What is staking? Is there any risk?

Staking has emerged as a highly popular way to earn investment income in the cryptocurrency markets. Staking is sometimes even compared to classic bonds as a way of getting consistent profit.

If you're unfamiliar with what cryptocurrency staking is and how it works, this article will help give you a better idea of crypto staking, the technology and the philosophy behind it. This article can also help you to understand the risks of staking.

What is Staking Crypto?

Staking is the process of holding funds to support the operations of a blockchain network through a reward-driven process. "Staking" means locking your crypto assets in a proof-of-stake blockchain for a certain period. These locked assets are used to achieve consensus, which is required to secure the network and ensure the validity of every new transaction to be written to the blockchain.

While Bitcoin and many altcoins use Proof-of-Work consensus models, many other projects use a Proof-of-Stake (PoS) consensus algorithm. In contrast to classic crypto mining, in the staking process, the figure of the "crypto miner" is replaced by the "validator"(somebody who provides the assets for staking). This validator will be in charge of verifying transactions and mint new coins, if necessary. And they can do that only by "staking" their coins on the platform.

In some point of view, the idea of staking for an average user is very similar to traditional asset allocation and earning passive income, like interest from a savings account. Users have an opportunity to get more money by providing some assets to the network.

Is it an Alternative to Traditional Capital Assets?

Capital assets, such as bonds and stocks, generate revenue for their owners and are typically valued as the net present value of future cash flows. Transformable/consumable assets are typically commodities or energy products that are destroyed or transformed when consumed. Store of Value assets such as gold can't be consumed nor generate cash flows, but have an economic value usually through a social consensus.

Crypto assets that are staked are a new form of digital capital asset. However, like all types of investing, staking does not come without its risks, and we will talk about those in this article.

How Popular is Staking?

Currently, the capitalization of the staking market is estimated at $620.6 billion (for comparison, the overall crypto market cap is around $1.7 trillion). The number of assets staked has increased significantly over the 2020–2021 financial year, with the growing popularity of Proof-of-Stake (PoS) blockchains.

Even after the last price drop, the share of staking assets in total capitalization has become even more significant (about 36%).

The chart below contains data on global capitalization and staking capitalization.
Source: https://www.stakingrewards.com/global-charts

To date, staking data hub Staking Rewards has listed 217 assets, with annual rewards ranging from 2 to 162% and an average reward rate of 14.95%.
Source: https://www.stakingrewards.com/global-charts

Let's summarize: staking is the act of locking cryptocurrencies to receive rewards. Staking involves holding funds in a cryptocurrency wallet to support the security and operations of a blockchain network. The security of the network in Proof-of-Stake is guaranteed by validators. As a reward for contributing to the network, holders who stake their coins are rewarded with newly minted coins.

What Determines the Rewards Amount of Staking?

Each staking coin has its own transaction fees, staking reward rate, block time, etc. Further, each of these projects was created with a specific purpose in mind.

The rewards are usually calculated based on the stake size, duration, actual participation in the consensus mechanisms and the total amount of coins at stake. Some blockchains have a significant lockup period (during which validators cannot retrieve their coins) as well as certain minimum thresholds for staking.

Reward size depends on the chosen coin and the fee of the staking platform. Let's outline the current leaders according to their Staking Rewards rate.

Top-10 Most Popular PoS coins for Staking

By staked value, the top blockchains in staking are Cardano and Polkadot (as of May 2021).

Cardano has currently roughly $39.062 billion worth of Cardano (ADA) allocated to securing the network. With Cardano's entire capitalization tagging $54.37 billion, 73,42% of circulating ADA are being staked.

Source: Staking Rewards

Staking Rewards estimates Cardano stakers are earning an annual reward of 7.3%.

The second-largest crypto asset by staked value is Polkadot with $16.7 billion worth of DOT locked – representing 63.9% of its circulating supply. Average annual staking rewards for DOT are estimated at 13.18%.

Cardano and Polkadot currently represent 7.9% of the $620.6 billion in crypto assets currently designated for staking across the crypto asset sector combined.

The remaining networks inhabiting the top 10 rankings for staked capitalization are Ethereum 2.0, Solana, Algorand, Avalanche, Binance Smart Chain, USD Coin, Dao and Eos.

How to Stake Crypto Yourself?

With so many assets and service providers to choose from, there are several things to keep in mind when deciding what and how to start staking. First, it's critical to do your own research to find a match that aligns with your goals.

Some fundamental questions you should be asking yourself before staking your crypto are:
● How much time, money and research am I willing to commit to?
● Which technical requirements and knowledge do I need to have?
● What about historical returns, functionality and development expectations of staking asset?
● Is there any minimum amount?
● Is there any lockup period or not?
● Which coins to stake are optimal for me?
● Is my crypto safe during the staking process?
● Do I need to use a staking service provider?

Understanding the Risks

The reward rates definitely look attractive. However – and no matter how much staking providers stress their security – this investment tool comes with certain risks:

1. Volatility risk.

It's common for cryptocurrencies to lose or gain a large portion of their value in a short time. Sometimes the market is up, sometimes it's down, even within a matter of minutes. You can go to bed and wake up to astonishing changes in prices.

If, for example, you are earning 30% APY for staking an asset, but it drops -50% in value, you will have made a loss.

When Bitcoin appreciates or depreciates, it has a huge effect on other cryptocurrencies – altcoins shed or gain value, sometimes more than Bitcoin itself. Bitcoin's dominance in the market makes it a frequent catalyst for volatility in the crypto industry.
Bitcoin dominance chart

Source: CoinMarketCap

When Bitcoin recently suffered a sharp drop in prices, the cryptocurrency market also went through a correction. After hitting an all-time high of $64,800 on April 14, 2021, Bitcoin shed more than 50% of its value by May 28. The market lost more than $300 billion (USD) in the process.
BTC/USD price chart

Source: TradingView

Before this, Bitcoin had been on a remarkable bull run. The cryptocurrency saw roughly 350% in gains from the $13000 it was worth in November 2020 to its peak in April 2021. Before starting to invest in crypto, no matter if it is staking or not, you need to understand the risk of volatility.

2. Staking rewards risk

The rates of return on staking rewards are not always guaranteed and may even change over time. Also, there is a risk that the rewards will not be paid (even though it is supposed to be paid). Always check to see if your rewards have been paid or not.

Some staking assets don't pay out staking rewards daily. As a result, stakers have to wait to receive their rewards. To mitigate the negative effects of long reward durations on your overall crypto investment returns, investors can choose to stake assets that pay daily staking rewards.

3. Liquidity Risk

Altcoins that have extremely low liquidity on exchanges may have problems with selling or converting staking returns into bitcoin or stablecoins.

4. Lockup Periods


Most projects require a minimum holding of their coin to be eligible to receive a staking reward. Some assets come with locked periods during which you cannot access your staked assets. If the price of your staked asset drops substantially and you cannot unstake it, that will affect your overall returns.

5. Project failure

Before you stake a coin, please, investigate the project you are investing in. Do not consider only the projects that pay the highest staking rewards. Instead, select projects that have real fundamentals and technology as well as a good community supporting them.

6. Counterparty risk

Since you may be staking through an exchange or wallet, there is also counterparty risk to consider. If for some reason the platform (e.g. wallet or exchange) you are staking through goes out of business and delists all the coins, you will most likely lose all the staked coins held on that platform. Choose a reliable and well-known counterparty.

7. Exposure risk

If all your investments are in one asset, then all your eggs are in one basket – one disaster might destroy everything. To minimize exposure risk, choose a diversification strategy.

Conclusions

Staking is an attractive and relatively low-risk way to generate a passive income on your crypto assets. But more than that, it is a way of actively participating and providing value to a decentralized network.

Crypto investors need to choose carefully the assets they decide to stake and not to choose their staking asset purely based on APY figures.

The holders of the Franklin (FLy) token, the native token of VRM and the Black Ocean ecosystem, also have access to staking as a new type of digital bonds. Black Ocean Liquidity Mining platform offers FLy token holders sustainable projects with high APY. Users can use FLy tokens for staking or to provide FLy trading pairs on Uniswap with liquidity to earn more FLy or other promoted tokens.

Liquidity providers generate revenue from trading fees charged and reward pools, which are provided by connected projects. Average annual staking rewards for the FLy token staking program depends on the amount and locking period – there are 1, 3 and 6-month duration programs.

You can receive more FLy tokens by following the links below:
Staking (press here)
Liquidity mining (press here)

Risk warning:
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Cryptocurrency trading is subject to high market risk. Please make your trades cautiously.

Thanks for your support!

VRM and Black Ocean team