Staking crypto refers to the process of locking up some cryptocurrencies to earn rewards. The rewards are expressed as an APR or APY percentage.
Like many aspects of cryptocurrencies and investments generally, staking cryptocurrencies bears certain risks. In this post, we’ll discuss potential risks associated with staking Ethereum.
Staking is the process of committing funds to a cryptocurrency network to help maintain its operations and secure the blockchain. When a user stakes their coins, they are essentially lending their coins to the network, and in return they receive rewards in the form of additional coins.
Staking is different from mining, as it requires no specialized hardware or technical expertise. It is a passive income stream that can provide a steady stream of income over time.
Like most cryptocurrencies, Ethereum’s price in fiat or U.S. Dollars tends to be volatile and fluctuates constantly. As staking Ethereum requires locking a portion of ETH for a period of time to earn rewards, capital is tied up. The Dollar value of ETH could hypothetically be lower by the time the staker decides to unstake their ETH.
Most stakers stake their ETH via a third party to avoid the strict staking requirements. These third parties tend to be major cryptocurrency exchanges or liquid staking platforms. On these platforms, all users’ ETH tends to be pooled via smart contracts to operate validating nodes.
While somewhat rare, smart contracts have been exploited before, most notably in the 2016 DAO hack. In the DAO hack, exploiters managed to steal an estimated $8.5 million in Ethereum at the time of the attack due to a bug in the smart contract.
Validator nodes that operate maliciously or negligently risk having their deposited ETH “slashed.” If a validator is found to be malicious, their deposit (stake) can be partially or completely "slashed" or taken away as a punishment. Typically the first penalty is the loss of 16 ETH out of 32 ETH, and the second is node closure.
Slashing helps maintain the integrity and security of the network, as it incentivizes validators to act in the best interest of the network. While ETH staking platforms are generally at lower risk than solo-stakers, slashing is still a risk.
Sometimes computers, the internet, or servers experience downtime or technical difficulties. Downtime can severely affect a validators ability to earn staking rewards.
While downtime is more common with solo-stakers as they need to manage all of their technical aspects, staking platforms can also experience downtime.
Some non tech-savvy users may experience difficulties while staking ETH. While most staking platforms are generally user-friendly, a staker unfamiliar with cryptocurrencies may experience some difficulties. Technical knowledge is especially required when solo-staking as the staker will need to handle all the technical aspects of staking.
Technical mistakes can result in the loss of funds.
Staking crypto can be a very profitable venture for stakers, although one must consider the risks above and market conditions. Staking, unlike other investments in cryptocurrency tends to provide a relatively stable return-on-investment.
Cryptocurrency enthusiasts should consider staking as a viable investment strategy.
In conclusion, staking Ethereum is generally safe as long as users are aware of the potential risks. Staking Ethereum via a dedicated platform may be more beneficial and secure for most users. It is best to do your own research and make sure you understand the risks before committing your capital to any staking platform.
Like all forms of investment, you can potentially lose money staking crypto. Losing funds by staking tends to be somewhat rare however. Should a staker minimize the risks listed above, losses can be minimized.
There are no taxes associated with staking crypto. Individuals may need to pay taxes if they sell the rewards they have earned for fiat currency, such as the U.S. Dollar or Euro. Taxes tend to vary from country to country, and district to district. It is always recommended to look into local laws, taxation rates, and regulations before investing.
Essentially yes, staking crypto takes it out of circulation and reduces a circulating supply. You cannot stake and sell your crypto at the same time.
Yearly APRs or annual percentage rates for staking crypto tend to vary between 4 - 10%. The amount you can make depends on the amount you stake.
