficient
Besides, staking is equally energy-efficient. Take Ethereum’s Merge for example. After the Merge, according to the CCRI report, Ethereum’s overall electricity draw now tallies just 2,600 megawatt hours per year, compared to 23 million megawatt hours before the merge. That means a well over 99.99% consumption reduction.
With more crypto exchanges warming towards it, crypto staking is gaining more popularity as a new way of earning passive income in the crypto space.
Finally, when deciding to start staking, research the available cryptocurrencies for staking and look for a project that not only offers the best rewards but also has the best potential for your portfolio.