As a crypto investor, chances are that you have come across staking as a means of earning passive income from the blockchain.
Earning passive income is a real benefit to staking, but as we are aware, all investments have both benefits and drawbacks.
Staking has its advantages and disadvantages both towards its users and the general crypto scene.
Before making up your mind to start staking, it’s worth taking the time to understand how your preferred mode of participation within the cryptocurrency space contributes to its improvement or destruction.
Staking is gradually growing in popularity, especially within newer blockchain projects, and for a good reason.
In this article, we will consider some of the reasons why most developers gravitate towards staking to ensure security within their networks compared to other models, and we will consider whether or not staking is good for crypto.
Is staking good for crypto?
Staking may be both good and bad for crypto. As we have mentioned earlier, there is no form of investment without both benefits and drawbacks.
However, often one side outways the other, and in the case of staking, it offers more good than it does the bad towards crypto.
Also read Can You Stop Staking Crypto?
How is staking good for crypto?
There are several ways in which staking can be considered a good thing for the blockchain industry. Here are some of the main ones:
The biggest problem that the more established blockchain networks such as Bitcoin have is that the consensus mechanism they use is limited in network throughput, meaning that even with their popularity, they cannot achieve a certain level of speed.
Staking was introduced specifically to help solve the network speed problem.
Ethereum, the leading smart contract blockchain, has acknowledged the benefits of implementing staking instead of mining.
Its core developers are working on shifting the network from a Proof of Work (mining) model to a Proof of Stake (staking) model.
Staking arguably contributes to the decentralized blockchain networks by making it easier for community memes to participate in the governance and transaction validation.
PoW mining models are hard to join, given that the miners have to invest in the mining hardware, which can get very pricey for extremely competitive networks such as Bitcoin.
In contrast, the initial investment and the ongoing maintenance charges are reduced when it comes to staking, making it more accessible to a wider population.
One of the most prevalent criticisms that blockchain networks receive is that they contribute to environmental degradation, but this is not true for some networks that use staking.
Pow mining networks such as Bitcoin consume a lot of energy whose source may or may not be non-renewable energy.
Networks that have adopted staking as a consensus mechanism have effectively sidestepped this landmine since staking infrastructure is less energy-intensive.
Compared to other consensus mechanisms, staking can be considered a more passive investment method for those investors looking to participate in the blockchain economy without putting in a lot of effort.
Depending on the network and how you want to participate (either as active or passive), you can effectively invest in the network and never have to deal with maintaining your investment for as long as you want to stay involved.
In contrast, if you are mining, you have to stay active, making sure that your hardware is working at tip-top conditions to get the maximum rewards whether or not you are mining within a pool or as a solo miner.
The prospect of not doing a lot of work but getting rewards for your staked crypto attracts most passive investors, which can only be good for the network and crypto in general.
Read more about staking and dividends.
Does staked crypto still increase in value?
Yes, staked cryptocurrency assets can increase in value, but there is the possibility that these assets’ value can decrease as well.
Four factors affect the rate at which the staked crypto changes in terms of value and quantity. These are:
Staked crypto can increase if the network rewards the owner for contributing towards validating transactions.
Typically, the more one stakes, the higher the chances of creating the next block, coincidentally increasing their chances of getting rewarded.
Over time, their initial stake would have increased in value.
Cryptocurrency assets are notorious for their wild price movements. It is not uncommon to witness 20%+ daily rallies or corrections.
The assets are extremely volatile, but then, according to historical data, most crypto assets have seen appreciating values with intermittent drawbacks.
Given that staked coins are subject to locking periods, there is a chance that they could fall or rise in value depending on the direction in which the market action leans.
Most blockchain networks that utilize staking as a consensus mechanism have implemented a staking policy that incentivizes good behavior from all participating nodes.
Typically, if a node misbehaves or acts maliciously, they risk losing some or all of their stake. In this rare case, the value of staked coins can fall, but otherwise, the value of coins staked is expected to rise over a long enough period.
Utility is the measure of the usefulness of staked coins.
Depending on the platform you choose to stake your coins or tokens, you may find that you can use your coins for other purposes even though they are locked and limited against movement from wallet to wallet.
For instance, they can be used as a security to get a DeFi loan.
On the Binance platform, the largest cryptocurrency exchange by daily trading volume, Ethereum 2.0 stakers are issued with pegged tokens on a 1:1 ratio against their stakes that they are allowed to trade on the marketplace or hold to qualify to receive staking rewards.
The tokens are named Binance ETH (BETH). Staking your Ether on Binance can be considered doubling the value of your assets, given that even though the initial deposit is locked away and earning your rewards, the newly issued BETH tokens are much more liquid and can be used in more ways to increase their value.
Read Staking Crypto Vs Airdrop .
What are other benefits of staking?
Staking has a lot of benefits to the cryptocurrency community at large and the specific network. Previously we highlighted its benefits to the community.
In this section, we will look at some of those benefits to the network. It’s worth noting that most of the advantages of staking apply to both networks employing staking models and the crypto community.
Security and governance: staking, in any of the various models it exists, is how a blockchain network maintains its integrity by allowing stakers to participate in transaction validation and network governance.
Staking rewards: staking is akin to maintaining a banking account whereby you deposit some funds and receive interest at the end of a specified period.
The difference is that staking networks can be much more generous than banks in rewarding participants.
Some networks pay out as much as 20%+ in annual rates compared to about 4-6% in the traditional financial institutions.
Minimum entry requirements: compared to mining, staking has a very low entry barrier.
Depending on which network you wish to participate in and how you want to stake, some platforms require as little as a few dollars worth of the native cryptocurrency to start staking.
For instance, if you wish to stake Ethereum on Coinbase, there is no minimum balance to qualify, different from the 0.1 ETH balance for staking through Binance or even the 32 ETH balance for running a staking node.
Also check the impact of staking on circulating supply.
What is the downside of staking?
As mentioned earlier, any investment opportunity comes with benefits and drawbacks, and staking is not an exception.
Here are some of the noteworthy downsides that every investor should be aware of before starting on their journey towards staking:
Market risk: one of the most basic requirements when staking is that assets are locked for unspecified periods, and any withdrawals are subject to delays.
This arrangement introduces a few problems, and chief among them is that the assets are vulnerable to wild price swings, and there is a possibility of losing your investment if its price adversely falls within the period of staking.
Security risk: staking is an alternative to the more popular mining consensus mechanism used by some established networks such as Bitcoin and Ethereum.
Staking is a more recent consensus model yet to undergo extensive testing to understand how it would hold up over longer periods.
Liquidity risk: liquidity is the measure of how easy it is to convert an asset into spendable cash.
Staked assets are often subject to locking arrangements which means that the assets are out of reach for predetermined periods and therefore cannot be used in other ways, at least not immediately.
Slashing risk: whenever a node misbehaves or acts against staking policies, the network can punish it by taking part or the entire stake.
Slashing is a big risk, especially when staking with a staking service or staking pool with several other pool members whose behavior might jeopardize your stake.
Sometimes, the pool operator might inadvertently violate staking policies leading the entire pool to lose its stake.
Risk of Loss or theft: staking is effective when the participant holds their assets for long periods, which exposes their wallets to security risks or just losses from misplacing or losing private keys to their wallets.
Check Is NFT A Cryptocurrency?
Staking is an excellent way for investors looking to earn passive returns from cryptocurrency.
It comes with many merits, such as allowing blockchain networks to scale their throughput and enabling more participation in network governance and transaction validation from the network’s community members.
Despite these advantages, staking also has drawbacks that investors need to be aware of, such as market, liquidity, slashing, and security risks. However, staking is not unlike most investments.
It has both benefits and drawbacks, and any rational stakeholder needs to consider their investment goals to decide whether staking works for them.