Cryptocurrency development comes along with many ways to make money, one of which is staking. It means receiving rewards in the form of crypto for supporting the network, so it is a quite easy way to increase your assets. However, staking also entails some risks that you need to be aware of before you start to invest. In this article, we will look deeper at the cryptocurrency staking issue and explore the pros and cons of this process.
What Is Staking?
As we've already mentioned, staking is one of the popular ways to make income from cryptocurrencies. The way it works is as follows: the owner of digital assets sends a part of them to the blockchain, guaranteeing the high security and performance of the network. For this contribution, the participant gets rewards with a percentage of the returns.
Staking works on the PoS (Proof of Stake) algorithm and utilizes smart contracts. The process itself involves locking up one's tokens for the functioning of the blockchain network. In this way, when new participants stake their coins, they help secure the network and validate transactions. Along with it, not all networks allow stake — this list is limited. Among the most popular blockchains for staking are Ethereum, Cardano, Solana, etc.
Numerous investors are drawn to staking because of the potential of passive income and its simplicity, as no special technical equipment is required. Nevertheless, staking has its benefits and risks just like all types of cryptocurrency earnings.
Pros Of Staking
Staking has many advantages. First of all, it is chosen for its possibility to generate passive income. At the same time, staking is much broader — let's take a closer look at its benefits.
Getting Passive Income
As mentioned above, cryptocurrency staking involves your coins locking into the network's wallet. The size of these rewards varies depending on the network and the amount of staked cryptocurrency, but in any case, they will generate income for you. This way, you will always get money without an active trade if you stake.
High Interest Rates Of Rewards
Cryptocurrency staking offers higher returns than traditional investments — the average annual reward rate is 11%. Some networks offer 20%, and some offer 50%. These favorable return terms make staking a very attractive way to increase cryptocurrency assets.
Secure Network
Staking operates within a decentralized framework, which implies that there is no single "boss". This fact greatly reduces risks of the network’s work. In turn, network participants maintain the integrity of the network and the security of the blockchain by contributing their coins. This contribution to the network stability benefits financially and ideologically, because everyone involved is interested in the success of the network performance. What is more, it encourages validators who process transactions to act in the best interest of the net.
Network Management
The decentralized nature of the network allows each member to influence its changes. For example, stakers have a say when the decisions on protocol updates are made. So, they participate in forming the network’s future direction. This measure ensures that each participant is comfortable with the conditions and mode of operation.
Energy Efficiency Of The Network
Staking does not require any special technical knowledge — it is enough to keep your coins or tokens in your wallet to stake cryptocurrency. It is an energy efficient and environmentally friendly process that requires minimal computing power to create blocks and verify transactions.
Cons Of Staking
Although staking is meant to increase profits, it also has some risks. They are related to market changes and security. Let's figure them out!
Risk of Volatility
There is a risk of going negative due to market volatility. If the price of the staked cryptocurrency falls, you may get no profit, or you may be left with less assets than you originally invested. Therefore, consider the possible risks associated with market volatility and diversify your portfolio. For example, invest one part of your assets in staking with strong rate changes and the possibility of high returns, and the other one — in cryptocurrency with a more stable rate, but a low capitalization.
The Need For A Minimum Investment
Most networks require a minimum amount to be available for staking. For example, when staking Ethereum, you must deposit 32 ETH to get started. In this case, you have the opportunity to become a full validator of the network. However, if you don't have the minimum required coins, staking can be an obstacle. In this case, you can stake using pools and share rewards with other participants.
Blocking Tokens
Cryptocurrency staking assumes locking tokens for a certain period of time. For example, if you stake your coins for a year, you will have no access to them during this period. In this case, there is a risk of missing investment opportunities and not reacting to price fluctuations fast. However, the blocking period varies depending on the network, so you should choose the one whose blocking period suits you best.
Technical Risks
Working in a stake network always carries the risk of technical problems and fraud. In this matter, the safety of participants will depend entirely on the platform they use for staking: it should be reputable and secure.
If you will stake on Cryptomus, the danger will be reduced to a minimum: the platform is protected by encryption technology, and all participants of the network, both validators and delegators, are verified before registration. Therefore, you can be sure that your funds are secure. If you have any questions or difficulties in working with the platform, technical support will promptly help you to make your work comfortable.
Unscrupulous Validators
There are cases when network validators refuse to transfer payments to investors. And in some staking projects, rewards are paid only after a long time. In addition to choosing a reliable platform, you should learn the rules of staking on it in detail. Find out the amount of rewards, study the withdrawal rules and check the date of payouts. And never send funds directly to the validator, as this is a sign of fraud.
Is It Worth To Stake?
Staking allows cryptocurrency owners to earn passive income in the long term. The rewards, meanwhile, are generated from fairly high interest rates, significantly multiplying the participants’ funds. So staking is a reliable and profitable way to earn passive income, that also helps investors reduce risks from short-term price fluctuations.
In addition to earnings stability, staking ensures the network safety through the investment of the stakers themselves. Of course, there is always the risk of fraud and hacking, but using a reliable platform removes this obstacle as well, making staking a completely safe and profitable process.
Before you start staking, research your cryptocurrency in detail, study the benefits and the risks of the platform you are going to use and keep an eye on the market. These measures will help you invest in a profitable and safe way.
We hope this guide has helped you to fully understand the pros and cons of staking. If you still have any questions, you can ask them in the comments.
