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 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 your safety concerns about crypto staking and determine whether it is worthwhile. We will also go over how crypto staking works and recommend some trustworthy crypto platforms that provide crypto staking services.
Have you ever participated in fixed-term savings with your bank? If so, depending on how much you saved and how long you saved it, you may have been given interest. Crypto-staking operates on similar principles. You deposit your crypto assets in a staking pool and get rewarded based on how much you deposit and how long your deposits stay there. That is the summary. Now, let's break it down.
In its simplest form, staking crypto makes sure that a growing number of blockchains stay up and running. 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 called "validators," and they are in charge of making sure that transactions on the network are legitimate. 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, depending 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 at all.
Read this to learn more about what staking cryptocurrency involves.
We will now consider five risks that come with staking cryptocurrencies.
This risk is common with anything that has to do with cryptocurrencies. Because crypto assets are notoriously volatile, there is a risk that your staked assets will be worth much less if the market falls precipitously. Therefore, you may end up being a "bag holder" (someone with many coins worth little monetary value).
Being a validator on a crypto blockchain is not cheap. Most networks punish validators that do not show much online presence. To avoid being slashed (stopped from staking), validators need good hardware and a steady power supply. If they are not careful, the costs can eat into their rewards, making them run at a loss.
If hackers get into your wallet or staking pool, they could steal your digital assets at any time. This is true whether you stake your crypto assets on a platform that is centralized or decentralized. To reduce or get rid of this risk, it is important to follow good security practices.
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. Sometimes, the market's prices may be going down, which means you should sell your assets quickly to keep your portfolio from getting worse.
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.
Staking is mostly a decentralized activity, so it takes place in the world of decentralized finance, which is not regulated. This makes it easier for fake platforms to trick crypto investors who don't know what they're doing 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.
Insurance is a big topic in crypto asset safety. This is because things can go wrong despite the best intentions. As a result, crypto investors will sleep better at night if they know their staked assets are protected from potential 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 cryptocurrency 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.
Even though loyal DeFi adherents frown at crypto regulatory policies, the truth is that a regulated crypto platform puts the minds 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 crypto assets with a large market cap and a large number of users.
Taxation policy is another critical 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.
Non-fungible tokens are unique types of cryptocurrencies. However, you can still stake them like other crypto assets. To stake your NFT, all you have to do is add it to a crypto protocol that supports it. Then, you can sit back and watch as your already-unique investment earns you passive income. There are three main ways to staking NFTs:
An example of this is the Binance cryptocurrency exchange. This exchange is a leader in many areas of the cryptocurrency world, and its NFT PowerStation, which is only for Binance fan tokens, lets you stake NFTs. Other examples of NFT staking platforms are NFTX, Doge Capital, etc.
This is the most common form of NFT staking. Some play-to-earn protocols, such as Mobox, ZooKeeper, Splinterlands, etc., allow NFTs issued on the platform to be staked. For example, you can stake MOMO NFTs on MOBOX and earn MBOX tokens.
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.
It is also important to follow security rules when staking NFTs to avoid hacks and losses. One of these steps is to deposit your NFT using a trusted protocol and keep your sensitive wallet information safe.
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. Keep in mind that this isn't financial advice, but the platforms below have been checked out by an independent review process. They bring together accurate sources of information from all over the crypto world.
With that in mind, consider the following options:
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 comprehensive Kraken review to learn more about Kraken.
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. To that end, 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 don't have to lock up your crypto before getting crypto rewards, either. 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.
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 on a trusted platform and engage in safety practices yourself. Still, the cryptocurrency world is largely volatile and can occasionally spring surprises. Therefore, look before you leap, and don't invest in what you can't do without.
Yes, staking crypto is worth it for these reasons:
Staking assets provides a way for crypto holders to earn rewards without doing away with their crypto holdings.
It can make you rich, especially if your staked asset gains value while also adding to your portfolio. The more crypto funds you stake, the more rewards you earn.
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.
It provides crypto enthusiasts with a way to support their favorite blockchain networks while earning juicy staking returns.
Still, people need to be aware of the risks that come with it, such as liquidity risk, validator risk, a lack of regulation, etc.
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 are vital.
You can either stake as a validator or a delegator. To stake as a validator, you must connect your wallet to the blockchain network protocol and stake the required number 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 on major cryptocurrency exchanges. In most cases, all you need to do is register on the platform, make your deposit, and stake. Then sit back and expect your rewards.
The content is only provided for informational purposes. It is not meant to be tax or financial advice, and it does not recommend any particular investment plan. Every investment has risk, including the possibility of a cash loss. Past performance does not guarantee future results.
Bitcompare does not guarantee good investment outcomes. The way a security or financial instrument did in the past does not show how it will do in the future. Before investing in options, clients should carefully assess their financial goals and risk tolerance. Due to the importance of taxes in all staking transactions, a customer who is thinking about staking should talk to a tax expert to find out how taxes affect the outcome of any staking strategy.