Crypto staking can be both rewarding and risky

stake

The launch of proof of stake consensus mechanism has been a positive disruptive force in both blockchain and cryptocurrency worlds. Compared to the traditional Proof-of-Work model, the newer PoS system assures much less energy intensive and a more eco-friendly process of block validation. Also, interestingly, the PoS crypto blockchains have introduced a new avenue to make money for crypto investors. The process is called crypto staking – a welcome way to improve wealth with crypto yet without buying crypto or selling the crypto holdings.
Crypto staking extends a potential way to make inroads to passive income from crypto. However, the process involves its own share of risks as well. We will discuss rewards as well as risks about staking in this post but before that, let’s have a look at the process of crypto staking.
What does it mean by crypto staking?
Crypto staking, in one line, refers to the validation process used by PoS blockchain to verify transaction data on new blocks.
If you are familiar with the operations of a blockchain network, you must know that a blockchain always conducts extensive verification before connecting every new block to its chain. In a PoW environment, the verification process is executed by PoW miners who have to solve computational puzzles to validate new blocks. But, the more advanced PoS system validates every new block through the process of crypto staking.
The staking process
In crypto staking, crypto holders pledge (deposit and lock-in) a certain portion of their holdings to smart contracts of a blockchain. The locked coins help the blockchain network to verify a new block before adding a one to its existing chain. As a reward, the blockchain offers the stakers with new coins. The staking rewards are calculated in APY or Annual Percentage Yield.
Ethereum is about to be a full-fledged PoS crypto project by the end of this year. However, thanks to the launch of Beacon Chain, ETH holders can start staking in Ethereum now. Other notable crypto coins that allow staking are Polkadot, Polygon, Algorand, Solana, and so on.
Rewards involved with crypto staking
To start with, crypto staking could be a rewarding process, provided you stake the right way. Let’s have a look at the amazing rewards you can expect with cryptocurrency staking.
Excellent route for passive income
This is by the far the most significant reward of signing up for crypto staking.
As mentioned previously, crypto staking extends an excellent opportunity for passive income. All you would have to do here is to engage your already-bought crypto holdings into a blockchain verification process and earn handy staking rewards in return. The only clause is the coins will be kept locked up for a certain period of time. There is no need to buy crypto separately for participating in staking.
Great rewards percentage
Staking a crypto is somewhat like keeping money in your savings bank account. When you store money in the savings account, the bank utilizes your money for different banking activities, such as provision of loans. In return, the bank offers you interest. Similarly, you earn rewards from the blockchain platform when you lock up your crypto coins for staking.
But, the staking process offers a much higher percentage of rewards compared to what you receive with conventional bank savings accounts. The average staking APY per annum is somewhat like 10-12%. Some of the coins can offer you 15-20% APY.
Two income streams from same holdings
Crypto staking offers an additional income stream from the same crypto holdings that you have kept them on hold for long-term trading. Thus, with crypto staking, you receive the opportunity to earn two channels of earnings yet from the same holdings.
More eco-friendly
On one hand, crypto staking rewards stakers with a promising window to earn handy passive income. On another, it helps to establish a greener process of validating new blocks. The older PoW process is extremely energy-intensive and endangers the environment. The PoS process does not consume the high level of energy as is consumed by its predecessor.
Risks involved with crypto staking
Slashing
Slashing is a process where a blockchain network slashes down a part of staking rewards if a staker or validator does not behave as per the compliance standards. If you engage in crypto staking, you need to ensure 100% uptime for nodes. Also, you cannot use modified software to manipulate the staking process in your favor. The other one is, you need to ensure the nodes are safe from attacks during the staking process. If any of these factors is not in line, i.e., if the nodes suffer downtime or get attacked or/and you use some kind of modified software- you will be penalized. As part of the penalty, a portion of the staking rewards will be cut down.
Lack of liquidity
What do you plan to do with the coins that you would receive as staking rewards? Odds are, you are likely to sell them off. But what if it becomes an arduous task to sell off the asset? Low liquidity is a major risk of crypto staking.
Declining value of coins
As you know already, the crypto market is radically volatile. Coin prices can take a plunge or jump up to stellar heights in the blink of an eye. Now, there is no point in feeling glorious about receiving 15-20% APY on staking rewards if your chosen coin’s value shows a highly bearish market while you receive the staking rewards.
Attack on exchanges
Crypto exchanges have been the hottest targets for hackers for quite some time now. If you stake through a crypto exchange, your holdings will stay locked up in the exchange’s wallet. Now, a single attack on the exchange’s wallet will not only destroy your chances at staking rewards but will leave you stranded with lost holdings.
Tips to mitigate the risks
We will wind up the article with some pro tips to mitigate the risks-
● To avoid slashing issues, try to perform the staking through a leading and well-equipped crypto exchange
● Stake on coins that boast high liquidity
● Stake through an exchange that is backed by cutting-edge security measures. The exchange should also have the experience of helping users to get their coins back even after an attack.

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By Kevin Hall

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