Cryptocurrencies and blockchains are the latest additions to the world of finance. Initially, they were taken with suspicion, and banks, central banks, governments, and regional economic blocks advised their subjects against them. Now, about 13 years down the line, the reverse is true. More parties are rushing to adopt them.
Central banks, national governments, and regional blocks are busy introducing their own blockchains, while companies have a new way of payments. In El Salvador, the government has already accepted Bitcoin (BTC) as a legal tender. The World Bank is already working on its own Central Bank Digital Currency.
The growing support for cryptos and blockchain systems has also opened new methods of investment. For example, you can trade the crypto coins on the exchanges just like you do stocks. However, the most preferred method of investing in crypto coins is staking to make passive income. This is the process of committing the crypto coins to help with the validation of transactions on proof of stake (POS) blockchains.
In return, you are rewarded with a section of the fees people pay to run transactions or new cryptos. Make sure to comprehensively review crypto wallet vs exchange storage for your coins before getting started. More importantly, you need to know about the risks involved in staking and avoid them. Here are some of them:
Why Staking?
In centralized financial organizations, such as credit card companies, the management is responsible for processing transactions. However, it is the computers/ nodes spread in blockchain networks that validate transactions in blockchain networks. With proof of stake (POS) blockchains, such as Ethereum and Cardano, only the nodes with some stakes can validate transactions. This process is referred to as staking.
The process of staking is easy, especially when using decentralized finance (DeFi) platforms, because all you need is to send your coins to the selected pool. The main benefits of crypto staking include generating passive income without selling your coins and being eco-friendly. You also need to understand the risks and avoid them at all costs.
Staking in a Saturated Pool
As we indicated already, staking through a DeFi platform means that you send coins into a pool that acts as a node on the blockchain network. It is a good thing because the more the coins, the higher the chances of getting selected to confirm transactions. However, there is a maximum point, which is referred to as a saturation point. This means that there are so many coins in that node and the reward is capped.
Adding more coins to a pool that has hit the saturation point means the profits will be shared among more participants, but the rewards will not increase.
To avoid getting to the point of saturation, look for pools that run multiple nodes. You might also want to be specific about the saturation points for different coins that are involved and efforts to optimize returns.
Selecting a Non-Transparent Staking Pool
When you select a decentralized finance (DeFi) platform, it means you commit the coins to another node as opposed to using a personal computer. So, all the rewards will be directed to that node before being divided among the participating coins. If the selected DeFi is not transparent, there is a risk of not getting the correct staking share.
So, how do you identify a good staking pool? Here are some useful tips:
- It should have positive feedback from past clients.
- Excellent customer support.
- Pre-defined returns for users.
- Supported by a reputable team.
The Risk of Losing Your Coins through Hacking
You might have heard about crypto coins that were hacked and investors lost millions worth of their coins. Staking pools are the first target for hackers because a lot of coins are already bundled together. So, check the performance of the selected pool to establish if it has a history of being hacked.
Review the measures installed to protect clients’ cryptos. For example, does the DeFi platform use in-wallet staking? What protection does the platform use to secure its system from hackers?
This post has looked at some of the common risks associated with crypto staking. The bottom line is that you should go for the DeFi platform that is professionally designed to secure your coins and deliver the rewards as agreed with stakers. One such platform that has been rated highly by past users is hi.com. Visit them now by typing hi on your WhatsApp or Telegram and start enjoying the best crypto services, including sending, receiving, and converting your coins.
