Staking Cryptocurrency: Pros and Cons
A Staking pool is a device that permits multiple crypto token holders to pool their tokens, thus granting the staking pool’s operator status of a validator and rewarding all parties with tokens in recognition of the computational resources they contribute.
For many crypto-investors across the world, the concept of the staking pool is unfamiliar as investing in one can trigger suspicion rather than attract masses of potential investors. However, the idea of the staking pool is accessible on blockchains using the “proof-of-stake” (PoS) method. Participants must secure their crypto-tokens at an individual blockchain address or wallet for an annual percentage rate (APY).
The tokens that are locked are tied to the development of the blockchain. In exchange, the blockchain offers participants via the operator of the public stake pool a percentage of the reward dependent on the number of staked tokens. The numerous advantages that come with investing in a public stake pool are offset by various cautions to consider before betting cryptocurrency, specifically the model of staking pools used.
What are the benefits of staking in crypto?
There are various ways that staking could be considered a positive idea for blockchain technology. A few famous examples are as follows:
The main issue that more well-established blockchain networks like Bitcoin are facing is that the consensus system they employ is limited in terms of network speed, meaning that despite their growing popularity, they can’t attain a certain amount of speed.
The introduction of stakes was explicitly designed to solve the issue of network speed.
KuCoin, the most widely used blockchain for smart contracts, has acknowledged the advantages of implementing staking rather than mining. The core developers of the network are currently working to shift the web away from a Proof of Work (mining) model to a Proof of Stake (staking) model.
The stakes system could contribute to decentralized blockchains, making it more straightforward for community memes to take part in the oversight and validation of transactions.
PoW mining systems are difficult to join because the miners must invest in mining equipment, which could cost a lot for competitive networks, such as Bitcoin.
The initial investment and regular maintenance costs are lower when you stake, making it more affordable to a larger population.
One of the most extensive critiques of blockchain networks is that they cause environmental pollution. However, this isn’t true for all networks that utilize the staking method.
Pow mining networks, such as Bitcoin use a significant amount of energy. The source of this energy may or might not be non-renewable energy.
Networks that have embraced staking as a mechanism for consensus have successfully avoided this landmine because staking infrastructure is not as energy-intensive.
Compared to other consensus mechanisms, Staking is an investment strategy that is more passive for investors who want to participate in the blockchain economy without putting in a lot of effort.
Based on the network you choose and how you wish to participate (either actively or in passive mode), You can successfully make an investment in the community and not have to think about the maintenance of your investment for long enough to remain engaged.
What are the negatives of staking?
As was mentioned previously, any investment has its positives and negatives, and staking isn’t one of them.
Here are a few essential negatives every investor must be aware of before beginning their journey to investing:
Risk of the market:
One of the primary conditions for the process of staking is to ensure that the assets are kept locked for an undetermined period the withdrawals of funds can be delayed.
This arrangement presents several problems. The most important of these is that the investments are prone to extreme price swings. There could be a chance of loss of your investments if the price falls negatively during the time of the staking.
Risk of security:
Staking is a different option from the famous mining consensus system employed by some established networks like Bitcoin and Ethereum.
Staking is a less recent consensus model, but it is still undergoing extensive tests to see how it will perform for longer durations.
Risk of liquidity:
Liquidity is the measure of the ease in converting asset cash that can be used for spending.
Locked assets are typically subject to lock arrangements, which means that the assets are inaccessible for specific periods and cannot be used in different ways, or at least not right away.
When a node behaves in a way that violates staking policy and rules, the network could penalize it by taking a portion or all stakes. Slashing can be a danger, especially when betting using a staking service or in a pool that is staking with other pool members whose actions could put your stake in danger. Sometimes, the pool operator may inadvertently break staking regulations and cause the entire pool to be unable to stake its money.
The final thoughts
Staking is an excellent option for investors to make passive income from a cryptocurrency exchange. It is a significant investment with numerous benefits that include the ability of blockchain networks to increase their efficiency and allow more involvement in the governance of the network and validation of transactions by the community members.
However, staking has disadvantages that investors must be conscious of, for example, liquidity, market cutting, and security risk. But staking isn’t like other investments.