What is Cryptocurrency Staking?

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Author: Mr. KingsHOK
An accountant who turned cryptopreneur to pursue my interest in crypto and decentralized finance. Let me show you how to invest safely in the space with my experience over the years.

Crypto staking is an activity where you hold funds in a crypto wallet to participate in some kind of PoS (Proof-of-Stake) based operations.

It simply mean locking up of a digital asset as a validator, but in a decentralized network to ensure integrity, security and continuity of the network.

It is similar to cryptocurrency mining in the sense that it helps a network achieve consensus, while rewarding users who participate.

In staking, the right to validate transactions is baked into how many coins are ‘locked’ inside a wallet.

However, just like mining as a PoW (Proof-of-Work), incentives are paid to people staking their cryptos for a new block to add transactions on the blockchain.

Apart from incentives, Proof-of-Stake blockchains are scalable with high crypto transaction speeds.

HODL vs Staking

HODLing crypto is the act of holding and keeping cryptocurrencies in the wallet for a long time for profit.

On the flipside, staking simply means putting your crypto assets to work, while still holding them for a period of time.

If you are new to the terminology (i.e. HODL), then you should read my glossary page.

A HODLed coin can increase in value due to market momentum, but not in number, but staked coins can increase in number due to rewards.

In all round, staking cryptocurrencies can earn someone a very high return on investment within a specific time.

Crypto staking rewards

Arguably, staking became so popular, because it enables crypto holders to earn higher APYs than traditional bank savings accounts.

You can stake Algorand (ALGO), Kava (KAVA), Tezos (XTZ), Cosmos (ATOM), and Tron (TRX) to earn between ~6% to ~12% APY directly within your Trust Wallet app.

However, you will need to use a good and secured wallet to keep your staked cryptocurrency safe for the long-term strategy.

I recommend you use a hardware wallet (like: Ledger Nano S/X), because they’re among the best offline wallets in the market.

If you are still new to crypto investment, I would like you to read my guide on crypto wallets and how they work.

7 Risks of staking crypto

Cryptocurrency staking can generate a well above-average returns for influencers and investors.

However, a number of risks that you should be very much aware of are involved in the process.

1. Market Risk

Arguably, the biggest investment risk that people face when staking crypto is a potential adverse price movement in asset(s) they are staking.

For instance, you’re earning 15% APY for staking an asset, but it drops 50% in value throughout the year, you will make a huge loss.

Therefore, investors advised to choose the assets they decide to stake carefully, and not purely based on APY figures.

2. Liquidity Risk

Liquidity of the cryptocurrency asset you are trying to stake is yet another risk factor you should try to avoid.

If you’re staking a cheap crypto that barely has liquidity on exchanges, you may find it difficult to sell your asset.

The Altcoin may also become worthless, when you want to convert its returns into an established crypto-coin or Stablecoins.

Staking liquid assets with high trading volumes on exchanges can mitigate liquidity risk.

3. Lockup Periods

Stakable assets has locking periods, during which you cannot access your staked assets.

Tron and Cosmos would be examples of this.

If the price of your staked asset drops substantially and you cannot unstake it, that will affect your overall returns.

Staking cryptocurrency assets that does not have a lockup period would be a way to mitigate lockup risk.

4. Rewards Duration

Similar to lockup periods, some staking assets don’t pay out staking rewards daily. As a result, stakers have to wait to receive their rewards.

This shouldn’t affect your APY if you ‘HODL’ and stake the entire year.

However, it will reduce the time that you can re-invest your staking rewards to earn more yield (either by staking or by deploying assets in DeFi protocols).

To mitigate the effects of long reward durations on your overall crypto investment returns, you can choose to stake assets that pay daily rewards.

5. Validator Risk

Running a validator node to stake a cryptocurrency involves technical know-how to ensure that there are no disruptions in the staking process.

Nodes need to have 100% uptime to ensure that they maximize staking returns.

What’s more, in case a validator node (mistakenly) misbehaves, you could incur penalties that will affect your overall staking returns.

In the worst-case scenario, validators could even have their stake “slashed,” at which point a share of the staked tokens would be lost.

To mitigate the risks that come with staking using your own validator node, you could use a reliable provider to delegate your stake to a third-party validator.

6. Validator Costs

In addition to the risk of running a validator node or using a third-party service to stake, there are costs involved in staking cryptocurrency.

Running your own validator node will incur hardware and electricity costs.

On the contrary, staking with a third-party provider typically costs a few percentage points of the staking rewards.

Costs are something that crypto investors need to keep an eye on to make sure that they don’t end up eating too much into staking returns.

7. Loss or Theft

It’s always likely that you’ll lose your wallet’s private keys, or that your funds gets stolen if you don’t pay adequate attention to security.

Regardless of whether you are staking, or simply ‘HODLing’ digital assets, making sure you backup and store your private keys safely.

This is why leaving your crypto on an exchange for a long-time isn’t a good investment strategy.

Moreover, it’s advisable to stake using offline crypto wallets, where you hold the private keys as opposed to using custodial third-party staking platforms.

Staking cryptocurrencies

At this point, I will say that staking crypto asset is way better than just endlessly holding your digital asset with hope to make passive income.

Remember that crypto staking comes with significant risk, so it’s absolutely necessary to do thorough research and invest wisely.

Meanwhile, don’t forget to always take your investment away from online exchange wallets, to avoid loosing it due to hacks or theft.

Personally, I preferred using either; Ledger Nano S/X, or Trust mobile wallet app to stake and store my crypto assets away from the internet.