What Are the Risks of Staking Crypto? - Makeuseof

What Are the Risks of Staking Crypto?

Cryptocurrency staking is now a famous manner to earn a passive income through placing up a portion of your price range as collateral. People can earn tremendous amounts of money by way of doing this, however, as with some thing in the crypto international, staking doesn't come without its risks.

So, what are the main dangers of staking your cryptocurrency?

1. Impermanent Loss

Impermanent loss is a pretty common downside of crypto staking and is a risk to the crypto industry as a whole. By nature, the crypto market is very volatile, which means the value of tokens can rise and fall rapidly in the space of hours. So, if you're staking a coin, and its value drops drastically during your staking period, this can be a problem.

As a staker, you become a liquidity provider as you are providing a platform with available crypto funds, and therefore liquidity. In the case of a drop in your staked token's value, you could be at risk of losing a lot. This risk is greatly reduced when you stake a stablecoin, as it is wrapped and therefore doesn't experience huge hikes or drops in value.

Impermanent loss can be counteracted by trading fees, but it is still a very real risk that affects thousands of people every month.

2. Lockup Periods

While there are now types of staking out there that do not lock up your crypto, the majority of staking options still require lock-ups. This involves your staked funds being locked, and therefore inaccessible, for the duration of your staking period. On top of this, if you decide you no longer wish to stake during this period, you'll have to wait three weeks for your funds to be unlocked.

So, if you suddenly need your staked funds for something else, or you decide that you've made a poor decision by staking your funds, there's no quick way to get your funds back in your control. This is a very important factor to acknowledge before you begin staking.

3. Loss or Theft of Funds

With the rise of blockchain technology, crypto theft has become a big industry in and of itself, which threatens crypto owners and the services they use on a daily basis. And, even if your funds are "locked" during the staking period, this doesn't mean that they're entirely safe.

While some exchanges claim to hold locked funds in cold storage, this isn't always the case, and funds have been stolen by cybercriminals from major exchanges in the past. Take BitMart, for example. This exchange lost almost $200 million in crypto to theft in 2021, a huge loss for the platform. Individual users can get funds stolen from their exchange wallets, too.

On top of this, technical errors can also pose a threat to your funds. If something major goes wrong within a network, it could result in the loss of your staked funds, as well as your rewards.

4. Risk of Illiquidity

In short, liquidity refers to the availability of liquid assets to a market or company. In terms of crypto, liquid assets include tokens, NFTs, and other similar products, and a crypto platform's liquidity depends on an asset's ability to be converted into cash or other digital coins. Crypto exchanges, lending platforms, and other services rely on liquidity to make a profit and stay in business.

Liquidity isn't just important for cryptoWhen you stake, the idea is to earn rewards that you can sell, invest, or swap for another token. This is a particular problem when you're staking a token with a very small market cap that doesn't have much liquidity on other platforms.

If this is the case for you, you may find it difficult to do anything with your rewards. Because you're paid in the form of the token you initially lock up when you stake, the token's liquidity directly affects your options. So, before you stake a smaller coin, take this risk into consideration.

5. Validator Errors

While you can pool stake your crypto, independent staking, and therefore becoming a validator (or node), brings in higher returns overall. This is why a lot of people decide to stake independently. And, while being a crypto validator is a pretty passive responsibility, there are ways in which a validator can make mistakes and cause problems for themselves or their chosen platform.

For example, if a validator isn't online, as they always must be to process blocks, this becomes a problem for the platform, as the constant activity of nodes is integral to keeping blockchains functioning.

If a node repeatedly makes mistakes in the validating process, their rewards can be reduced, either slightly or significantly, which can make the staking process pretty pointless overall. This is worth noting if you want to stake independently and act as a validator.

However, even if you're in a staking pool, validator error can also be a problem. Users in a staking pool rely on its validators to process blocks and earn rewards, so an inconsistent validator could make for some pretty disappointing returns.

6. Validator Costs

This is a very important factor to consider if you want to be an independent staker, and therefore a validator, on an exchange or similar platform. The cost of being a validator may sometimes exceed the rewards you can earn, so doing the maths on what you'll be spending versus what you'll be earning is key.

The biggest cost you'll incur while being a validator will come from the electricity required to run a node all day, every day. Keeping your device on to do this will, of course, require more electricity than you usually consume, and so your energy bill will most likely increase as a result.

Additionally, validators often buy external hard drives to allow for the extra storage space required to independently stake, which will also contribute to the overall cost of being a node. So, if you're living on a tight budget, or the staking returns of your chosen coin are low, the costs of validating can become a bit of a problem.

Staking Can Be Profitable however Isn't Watertight

Though staking gives a regular passive earnings for thousands of humans worldwide, it would not come with out its risks. Whether it's the kingdom of the marketplace, cybercrime, or validating prices, it's vital to don't forget each and each one of the dangers listed above before making a commitment to staking your crypto. It should emerge as saving you a huge bite of cash.