To “stake” a cryptocurrency is to “lock” your holdings of that coin to help the blockchain function. You will be rewarded for validating blocks. In a way, it’s like having stock in a firm and getting dividend payments once a year.

The Proof-of-Stake consensus mechanism underpins staking, and it has been argued that this method is more environmentally friendly than the alternative, Proof-of-Work. Staking crypto, as opposed to mining, is used to verify transactions. By doing so, you become actively (and monetarily) invested in the blockchain, increasing its security and efficiency.

Solana, a blockchain network, has seen more than US$50 billion in wagers as of January 2022. To be sure, there is money to be made by staking. However, there are risks involved.

What are the potential downsides of staking cryptocurrency?

• Sustaining quite severe losses

The possibility of suffering a loss is the first and probably the most obvious risk. This is possible if the prices of the cryptocurrencies that you are staking suddenly drop. If you had invested in Solana (SOL), for instance, and its price dropped by fifty percent, you would have lost fifty percent of your investment. When it comes to brand-new projects that you know very little about, this is an important cause of anxiety. They may begin with a great deal of promise, but it is possible for them to swiftly deteriorate and lose all their worth.

• Being a victim of fraud and dishonesty as well as theft

Theft and other types of crypto-related crimes are becoming increasingly widespread with each passing day. An all-time high of $14 billion US dollars was made in cryptocurrency by criminals in just the previous year. When you stake cryptocurrencies, you are putting your faith in the fact that the person who has the funds you have staked is not a con artist. If they are, there is little you can do to prevent them from escaping with your money, even if you catch them in the act.

• The time spent in “lock-up”

Most of the staking services demand that you hold onto your coins for a predetermined amount of time. This implies that you will not be able to access your coins or exchange them during this period. This can be problematic because if the price of the cryptocurrency you hold drops significantly, you won’t be able to sell it and cut your losses to reduce the amount of money you’ve lost.

• Significant costs

Even though it does not require the use of heavy machinery as mine does, staking is nonetheless quite expensive. You need to have access to a strong computer as well as a reliable internet connection. Furthermore, you are responsible for paying the cost of the electricity that is required to power your computer. Because of all that might go wrong, staking may not be as profitable as it appears to be at first glance.

• A wait for the benefits

The distribution of staked rewards in many cryptocurrencies takes a significant amount of time and does not occur regularly. Because of this, you could have to hold off on reinvesting your profits for a considerable amount of time, which will have an impact on your portfolio. And if the price of the cryptocurrency you own drops while you are waiting, you will have to wait even longer to get back to where you were before the wait.

• Dangers posed by network operations

Blockchain networks are susceptible to operational risks in addition to market and liquidity uncertainties. Inaccurate validator nodes are one such problem that could arise.

When a new block is added to a blockchain in a proof-of-stake network, it is done so because a validator node was randomly chosen to do so (this is the action that earns a reward). In some crypto networks, validator nodes (a machine running the blockchain network’s software that validates transactions) can be set up by individual users with minimal effort and token investment.

Unfortunately, if your machine malfunctions or gets it wrong, you may lose, which lessens your returns on stakes. If your blockchain network’s validator node isn’t performing as expected, it may have a lesser chance of being chosen to process transactions.

A validator pool is a group of investors who pool their tokens together and designate another machine to undertake the real work of validating transactions in a blockchain network (known as a “staking pool”). A validator in a staking pool, however, will deduct a charge from the payout as payment for their services. Although the amount of this cost varies from cryptocurrency to cryptocurrency, it is important to keep in mind that it will affect your yearly stake return.

While staking cryptocurrency is an intriguing development in the blockchain business, it isn’t for everyone. However, a large yield is no assurance of success because of the special dangers involved. Your decision to buy cryptocurrency and stake it should be made in the context of a diversified portfolio that includes traditional assets.

Is it a good idea to stake cryptocurrency?

Honestly, it’s hard to say. There are a lot of possible downsides, but also a lot of upsides. The practice of staking cryptocurrency can be used to generate passive revenue. An annual interest rate of more than 10% to 20% is possible simply by keeping money in a staking wallet. The benefits of staking cryptocurrency, however, may only be available to a select few. 

Many exchanges need a bare minimum stake of cryptocurrency price to participate. To stake Ethereum 2.0, for example, you need to deposit a minimum of 32 ETH, which is more than $85,000 at the time of writing. That’s a huge outlay of cash that usually only the wealthy can manage.

In addition, many participants join staking pools to increase their chances of winning prizes by sharing computational resources. For all the security it affords validators, it has the potential to foster bias. 

Solana, Cardano, Polkadot, and many others are just a few of the well-known and highly valued cryptocurrencies that use the Proof-of-Stake consensus today. Staking crypto is seen as a greener option to mining, which uses a lot of energy and has a negative impact on the environment. It uses stakes instead of heavy gear.

The Bottom Line

Staking cryptocurrency or using the best staking platform, in general, has advantages and disadvantages. The potential for gain is balanced by the inherent danger. Do your homework and weigh the potential outcomes before placing a bet.