Like most things in the crypto world, it can be hard to wade through all the information on staking. Your colleagues and friends likely have BIG opinions about crypto staking and having assets locked, but how well-founded are those opinions?
Blockchain was only launched 10 years ago. In that time, the technology and its uses have continuously expanded. It can be hard to keep up with everything, and a lot of “telephone” is likely being played.
Someone hears something. Misunderstands it. Then explains their misguided understanding to others.
In this article, we will debunk some of the biggest myths around crypto staking to help you find your own path through all of the “investment advice” out there.
Image source: Coindoo
What is staking?
Before we dive into the technical aspects of staking protocols and crypto assets, let’s start with the basics. Stated simply, staking is a way of earning rewards for holding cryptocurrencies or digital assets.
- PoW (Proof of Work): When blockchain technology was first introduced, there was only one way for transactions on a chain to be verified and added to a block. This process was/is highly competitive and requires miners (powerful computers) to solve complex mathematical problems in return for a small amount of cryptocurrency.
This method is known as Proof of Work. While it is scaleable, there are a few major drawbacks. It takes a lot of energy to run the supercomputers needed, and it can be slow if there are a lot of transactions taking place at once.
- PoS (Proof of Stake): In recent years, another form of verification has emerged called Proof of Stake. This method allows people to invest cryptocurrency into a blockchain to verify and add new blocks.
These investors are putting their own money on the line to verify transactions to earn rewards. The network selects someone to validate based on the number of tokens staked. The more and longer you have a token staked, the higher your chance of being selected to validate.
But like any investment, staking cryptocurrency involves risk.
If you’re selected and validate incorrect transactions or are not online at the time of selection, you may be penalized with something called slashing and lose some of your crypto.
This method still requires computing power and being online, but it doesn’t require nearly as much energy as PoW.
Image source: 101 Blockchains
Myth #1: All staking is the same
From soft staking (token holders aren’t required to lock coins) to multiple liquid staking protocols (coins are locked, but a derivative token can be used instead) and yield farming (staking an asset to earn a different asset in reward), there are a vast number of protocols available.
We’ve just mentioned three options, but there are many to choose from. Some are definitely more reliable/secure than others. Some offer bigger payouts for higher risks. No matter what you choose, make sure you understand the fine print and know exactly how your money will be put to use.
Image source: Binance
Myth #2: Staking rates are too good to be true
It is not uncommon to see PoS protocols with staking rates higher than 10%. In the world of traditional banking and fiat currencies, that would be a red flag.
But the fluidity of crypto prices and inflation rates normalizes this number.
For example, the annual staking rate for $LUNA is about 12.10%, but it has a fixed annual inflation rate of 7%. So, there is plenty of $LUNA to go around.
Staked capital in the crypto world is just a way to help make sure the protocol is mutually beneficial for everyone involved. Staking increases network security, which is then reciprocated by the network by protecting your purchasing power.
So, before you judge a book by its cover, be sure to look up the protocol staking rates and compare them to the inflation rate.
Image source: TechCabal
Myth #3: Staking works the same in all cryptocurrencies
Since there are so many different types of staking, it should be no surprise that each cryptocurrency does it differently.
Some supported DeFi (decentralized finance) protocols require investors to purchase a governance token. The investor earns rewards and the right to governance votes by staking governance tokens.
Others use mechanisms like liquidity staking. A liquid staking protocol allows investors to have liquidity by providing a derivative token that can be used in DeFi. So, the investor’s staked assets are earning a staking reward while the investor is free to use their derivative token like normal. Liquid staking solves one of the biggest issues investors hate most about staking: frozen assets.
Each cryptocurrency is going to do staking just a little bit differently. Be sure you understand how it works, how long assets will be frozen (if they are), and how you can earn rewards using proof of stake (PoS).
Myth #4: Rewards are sure and consistent
PoS networks provide staking rewards at very different rates depending on what is happening in the market.
- If you use a crypto exchange or staking-as-a-service provider to validate for you, the rate the validators charge could go up or down. Usually, you’ll be provided with some sort of staking calculator, but the number given is usually just estimated.
- Some networks, such as Solana, use a staking dilution structure. This means the reward amount goes up and down based on the number of $SOL currently staked.
- Slashing is also always a possibility if you are running your own validations. If you validate something incorrectly or aren’t online when you should be, you could be penalized and forced to give up some of your crypto.
Like any investment, there are risks and rewards to weigh out when deciding whether or not to stake crypto.
Myth #5: You need to be an expert to stake
There are a few different ways to enable staking. Each of them comes with its own pros and cons. Some options have user-friendly setups, while others have increased emphasis on security.
Here are the top 3 ways to begin staking:
- Use a crypto exchange.
- Connect your wallet to a staking-as-a-service provider or staking pool.
- Validate blocks yourself.
Crypto exchanges and staking platforms do most of the hard work for more than half of the current staking investors. So, it’s pretty clear that the first two options in this list are the easiest. As long as you know how to buy crypto and have a place to store it, the first two options will be pretty simple to navigate.
Validating blocks yourself is significantly more difficult. Remember when we talked about slashing? We mentioned that if your computer wasn’t online when you were selected that you could be penalized with slashing.
To avoid this, when you validate transactions, you will need to have the skill and hardware to set up a system that functions properly all of the time.
While there are options for staking that will require some expert knowledge, there are plenty of ways you can get started without needing to understand all of the technical stuff or build your own mining system.
Image source: CryptoSous
Myth #6: Everything called staking is staking
Some projects have started using the term “staking” to lure people into holding their assets without having the ability to offer real staking rewards.
For example, as crypto and Web3 influencer Cobie pointed out, Bored Ape Yacht Club’s ApeCoin used the term staking when the company itself was just rewarding people for holding the coin. You can’t stake ApeCoin because there isn’t a blockchain for it; there’s nothing for it to validate.
This just goes to show that a basic understanding of blockchain, staking, and projects is necessary if you’re considering doing any kind of PoS liquid staking, soft staking, or yield farming.
To sum up: staking rewards & myth-busting
Staking platforms are great at enabling capital efficiency and can be one of the safer long-term investments in both a bull and bear market.
We hope this article has helped cut through some of the myths and misconceptions around Proof of Stake (PoS) and helps you put the assets in your crypto wallet to work.
It’s unlikely that the myths around staking coins will ever go away. After all, this technology is still in its infancy and will only become more complex. As staked assets continue to become increasingly popular, you will need to find trustworthy resources and information portals.
Find out more about the world of crypto and NFTs by following Wizardia’s blog!
FAQ
Is there any downside to staking crypto?
Yes, like any investment, there are risks associated with staking crypto. For example, you could run into scammers. It’s also important to remember that your staked assets will likely be frozen for a period of time. And you could also incur slash penalties for validating incorrect transactions or not being online when you’re selected to validate.
Is it worth staking crypto?
Staking is a great way to earn passive income. If you have the funds to invest, the returns can be high and well worth all the effort it takes to get you setup up and running. And as we all know, investing in technology in its infancy can be life-changing if you make the right selections.
What can go wrong with staking crypto?
From scammers to frozen assets and penalties, non-centralized staking can be high risk if you don’t have a good foundation and understanding of how it works. This investment and trading move deserves careful research before you decide if it is the right crypto investment for you.
Heather Budrevičienė
Heather is an American writer and editor based in Lithuania. She is obsessed with learning and loves to dabble with new tech in her free time. Heather started her career in Fintech and has only fallen more in love with blockchain through the years. She also loves to unplug and spend time outdoors. When she isn’t working, you are likely her with her family hiking in a forest or kayaking down a river.
Contents
Further reading
All articles
Pay-to-Win in Web3: How Can It Help
Pay to Win is where a player can use additional funds outside the initial price of the game to gain an advantage against other players, usua...
What Is Tokenomics? [Understanding the Token Economy]
Many people new to Web3 believe that any crypto coin can become as big as bitcoin or Ethereum, even if nothing could be further from the tru...
Cross Chain $WZRD Tokens — How to Bridge BSC to SOL
Wizardia's $WZRD token is cross-chain - Solana (SOL) & Binance Smart Chain (BSC). Depending on the Launchpad where investo...