Crypto Staking: What Is It and What Are The Risks Involved?
Crypto staking is where one must put a specified amount of a given crypto coin in a wallet so as to contribute to the general operation and confirmation of operations of a given blockchain.
As is evident from the above explanation, in return for placing their coins out, the holders earn further coins as an interest. This concept is the same as stockholding where one earns dividends or saving where one earns interests on the amount saved.
While staking may seem as basic to any crypto investor, it still has risks inherent that must be fully understood before any staking exercise is done. In this post, I shall explain what staking in crypto is, how it works, and what potential risks that an investor should consider.
How Does Crypto Staking Work?
For staking a crypto, an investor must own the right type of crypto that best does the staking. However, not all cryptos are stakable, thus, there should be a distinction in order to find out which cryptos possess this characteristic. After purchasing the desired coin, investors can trade it to another wallet or digital platform that supports staking options.
Staking often means that the coins are locked by investors for a specific time, known as staking period. During this time, the staked coins work towards the maintenance of the network as well as to validate new transactions – enhancing the security and decentralization of the network.
For instance, investors who invest their coins get back more coins as a form of interest for depositing their coins to create demand. The number of interest generated will depend with the staking rewards structure provided by the specific cryptocurrency, which one is being staked.
The Risks of Crypto Staking
Although staking has proven to be a lucrative endeavor to make passive income in the realm of crypto, there are various downsides that the investors have to beware of before they start to stake their coins.
However, among the key drawbacks of staking, the instabilities of the cryptocurrency market can be mentioned as the primary concern. Besides, it has been illustrated that prices of cryptocurrencies are more volatile in the sense that they can change for up to tens of percentages on a regular basis.
This defeats the concept of staking as the price of the coin staked may decline during that period resulting to loss such that the holder will have less value in his or her staked coins than the investment value.
Still another scenario that is also associated with cryptographic staking is security breaches. To stake, investors need to hold their coins in a wallet or some platform which makes them prone to fraud and hacking.
The risk investors in cryptocurrencies must overcome is that the staking pool operator could run off with their funds thus the investors ought to select a reliable staking pool that has robust measures against such risks.
Also, one of the threats that the network may face is that the network validators may take an illicite action and act in the network’s best interest. Despite it most staking networks having penalties for the dishonest validators, the fact remains that they can take advantage of other holes in the network.
Crypto staking can become a rather profitable practice in terms of earnings on passive investments in the field of cryptocurrencies. However, there are several risks that are associated with the investment activity and an investors needs to think about them before placing his coins. There is a need to gather information on the given cryptocurrency, the staking service provider, and the consequences of staking such as on the fluctuations of the market.
Posted Using InLeo Alpha