Cryptocurrencies are a very young but lively market that is quick to implement any technological innovation.
The latest hype that lures new enthusiasts to crypto markets are the several new ways of generating (more or less) passive income from your cryptocurrency holdings. The most popular ones are called network staking and DeFi staking.
In this article we will break down the risks they inevitably carry and give you a couple of hints on how to choose the best type of crypto staking for your goals and risk appetite.
The 101 on Crypto Staking
- There are two types of staking – network staking and DeFi staking.
Network staking is possible with some cryptocurrencies – those that run on a system called PoS, or Proof of stake. By staking your PoS coins you are contributing to the security of their blockchain.
DeFi staking is locking up your cryptocurrency into contracts tpo provide liquidity.
- All crypto staking carries a risk.
Without risk, staking would not earn money. However, the risks are usually small and manageable.
- Returns on crypto staking vary between 5-25% p.a.
DeFi staking is inherently more risky, because you are giving your coins away into a smart contract which can be buggy. Consequently, returns on DeFi staking are much higher than on network staking.
Assess Your Staking Risks vs Staking Profits
There are numerous approaches to digital currency staking. Regardless of whether you are risk-averse or quite into high-risk investments, there will be a staking method that is a good fit for you. It’s simply the issue of picking the right one for the type of investment you want and the amount of risk you are willing to take.
Let’s first look into what are some of the dangers of staking crypto
The Risk of Locking Up Funds
First off, there is one aspect that makes crypto staking risky which is common to all cryptocurrency trades: The markets are volatile.
Especially in emerging DeFi markets it can happen that the market conditions change rapidly while you are staking.
In crypto staking, funds are locked up for a certain period of time. If the market collapses while you are staking, you will not be able to sell your holdings in time.
It is key to do your own research and adjust the amount of money you decide to invest. Diversifying your DeFi portfolio can help.
DeFi Staking on Exchanges
To provide liquidity via a DeFi staking contract, you will need to send your crypto into that contract’s cryptocurrency wallet. Sometimes you will be sending money to an isolated contract but most times, you will do DeFi staking on a crypto exchange.
If you are a cryptocurrency investor, you are already familiar with crypto exchanges and possibly with some of the crypto heists of the past.
The largest portion of your risk here lies in the exchange. It is paramount to choose a platform that has a good track record and is popular among high-volume traders.
A good indication that an exchange serves professional traders is the availability of OTC, or over-the-counter trades. Only exchanges with a lot of funds at their disposal are able to provide OTC services, and with platforms rich on funds the odds are their IT security will be better.
Even so, with liquidity staking you may always be subject to risks that come from technicalities of staking, such as “impermanent loss”. These issues happen when the price of a cryptocurrency changes too quickly and you as the liquidity provider will sometimes need to take a monetary loss in DeFi srtaking due to them.
Staking from Crypto Wallets
Staking directly through your crypto wallet is a more beneficial method of staking. It’s usually network staking that is available this way though, so your returns will be less stellar. Your risks are much diminished too, though.
Notwithstanding, in case that you don’t have any desire to invest any time setting up geeky things with your crypto wallets to deal with your staking, this method isn’t a good fit for you.
Staking from a crypto wallet carries the least risk. Your wallet runs directly on your phone or laptop and works with your own private key.
In rare cases, wallets do have severe vulnerabilities that can open your funds to hackers, but in general the weak link will be between the screen and the chair. If you store significant amounts of crypto on your device, be careful about phishing campaigns targeting crypto traders.
There are a few different ways to acquire easy revenue by staking crypto. Network staking is simpler and conveys little dangers, DeFi staking can generate attractive benefits but conveys far deeper risks as well. Pick as per your own inclinations and consistently try to make informed decisions.