Network staking and DeFi staking of cryptocurrencies are one of the new ways to generate passive income from cryptocurrencies that you already own as long as it runs on PoS, or Proof of Stake.
Is Staking Crypto Risk-Free?
Staking isn’t risk-free. If it were, it would not be possible to make money on it.
However, the dangers are usually extremely low as long as you stick with the basic security principles. Consistently with this, the yields you can get from staking a digital currency are usually in the neighbourhood of 5% per year.
Keep in mind that both the risks and the rewards change with the type of staking you choose.
- The classic network staking, by which you contribute to the security of PoS blockchains.
- DeFi staking is a riskier but also potentially more profitable staking method, where you get rewarded for providing liquidity in a decentralized non-custodial trading app.
What are some of the risks in staking?
Bad Intermediary Some PoS currencies support only staking via validator nodes. It can happen that you stake a coin by assigning it to a validator, and the validator chooses to not pay you.
Phishing Network staking is often done directly from your cryptocurrency wallet. This can give better yields than staking via an exchange, but the security risk is that your staking wallet can get hacked. LEDGER and EXODUS wallets both support network staking and both are targeted by phishing attacks against crypto holders.
Counterparty Risk Both network staking and DeFi staking can be done on various crypto trading platforms, both custodial and non-custodial. There is a risk coming from working with a counterparty in that the platform might get hacked. If it is a custodial platform, your funds will be lost.
Impermanent Loss If you do DeFi staking (liquidity mining) on a non-custodial platform, the risk comes from the experimental and very new technology used to power it. There can be a bad Uniswap update that can take away your profits. But even if the systems run as they should, there is always the risk of impermanent loss.
Volatility Last but not least, you risk losing fiat value of your staked cryptocurrency. When your crypto is staked, it is locked up for a set period of time. During that time the market conditions can change, the value of that cryptocurrency can drop, but you will not be able to sell it if it is being staked.
How to minimize your risks in crypto staking?
Your risks depend a lot on where you stake cryptocurrency.
If you want to make sure your crypto staking risks are not higher than they need to be, the first area to start with is basic cybersecurity.
- If you use self-hosted wallets for staking, make sure you access them from a clean computer. Using Ledger and TREZOR wallets always helps with this, and both these wallets can be used for staking.
- With staking from a custodial platform, use multi-factor authentication and whitelist withdrawal addresses. This will minimize your risks of getting hacked.
- To minimize your losses in case your staking platform gets hacked, spread your staked crypto between several different platforms.
What are some well-known staking platforms?
Self-Hosted Wallets:
- Trezor and Ledger hardware wallets support network staking.
- Any hardware wallet can be used for staking via Allnodes.
- Out of the free crypto wallets, Exodus is the most reputable wallet that includes staking.
Custodial Crypto Exchanges:
- Binance exchange offers both network staking and DeFi staking. You can access both from the custodial platform, but the availability of both products is surprisingly limited for such a high liquidity platform.
- Bitfinex automatically stakes your PoS currencies that you hold in your exchange wallet. This is the easiest choice, plus there is no lock on your crypto - you can bail any time.
- FTX lets you lock up your crypto for staking with good yields. There is an option to request immediate unstaking for a fee.
Noncustodial Crypto Exchanges:
- The top DeFi exchanges are Uniswap, Pancake Swap, Curve Finance.
- The top DeFi liquidity aggregator is 1inch.
Node providers:
- Allnodes lets you spin up validators and master nodes for most blockchains.
- Smaller holders can join staking pools at Allnodes.
In case you are a bigger holder, running your own validator would give you more income as well as minimize some of your counterparty risks.
Final Thoughts
There are several approaches to get rewarded for staking. Depending on how much technical work and money you want to put in, you can choose from staking via self-hosted wallet, staking platform or an exchange.
Network staking via an exchange is at the moment the safest and easiest option of getting passive income by staking. DeFi staking, which is actually liquidity provision, pays more but carries more risks. Always decide responsibly and based on your own risk appetite.
