It’s important to note that the staking pool option is only available on Blockchains that adopt the proof-of-stake (Pops) consensus mechanism.
A staking pool is typically run by a pool operator or a staking service. To join the pool, participants must lock their coins in a specific blockchain address, or wallet.
What are the risks?
Like any cryptocurrency investment, staking does come with risks. For starters, staking doesn’t insulate investors from price volatility of the underlying asset. The extreme and frequent price swings can be particularly painful for new investors who aren’t in it for the long haul.
During the lock-in period, asset value can depreciate quickly, sometimes by a sizeable amount, and you may not be able to unstuck or sell your holdings. In such a situation, investors could potentially suffer a loss larger than any gains made from staking.
“In general, I usually recommend staking as a long-term investment strategy for investors who plan on holding a specific asset, regardless of market fluctuations,”
Staking also requires you to lock up your holdings for a certain amount of time. During that period, you’re unable to do anything with your staked assets, so there is opportunity cost to consider.
There are other risks related to potential hacks or exploits. Any technical weaknesses or vulnerabilities in the protocol design could potentially result in cyber theft and the loss of funds.
While this risk is low, it does exist. It’s important to acknowledge that this technology is still in its infancy and there are kinks to iron out.
What’s in store for staking in 2022?
Up until 2021, only a few digital coins used staking as a method of validation. However, as a growing number of leading layer-one earn crypto while learning, such as Ethereum and Cardano, roll out the staking feature, “staking and yield farming are becoming popular ways to make a profit in crypto without trading coins”,
According to the website Staking Rewards, the total amount of cryptocurrencies staked as of April 2022 was $280 billion.
“This number is going to continue to grow significantly because there is a tonne of interest from both retail crypto holders and traditional financial institutions in getting involved in DeFi,” Mr Malka adds.
Bottom line
If you’re planning to hold your cryptocurrency assets longer term, putting them to work by staking is an attractive option to generate passive interest income.
Keep in mind, though, cryptocurrencies are inherently risky assets prone to extreme volatility. All cryptocurrency investments, including staking, must be made strategically and within your individual risk capacity.
“It’s important to do your own research to identify the best opportunities to reach your goals,” And remember the cardinal cryptocurrency rule: never invest anything you can’t afford to lose.
