Crypto Staking: What Is It and What Are The Risks Involved? 2

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Custody Risk​

Custody risk refers to losing access to or control of digital assets due to the failure or inability of a third-party custodian. This can be caused by the following:

• Hackers breach the custodian's security systems and steal the assets.
• The custodian goes out of business or becomes insolvent, like the
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  .
• The custodian loses the private keys or fails to secure the assets properly.

One way to reduce custody risk is by embracing solo staking instead of delegating your crypto to a validator node or a staking pool to stake on your behalf. In solo staking, you retain control of your assets, while in the other options, you entrust your assets to a third party. Regardless of your staking decision, you must keep your private keys safe to avoid exposing them to unauthorized individuals or misplacing them.

In centralized crypto staking, the staking platform manages your stake. You can lose your stake through hacks, fund mismanagement, or insolvency. Therefore, you should choose a staking platform that can refund your stake in the case any of the above happens, by checking that they are able to supply

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to ensure that the institution has sufficient reserves to back the deposits is a key part of due diligence.

Validator Costs​

You should factor in validator costs, especially if you plan to become a solo staker or validator. Validator costs sometimes surpass the rewards you generate. Therefore, calculating your expenditure and earnings is essential when applying to be a validator. The major cost comes from electricity bills – remember, you will be running a node 24/7 and you will be penalized for being offline.

Besides, you may be required to purchase external hard drives to provide adequate storage space for solo staking. This will undoubtedly increase the overall cost of running a node. Therefore, the validator costs may be problematic if you are operating under a tight budget or your staking profits are small.

Loss or Theft​

Even excluding the algorithmic failure of Terra’s LUNA and UST, and the collapse of FTX, Celsius, and Voyager,

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reached a high of $2.8 billion in 2022, with these taking place across centralized and decentralized networks, based on data from DeFiYield’s REKT Database.


Even if you avoid using DeFi platforms due to a fear of hacks, the likelihood of misplacing or losing your

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if you fail to practice good online hygiene remains. For example, Luke Dashjr, one of the first Bitcoin Core developers,

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(currently valued at around $3.6 million) through an online attack on January 01, 2023. Generally, regardless of whether you are staking through a

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, it's important to do your own research around the potential platform you're looking to use, and store your private keys safely and offline.

Centralized Staking Platforms​

As mentioned above, centralized staking platforms offer a simple and convenient way for users to start staking cryptocurrencies. Moreover, they also offer multiple asset staking options, where the centralized platform manages the staked funds for you in exchange for a fee. Here are three centralized staking platforms to check out:

Coinbase​

You can earn up to 5.75% APY on your crypto holdings by staking with

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. Coinbase staking is available in more than 70 countries. You sign up with Coinbase (if you don't have an account yet) and buy your preferred staking and standard reward asset. To generate yield, you stake ETH or lock assets in the available DeFi yield and agree to the staking terms and conditions.

Yield rates are set by the DeFi protocols – Coinbase passes through the yield to you after deducting a fee of between 25%-35%, depending on the protocol. It's also important to note that some crypto like

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earn rewards via inflation or community rewards when staked. Basically, newly minted coins are included in the blockchain at a rate set by the

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and allocated to holders as rewards.

Binance​

You can earn up to 5.39% APY on your crypto with

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. Like Coinbase, Binance acts on your behalf in chosen

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protocols, obtains and allocates generated rewards, and helps you to take part in DeFi staking with one click. To help mitigate some crypto staking risks, Binance staking has laid out some protection measures such as:

• Slashing risks: Binance takes care of all slashing fines, meaning you will receive the same amount of assets you staked at the end of the staking period.
• Wallet attacks and scams: You minimize wallet attacks and scams when you stake with Binance since you don't have to transfer assets to delegators and staking pools or manually stake. Binance does everything on your behalf.
• Technical risk: Binance staking offers an easy, single-click-to-stake feature for over 100 assets. Besides, you can lock, unlock, or reinvest your rewards with minimal technical requirements.

Despite the above customer protection measures, there will always be risks associated with staking as mentioned above, so do your own research before choosing which platform to stake with.

Kraken​

With Kraken staking, you can earn up to 24% APY on your crypto holdings. Some assets available for staking on Kraken include

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,

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,

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,

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,

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,

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,

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,

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, and more. This is how to go about it:

• Acquire staking assets: Purchase or fund your Kraken account with any assets listed for staking.
• Choose an asset to stake: Pick from the available cryptos in your
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  account.
• Generate Rewards: You will earn rewards twice a week from your staked coins, although the distribution schedule might change depending on the crypto.

Conclusion​

Staking cryptocurrency offers users a way to put their crypto to work and earn returns on their crypto holdings, while maintaining ownership of their assets. There are many ways to stake crypto; from centralized exchanges, to solo staking, and even liquid staking through an LSD staking pool. However, crypto staking comes with several risks, such as market risk, lock-up and waiting periods, counterparty risk, custody risk, and validator costs. As such, it's important to thoroughly research and understand the specific staking process before participating, and ensuring that the staking platform or validator is reputable and secure is critical.