Learn more about how crypto staking works and the risks it entails, and how to save money by using well-grounded staking platforms.
By committing a percentage of your assets as collateral, staking cryptocurrencies is becoming a popular way to earn a passive income. Many investors see it as a way to make money rather than letting their assets collect dust in crypto wallets.
Because the crypto-verse is unpredictable and uncontrollable by nature, investors must first understand the risks of staking before plunging in. That is why some governments, like the United Kingdom and China, have been warning citizens about the menaces of investing in cryptocurrencies.
This short guide will provide all you need to know about staking, including what it is, how it works, and the potential hazards involved.
How Does Staking Work?
Staking consists of depositing assets in a pool and locking them there for a period of time to obtain rewards. The longer an investor has the coins staked, the larger the bonuses will be, similar to many other passive income investments.
It functions similarly to a savings account, in which the bank pays you interest for utilizing your money for their profit. Unlike a traditional bank, which may employ your funds to make loans to others, blockchains will use your staked coins to improve their security when processing transactions and building new blocks, using a mechanism known as Proof-of-Stake.
What is Proof-of-Stake?
Consensus mechanisms are used by blockchains to ensure that only genuine transactions with correct data are recorded in the blocks. Proof-of-Work was the first permissionless consensus technology released by Bitcoin, in which users solve cryptographic puzzles to earn the privilege to produce new blocks by mining. This method demands deep technical expertise and a lot of computing power, presenting a history of security flaws.
Not long after, the Proof-of-Stake protocol emerged, proving to be a more energy-efficient and safer consensus protocol. A validator is picked among individuals who have staked a minimum quantity of coins and then earns the authority to produce a new block in this system. This validator will be later rewarded for building a new block and contributing to the network’s overall security.
How to get started with staking?
Attempting to be a validator on your own can be a complex and extremely technical endeavor. However, staking can be accessible when done in groups through crypto exchanges and staking pools.
- Staking on crypto exchanges: in this method, the exchange will locate a node for the investor to join and manage the administrative responsibilities.
- Staking on a pool: an investor can pool their resources with other people who can act as validators due to their technical competence. When the prizes arrive, they are divided between the stakers and the operators.
5 Staking Risks to Watch
Staking, while potentially more profitable than average passive income investment strategies, is not without risk. It’s a clever idea to get to know the risks of staking, therefore we’ve compiled a list of the most important ones to be aware of. Take a look!
1. Impermanent loss
Because the crypto market is innately volatile, the value of tokens can change substantially in a few hours. Stakers offer liquidity to the pool, thus, if the value of the coin you’re staking drops during the staking time, you could lose a lot of money.
2. Lockup periods
Your staked funds will be frozen and unreachable for the duration of your staking term. So, if you regret staking your coins, need them for something, or see a gain in value that would make trading them a better decision, it won’t be quick or easy to get them back. In fact, retrieving them before the lockup period expires may even result in penalties.
3. Possible illiquidity
The ability of an asset to be converted into fiat money or other cryptocurrencies determines the liquidity of a crypto platform. If an investor stakes a token with a low market capitalization, there may be a lack of liquidity, affecting the subsequent staking rewards transaction.
4. Cryptocurrency theft
With the rise in popularity of blockchain technology, there has been a surge in crypto theft. While some exchanges say that staked coins are kept in cold storage, this isn’t always the truth. Technical flaws and breaches can expose staked assets, resulting in the loss of capital and rewards for investors.
5. Validator errors
As previously stated, being a validator on your own is a very technical and challenging task that, nonetheless, provides larger profits than staking pools and exchanges. On the other hand, solo validators may not be compensated at all if they make mistakes throughout the validating process, and staking may not be worth the effort.
Staking on GamesPad
GamesPad sustains staking pools on the platform to provide our community with a variety of investment options. We’re committed to presenting pools with excellent annual percentage yield rates and reasonable fees, all while maintaining your investments’ financial security.
When you stake with GamesPad, you are giving a valuable purpose to coins that would otherwise be sitting in your crypto wallet with no use. You become eligible to partake in any of our IDO offerings by locking them up. Here’s how to get started with staking on the GamesPad ecosystem:
- Log in to your account and navigate to the Staking Pools section.
- On this screen, you’ll find the Deposit option as well as important information such as the pool’s APY rate. Select Deposit.
- Then, you’ll be presented a window to write down the number of tokens you want to stake. Select Approve and Confirm from the drop-down menu.
- Your associated wallet may request double confirmation after verifying the transaction on the platform. Confirm once again.
- Excellent! Your tokens have been staked in the pool of your choice, and your rewards will be available after the lockup period.
Staking supplies thousands of people throughout the world with a steady passive income, but it demands patience and is not without risk. Thinking about each of the above-mentioned hazards before staking your crypto could save you a lot of money.
Would you like to start investing in the most impactful crypto gaming, NFT and metaverse projects with GamesPad? Learn how in this comprehensive tutorial!
Disclaimer. This material should not be construed as a basis for making investment decisions or as a recommendation to participate in investment transactions. Trading digital assets may involve significant risks and can result in the loss of invested capital. Therefore, you must ensure that you fully understand the risk involved, consider your level of experience, investment objectives, and seek independent financial advice if necessary.