Crypto Staking Safety

Learn what crypto staking is and whether it's a safe investment to consider.

Cryptocurrency staking is one of the most popular ways of making passive income from crypto assets. It doesn't require much technical know-how, nor does it take up much time. In most cases, all you need to do is to deposit into a staking pool and expect timely rewards. That is why crypto experts and novices alike favor the staking process.

However, with the recent hacks in the crypto industry, it is only natural to wonder how safe your digital assets are if you stake them. After all, there is no essence in earning staking rewards if you eventually lose them along with your capital.

That is why we have prepared this article. We will address safety concerns around crypto staking and show you if it is worth it. We will also discuss how crypto staking works and suggest some reputable crypto platforms that offer crypto staking services.

How Crypto Staking Works

Have you ever participated in fixed-term savings with your bank? If so, you were likely rewarded with interest, depending on the amount and duration of your savings. Crypto staking operates on similar principles. You deposit your crypto asset in a staking pool and get rewarded based on how much you deposit and how long your deposit stays. That is the summary. Now, let's break it down.

In its barest essence, staking crypto ensures the continuity of a growing number of blockchains. Based on the proof-of-stake (PoS) consensus mechanism, these blockchains 'force' interested investors to support the blockchain network by locking up their tokens. These crypto investors are known as validators and are responsible for verifying transactions on the network. They then get the blockchain's native tokens as rewards.

However, PoS blockchains usually have a high barrier to entry for validators. For example, you need to stake at least 32 Ether on the Ethereum network before you can be a validator. At press time, that was around $55,000. Not everyone can afford that. But if you can't be a validator, you can be a delegator.

A delegator is someone who delegates coins to a validator to add to their stake. Delegators do this by adding the tokens to a staking pool run by a validator. Thus, they get a secondary staking reward rate, dependent on how much the validator is willing to release. The advantage is that there is usually a low barrier to entry for delegators or none.

Read this to learn more about what staking cryptocurrency involves.

Risks Involved In Staking Crypto

We will now consider five risks that come with staking cryptocurrencies.

Volatility Risk

This risk is common with anything that has to do with cryptocurrencies. As crypto assets are known to be highly volatile, there is the risk that your staked assets will be worth much less if the market declines drastically. Therefore, you may end up being a bag-holder (someone with many coins worth little monetary value).

Validator Costs

Being a validator of a crypto blockchain is not cheap. Most networks punish validators that do not show much online presence. Therefore, validators need quality hardware and a constant power supply to avoid being slashed (suspended from staking). If they are not careful, the costs can eat into their rewards, making them run at a loss.

Loss Of Funds

There is always the risk that hackers could steal your digital assets if they access your wallet or staking pool. This is the case regardless of whether you stake your assets in a centralized or decentralized crypto-staking platform. That is why it is imperative to adhere to solid security practices to limit or eliminate this risk.

Lockup Risk

Many platforms that allow you to stake crypto usually require that you lock up your crypto tokens with them for a while, even if you are a delegator. Under normal circumstances, that is not a problem. But sometimes, you may be in a cash crunch and need to convert some of your crypto assets quickly. In other cases, the market may be in a price decline, warranting you to quickly sell your assets to prevent further damage to your portfolio.

Unfortunately, if you have locked up your tokens and find yourself in any of the situations described above, there's nothing you can do but wait. The damage may already have been done by the time the lockup period elapses.

Lack Of Proper Regulation

Because staking is primarily a decentralized activity, it operates in the unsupervised world of decentralized finance. This means it is easier for fraudulent platforms to sway unknowing crypto investors out of their hard-earned crypto wealth. However, this risk is mitigated if you use insured and regulated crypto-staking platforms. In light of that, we will discuss the principles surrounding crypto staking insurance and regulations.

Crypto Staking Insurance

Insurance is a big topic in crypto asset safety. This is because things can go wrong, even despite the best intentions. So, crypto investors will sleep better at night if they know their staked assets are insured against possible risk. But how does crypto staking insurance work?

In most cases, crypto staking insurance comes with the general insurance package that a staking platform offers. For example, even though Binance does not provide a specific staking insurance package, it has an insurance fund (SAFU) currently valued at over $1B. Thus, you have little to worry about if you stake your crypto assets with them.

Some crypto protocols specifically offer crypto staking and insurance packages. An example is the Unslashed Platform. It is a DeFi insurance platform that covers various risks in the crypto market. Some risks it covers are validators slashing, smart contract exploits, wallet malfunctions, etc. It also offers staking yields as high as 24% (at the time of writing).

Learn more about what crypto staking insurance involves.

Crypto Staking Regulation

Even though loyal DeFi adherents frown at crypto regulatory policies, the truth is that a regulated crypto platform puts the mind of investors more at ease than an unregulated one. This is because you know the platform is accountable to a higher power; therefore, it can't just vanish. Thus, even though it doesn't eliminate the risks of staking crypto, regulation minimizes them.

But what about DeFi staking platforms? How can they be regulated? True, many have been calling for a regulation of the DeFi space, yet it remains an arduous task. This is because the lack of regulation by a central body is one of the core principles of the DeFi crypto world. Therefore, you might not readily find a regulated DeFi staking platform. Still, you can reduce risk by using large-cap crypto assets with a solid user base.

Taxation policy is another noteworthy aspect of crypto staking regulation. Even though tax laws vary from region to region, the general idea is that staking rewards are a form of income and are therefore taxed. Also, your staked crypto asset may qualify for capital gains tax if it increases in value after you stake it.

This article discusses the topic of crypto staking regulation in more detail.

Staking NFTs

Non-fungible tokens are unique types of cryptocurrencies. However, you can still stake them like other crypto assets. To stake your NFT, you simply add it to a supportive crypto protocol and sit back as you earn passive income from your already unique investment. There are three main ways of staking NFTs:

Staking With An NFT Staking Platform

An example of this is the Binance cryptocurrency exchange. Being the forerunner in major aspects of the crypto world, this exchange also offers NFT staking through its NFT PowerStation, which is exclusively for Binance fan tokens. Other examples of NFT staking platforms are NFTX, Doge Capital, etc.

Play-to-earn NFT staking

This is the most common form of NFT staking. Some play-to-earn protocols like Mobox, ZooKeeper, Splinterlands, etc., provide staking functionalities for the NFTs issued on the platform. For example, you can stake MOMO NFTs on MOBOX and earn MBOX tokens.

DAO NFT Staking

Some decentralized autonomous organizations (DAOs) will give you voting rights if you add certain NFTs to an NFT staking pool. Some platforms even allow you to submit proposals that others can vote on after staking your NFT.

While staking NFTs, it is also imperative to adhere to security measures to prevent hacks and losses. These measures include depositing your NFT with a trustworthy protocol and keeping your sensitive wallet details safe.

Safest Crypto Staking Platforms

Now that we have touched on crypto staking safety, it's time to offer recommendations about the safest platforms you can entrust your crypto assets with. Bear in mind that while this is not financial advice, the platforms listed below have been vetted through an independent review process, aggregating accurate sources of information across the entire crypto world.

With that in mind, consider the following options:

Midas.Investments

Midas.Investments is a platform that offers unique crypto-earning products with high-interest rates. However, an even more notable feature of the platform is its partnership with Fireblocks, a noteworthy blockchain security platform. Fireblocks is also the security provider for major crypto institutions like Nexo and LedgerPrime. Thus, your assets are safe with Midas.Investments.

You can check out our Midas.Investments review for further information.

Kraken

Kraken is one of the leading cryptocurrency exchanges in the world. It is also one of the most secure crypto exchanges. Some of its security protocols include:

  • Offline storage for 95% of the crypto assets under its care.

  • Regular penetration tests to identify and plug security leaks.

  • Multi-factor authentication and SSL encryption.

  • Heavily guarded on-ground platform servers.

Therefore, Kraken is one of the safest platforms for staking crypto assets. Read this Kraken comprehensive review to know more about Kraken.

Binance

Binance has been the largest cryptocurrency exchange for a while now. Therefore, one would expect it to adhere to the crypto industry's highest security standards. True to that, Binance practices the following security measures:

  • Encouraging user accountability through multi-factor authentication methods. On Binance, you can use up to four authentication methods to secure your account.

  • The Secure Asset Fund for Users (SAFU) is Binance's insurance fund against unexpected losses. With an insurance fund of over $1 billion, investors can stake with peace of mind.

  • Being the largest crypto exchange, it is also one of the most regulated by governments around the world.

  • Other security measures include address allowlisting, cold asset storage, etc.

Binance also offers various staking products for different cryptocurrencies. You also do not have to lock your crypto holdings before earning crypto rewards. You can earn passive income through flexible staking (staking that doesn't involve fixed-term mechanisms).

If you want to know more about the Binance crypto exchange, here is a Binance review for you.

Final Thoughts

So, is crypto staking safe? The answer largely depends on how you go about it. You'll likely have no issues if you stake coins with a trusted platform and engage in safety practices yourself. Still, the cryptocurrency world is largely volatile and can occasionally spring up surprises. Therefore, look before you leap, and don't invest what you can't do without.

Frequently Asked Questions

Is Staking Crypto Worth It?

Yes, staking crypto is worth it for these reasons:

  1. Staking assets provides a way for crypto holders to earn rewards without doing away with their crypto holdings.

  2. It can make you rich, especially if your staked asset gains value while also gaining numbers in your portfolio. The more crypto funds you stake, the more rewards you earn.

  3. There is a low barrier to entry, especially for delegators. In most cases, a crypto investor only needs a crypto wallet and a few liquid assets to start staking.

  4. It provides crypto enthusiasts with a way to support their favorite blockchain networks while earning juicy staking returns.

Still, one should be careful of the attendant risks involved like liquidity risk, validator risk, lack of regulation, etc. You could also check out other profitable crypto investments to help pick the best fit for you.

Can Staked Crypto Be Stolen

Yes, hackers can steal your staked crypto assets if they access your wallet's private keys or the storage of the platform you use. That is why choosing a good platform and keeping your sensitive wallet details safe is vital.

How Do I Stake My Crypto Assets?

You can either stake as a validator or a delegator. To stake as a validator, you should connect your wallet to the blockchain network's protocol and stake the required amount of tokens. Most protocols will then randomly select you to be a validator. Take note that there is usually a maximum number of validators on a particular blockchain. Thus, you may not be selected if that number has been reached.

You can also stake by delegating your crypto assets to a validator. This is the easiest way and is usually common in major cryptocurrency exchanges. All you need to do, in most cases, is to register on the platform, make your deposit, and stake. Then sit back and expect your rewards.