Crypto attracts people who want to build their wealth without traditional financial institutions. Staking is an interesting way to get a passive income for those who want to try crypto, but don’t like to lend in the P2P borrowing services.
Staking is also a quite safe way to earn money since you don’t need to interact with people. Here you get your crypto rewards from services directly, as pre-described in their smart contracts. So, you have far fewer chances to get scammed and hacked as with other crypto options.
However, this way of investment has its challenges and drawbacks. That’s why I want to have a deep dive into this topic for you. Buckle up and prepare your wallet because after this article you will begin to look for a staking service to start your investment career!
Understanding Staking
So, what is crypto staking? It’s a practice that has been around since the early blockchain days, but it has only become popular in the last 2-3 years. When Ethereum switched to the PoS (Proof-of-Stake) consensus, many new blockchain developers decided that they wanted to run it too.
Staking is the process of locking up cryptocurrency to participate in the validation of transactions on a blockchain network. In return for staking their cryptocurrency, stakers often earn rewards. Typically, it’s in the form of more cryptocurrency: it can be some chosen coin or governance service tokens.
The mechanics of staking depend on the network, but in general, stakers are randomly chosen to validate transaction blocks. The more cryptocurrency a user has, the more likely they are to be chosen to validate a block. Once a staker validates it, they earn rewards, distributed to stakers in proportion to their stake.
Cryptocurrency staking is a vital part of POS networks, so blockchain developers decided to provide validators with tokens to encourage them to verify transactions. Lately, some validators realize that they can’t be constantly online, validating each transaction. It was the beginning of the Delegated PoS (DPoS).
Benefits of Staking as a Business
Some people take staking as a business opportunity. And I understand them since it’s a great way to raise a passive income. Stakers earn rewards for participating in the consensus, and these rewards can be significant.
For example, stakers on the Cardano network earn around 5% APY in rewards. In Ethereum stakers earn rewards in ETH coins, in Cardano (ADA) they earn ADA tokens. Users can stake them to get even more rewards or exchange them for any other token.
In addition to earning rewards for participating in consensus, stakers may also be eligible for other rewards and incentives. For example, some networks offer airdrops (tokens of new cryptocurrencies, not Apple headphones), and others offer discounts on transaction fees.
Cosmos network provides ATOM rewards and airdrops of new tokens on the Cosmos ecosystem. Osmosis is an exchange built on the Cosmos blockchain. Once staker put in their ATOM tokens, they get rewards in the form of new ATOM tokens as well as some airdrops of new tokens launched on the Osmosis. The same happens in the Secret Network and other less-known blockchains.
Another crypto staking benefit is its contribution to the security of the blockchain network. Stakers are responsible for validating transactions and ensuring that the blockchain is secure. It leads to increased trust and adoption of the blockchain network, boosting community engagement.
By staking their cryptocurrency, businesses can show their support for the blockchain network and its underlying technology. It can help to build relationships with other stakeholders in the community. And it works as an additional network promo.
Staking also provides opportunities for governance participation. In some networks, stakers can get governance tokens as a reward. It gives them their voice in the decision-making process. Also, it ensures that the network is aligned with the interests of the most active users or businesses that decide to stake their tokens.
Risks Associated with Staking
There are still many challenges associated with this process. And the main risk of staking crypto is the slashing penalties for misbehaving stakers. They can be applied to users who like to double-spend, approve fraudulent transactions, or fail to participate in the consensus process.
These penalties may be approved even on those, who behave correctly while sharing the same staking pool with a violator. Slashing risks can be mitigated by selecting a reliable staking pool or by running your own node.
The other major concern is market fluctuations. Crypto is still a highly volatile asset, and it impacts the staked assets' value directly. If the coin’s price falls, the value of the staked assets will also fall.
Let’s set a more real-life example. If a staker has 100 ETH when the price of ETH is $1,000, it will have a staked value of $100 000. If the ETH price falls to $750, the staked value falls to $75 000. So, the staker will lose 25 grand despite having been a law-abiding user.
Fluctuation risks can be partially mitigated by staking a diversified portfolio of cryptocurrencies. That’s why I always said: don’t put all your eggs in one basket, even with crypto. Pick as many currencies to stake as you can, and don’t forget to invest that amount of money you are not afraid to lose.
Another huge risk of staking crypto is the lockup period. Some networks require stakers to lock their crypto for a certain time before they can unstake it. Stakers can’t access their money during the lockup period nor earn rewards from staking during this period.
And the fourth horseman of the apocalypse, oh, I mean, the staking challenge is regulatory compliance. Each region and country have their own crypto laws. And the regulatory landscape is constantly evolving, so it may be hard to stick with the latest bills.
Best Practices for Staking Businesses
I hope the above information helps you to realize what staking crypto means. So now it’s time to find the best practices to profit from this investment.
First of all, pick the right platform. It should be secure with a track record. It should have a good liquidity pool so you can unstake your money when needed.
The platform should have reasonable fees. Don’t believe those who tell you they provide secure service without it. That deal exists only in fairytales with a godmother on the side. But don’t let services fool you by asking you unreasonably high charges. Pick the services with the middle fees: not too big nor small.
Keep up with additional security measures. Look for a service with two-factor authentication. Use strong passwords and keep your software up-to-date. Use non-custodial or cold wallets, so you will be the only one responsible for your private keys.
Back up your data regularly. When something happens with your computer or cold wallet, you can bring back the info. Run your own node if you have enough resources.
If you run a blockchain-related company, consider building community trust. Each staker should trust in you and your business to invest their money in you or with you. Communicate regularly with the community.
Be fully transparent about your staking process and respond to community feedback. Don’t forget additional incentives for community participation: new tokens, airdrops, NFT, or even physical merch. It’s up to you.
Once you decide to join staking businesses, you should start to monitor the market even harder than you used to do before. And this recommendation suits both network developers and potential investors.
If you are a business starting your staking journey on a popular network, monitor the network’s staking rewards, security logs, uptime, and node performance. The frequency of monitoring depends on the currency, the amount of stacked money, and your risk tolerance.
If you invest a little of your money in a pretty predictable network, you can monitor performance 1-2 times a week. If you stake a lot of money, do it in a relatively new network, or have a low-risk tolerance, consider analyzing your performance daily.
Future Outlook and Projections
It’s a great way to generate passive income, so I think it will become more and more common in the crypto community.
We already see the rise of new PoS currencies, so the growth of decentralized staking protocols is just around the corner. They can offer even more perks to potential investors, allowing them to manage multiple pools at once. As of late 2023, we already see the Rocket Pool and Stakefish protocols gaining popularity. And it’s just the beginning.
We will also see the growth of staking as a service: Staking as a service (SaaS) is a model where businesses offer staking services to individuals and institutions. Potential investors don’t need to monitor their nodes constantly, as those services take a small fee for this job. It has similarities with investment funds in traditional finances. The most popular services today are Kraken, Binance, and Crypto.com.
Most cryptocurrency stacking services are currently locked, so you can’t withdraw your investments wherever you need to. But, as staking services grow and get more liquidity, we will see changes.
As of 2022-2023, many big staking servicers start to provide liquid staking, where investors don’t need to lock their crypto. It unlocks new opportunities by making this industry even more accessible to individuals and small businesses. Lido and Marinade are great examples of these platforms.
It will lead to the growth of institutional adoption. As crypto staking investment becomes more common, we will see new regulations. Don’t fear it. Those changes lead to institutional adoption. We will see how banks and traditional investment funds start their staking journey. So, in the far future, it may even lead to full institutional crypto adoption.
But in the nearest 3-5 years we will still see regulatory uncertainty and technical challenges. There can even be some security risks, such as vulnerability hacking attacks.
It’s a new and complex technology, so some investors will eventually make mistakes. There is no escape from it. Don’t let it scare you. It’s still a promising and relatively safe investment strategy.
And as I see it, it will become a major growth driver for the crypto ecosystem. In the right hands, it can even lead to its renaissance, making it as popular as in 2019-2021.
Case Study
As a cherry on top, I want to provide you with a short case study about successful staking implementation in Kraken and Binance. They grow their staking investors base by offering easy-to-use services, competitive rewards, and a wide variety of supported tokens.
Kraken is a crypto exchange that also provides staking services to its users. Kraken's secret to achieving high popularity levels is to offer competitive rewards. In 2022, Kraken announced that it had processed over $1 billion in staking rewards for its users.
Binance is another extremely popular exchange that offers staking services. In 2022, they announced that they processed over $2 billion in staking rewards for its users.
Other great examples are Coinbase and Crypto.com. They don’t offer that much in rewards, but they provide advanced tracking tools. You can analyze every transaction in detail to boost your investment strategy.
Staked and Rocket Pool are staking platforms that allow users to stake their crypto without managing their nodes. They undertake this job, so potential investors can relax and let others work, as with investment funds.
Wrapping Up
Cryptocurrency staking is a promising and relatively stable way to build wealth in the crypto industry. Generally speaking, it is a process of locking up cryptocurrency to participate in the transaction validation. In return for staking their money, those users earn rewards. It can be the same cryptocurrency, governance tokens, airdrops, NFTs, etc.
You should understand possible risks, such as market fluctuations and slashing risks. Choose a service that supports the latest safety practices, has a liquidity pool, and sticks with international and local regulations.
Do your research to understand the risks coming with the service you want to use. Monitor staking performance regularly and withdraw funds if you are not ready to take risks.
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