Rant

Is Crypto Staking Worth it? Pros and Cons of Crypto Staking

By  | 

Cryptocurrency

You can make a profit out of crypto in various ways. For instance, you can buy, sell, or trade crypto. But if you are not a trader and want to hold your coins for a really long time and earn profits on the go, then crypto staking might interest you.

It is one of the popular ways to earn a passive income by putting up a portion of your funds as collateral. You have to hold your crypto funds for a specific time on a platform, and you will earn rewards on it.

But not too many people are aware of what crypto staking is and the risks and benefits. So let me go ahead and explain it to you:

 

What Is Staking in Crypto?

Staking is one of the new concepts in the crypto industry. Staking allows many cryptocurrencies to verify their transactions and allows participants to earn rewards on their holdings.

But what exactly is crypto taking? As per TheMoneyMongers.com definition, Staking crypto coins is a process that commits your will to hold your crypto assets on a blockchain network and confirm transactions.

There are many cryptocurrencies that use the proof of stake model in the payment process. And for such coins, staking crypto plays a key role. These coins are more energy-efficient compared to coins running on the proof of work model. As proof of work model requires mining devices that use excessive power.

But on the other hand, staking is a great way to earn passive income. There are many platforms that offer high-interest rates for staking. However, before you go ahead and put your money in crypto staking, let’s know how staking works.

How does staking in crypto work?

There are a majority of new cryptocurrencies that use the proof of stake model. Here the concept of staking is how new transactions are added to the blockchain.

In this model, the participants pledge their coins to the cryptocurrency protocol at first. Then from those participants, the protocol chooses validators to confirm blocks of transactions. Also, the more coins you pledge, the more likely you will be chosen as a validator.

As a result, every time a block is added to the blockchain, new crypto coins are minted and distributed as staking rewards to block validators. In most cases, the new rewards are the same type of cryptocurrency that participants are staking.

But some blockchain may use a different crypto coin apart from what a participant is staking on a crypto protocol.

So if you wish to stake crypto, you will need to own a cryptocurrency that uses the proof of stake model. Then you will need to choose the amount you wish to stake. However, the exchange will itself tell you about the minimum and maximum volume that you can stake.

Also, when you stake your coins, you are still the owner of them, and you can unstake your coins at any time. But some protocols might ask you to stake coins for a period of time.

Moreover, staking is not possible with all the cryptocurrencies out there. Instead, it is limited to cryptocurrencies that use the proof of stake model.

Pros Of Crypto Staking

Staking is a process that requires you to buy and hold a certain cryptocurrency in your wallet and earn profit from it.

Usually, there is no risk involved in crypto staking. As all you are doing is you are leasing your coins to the validator. Also, you will still have full ownership of your assets.

Also, the main advantage of crypto staking is that you earn a passive income. Also, you don’t have to invest a ton of money to get started with it.

Staking is also a pretty easy process to get started. All you have to do is sign up on a staking pool or use a crypto exchange. It is also considerably more energy-efficient than mining and less risky than trading.

Cons Of Crypto Staking

1. Impermanent Loss

One of the main drawbacks of crypto staking is impermanent loss. As the crypto market is extremely volatile. As a result, the value of the coins may drop or rise rapidly within a span of a few hours.

So if you are staking a coin and the price of the coin suddenly drops, then you will face an impermanent loss.

Also, when you are staking, you become the liquidity provider. As you are providing a platform with available crypto funds and, therefore, liquidity. So if there is a major drop, you will end up losing a lot of money.

However, you can easily deal with this impermanent loss when you choose to hold stable coins. As the price of stablecoins doesn’t fluctuate as much as any other cryptocurrency does. Also, if there is no locking period, then you can sell your funds and exit from the staking pool.

Moreover, the impermanent loss can also be counteracted by trading fees. But still, crypto-taking is a risky business.

 

2. Lockup Periods

In most cases, there are no locking periods when you are staking your crypto. But still, there are cryptocurrencies that require you to stake your funds for a certain time. This will lock your funds and prevent you from accessing your funds further.

Also, if at any moment you decide that you no longer wish to stake your funds during this period, then you will have to wait for your staking period to get over or at least wait for three weeks for your funds to be unlocked.

So in case there is a sudden need for funds or the value of your staked coins starts to drop, there is no way to recover your funds back.

 

3. Validator Errors

One of the main reasons why a huge number of people participate in staking is that if you stake your crypto, become independent staking or become a validator, it brings you high returns.

Also, 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 instance, if a validator is not online, then it becomes a problem for the platform. As the constant activity of nodes is an integral part of keeping the functioning of the blockchain.

Also, if a node makes mistakes repeatedly in the validating process, their rewards will get reduced slightly or significantly. As a result, for them, the staking process would be pointless.

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.

 

Should you stake your cryptocurrency holdings?

If you are thinking of staking your crypto, then there are a few things that you must consider before getting started. For instance, are you planning to hold your crypto for a long time or trade crypto for profit?

If you are looking for trading, then staking is not for you, especially on platforms with a lock-up period.

But if you are not a trader and want to hold your assets for a really long time, then staking might be the best option for you. Additionally, you also want to consider the risk and rewards involved with crypto staking.

Some of the points that you should consider while staking crypto are:

  • Is there a lock-up period?
  • Minimum deposit?
  • Maximum rewards per user?

So that was all about crypto staking. I hope this has helped you with all the information you need. In case if you wish to ask anything else, then do feel free to drop a comment below.

You must be logged in to post a comment Login