Why Is DeFi Staking Considered High Risk?

DeFi staking allows you to gain free crypto, making it an easy way to earn a passive income. However, as with any other investment, there are risks involved. Why is DeFi staking considered high risk?

DeFi staking is high risk due to the holding period and volatility. Even if you earn a decent amount of interest on your stakings, the price could plummet at any moment, causing you to lose money. It can also take a few days to unstake your crypto and rewards, meaning you can’t sell right away.

The rest of this article will discuss why DeFi staking is high risk in greater detail. Keep reading if you want to learn more.

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What Are the Disadvantages of Staking Crypto?

The biggest disadvantage of staking crypto is that you may have to lock your crypto for a period. This means that if prices begin to plummet and you want to sell your crypto, you won’t be able to. You also have to pay fees to your staking pool, which is another disadvantage.

Let’s take a look at the main disadvantages in more detail.

  • Locked crypto. In most cases, you’ll have to lock up your crypto for up to a month when you first begin staking. If you plan on holding your crypto for a long time, this won’t be a problem for you. But if you plan on selling when prices start plummeting, this may be an issue.
  • Fees. Staking has fees. Try to find the one with the lowest costs.
  • You could lose all your rewards. You might make a decent amount of passive crypto from staking. However, prices could drop overnight, and all your rewards may be gone. You could even lose money if this happens. Always keep this in mindbefore deciding to stake your crypto.
  • Unstaking. You may want to sell your crypto as quickly as possible if the price is high and you fear it’ll begin to plummet. In many cases, you have to wait a few days before you can withdraw your crypto from the stake pool, so this could cause you to lose potential earnings.
  • Useless stake pool. You may have chosen a bad or small stake pool and realize you’re not making any extra crypto. It takes time and effort to stake your crypto in the first place, so unstaking it and staking it again in a different stake pool is even more of a hassle.

What Are the Advantages of Staking Crypto?

We’ve discussed the disadvantages of staking crypto, but there are also some advantages.

The main advantage of staking crypto is that you can earn passive crypto without doing much. Additionally, staking your crypto means you’re actively participating in the blockchain, which can feel rewarding for many people. Staking is what keeps the cryptocurrency working, after all.

Now, let’s look at the main advantages of staking crypto in greater detail.

  • Earn rewards. The main reason people choose to stake their crypto is to earn more crypto. It’s an incentive for people to actively participate in the blockchain and a great way to get involved.
  • It’s generally straightforward. The easiest way to stake your crypto is by using a stake pool, which an operator runs. This way, you don’t have to worry about becoming a node or doing anything complicated. All you need to do is choose a stake pool, add your crypto, and you’re done.
  • Eco-friendly. In general, staking is more eco-friendly than the proof of work mechanism, which Bitcoin and Ethereum currently use. However, Ethereum is currently switching from a proof of work to a proof of stake mechanism, so you can now begin staking Ethereum.

What Is the Best Way to Stake Crypto?

The best and easiest way to stake crypto is by joining a stake pool. All you need to do is choose a pool, add your crypto, and leave it be. You don’t have to take any action unless you remove your crypto from the pool. However, you need to ensure you choose an appropriate pool.

Choosing a stake pool is probably the most challenging part of staking. Once you’ve done that, it’s plain sailing. 

You Can Stake On an Exchange or in a Wallet

The two main ways to stake your crypto are on an exchange or in a wallet. It’s always best to transfer your crypto to a software or hardware wallet. These are generally much safer than keeping it on an exchange.

By transferring your crypto to a wallet to stake it, you’re in total control of your keys, and there’s less chance of you losing your crypto to hackers.

Is Staked Crypto Safe?

Staked crypto is safe. Staking your crypto means you’re making it work to help validate transactions, so not only is it safe, but it’s helping keep the network running. However, you could lose much of your staked crypto and rewards if prices drop.

Although your crypto is safe while being staked, you technically have less control over it—it can take a few days to withdraw it from the pool.

How To Stake Crypto

To stake crypto, choose a proof of stake cryptocurrency, like Cardano. You’ll need to transfer it to a wallet and select a staking pool based on its size and interest rate. Once you’ve chosen the appropriate pool, you can add your crypto and leave it be.

Now, let’s look at how to stake crypto in greater detail.

  1. Choose your crypto. You can’t stake all cryptocurrencies. You need to choose a currency that uses the proof of stake mechanism to validate transactions. The most popular currencies to stake include Ethereum (ETH 2.0), Cardano, Solana, and Algorand.
  2. Transfer to a wallet. You can choose to stake your crypto on an exchange, but it’s safer to transfer it to a wallet and stake it that way.
  3. Choose a stake pool. The best and easiest way to stake is by joining a stake pool. You can choose between many different pools, and knowing which one to pick is challenging. The bigger the pool, the higher the chance of earning rewards, but the rewards will be small. The smaller the pool, the lower the chance of earning rewards, but rewards are generally high. Most people like to go with a size that falls somewhere in the middle.
  4. Check the fees and interest rate. Before joining a stake pool, you should look at the costs. You’ll have to pay a transaction fee and deposit fee. The interest rate is how much crypto you’ll earn per epoch, so checking this is essential.
  5. Transfer your crypto to the stake pool. Once you’ve chosen a pool, all you need to do is transfer it over and leave it be. The only time you’ll need to interact with it is when you want to make a withdrawal.

Staking Ethereum on an Exchange

Some people may prefer to stake on an exchange because it’s easier and quicker. Exchanges like Coinbase offer staking options, so you should check out which exchange you’d like to use.

For example, you can stake Ethereum (ETH 2.0) on Coinbase now, but it’s risky. Since ETH 2.0 isn’t fully ready yet, staking it means you can’t withdraw it. You’ll have to keep it staked for the foreseeable future, meaning you should only choose to stake it if you plan on holding for a long time.

Conclusion

DeFi staking is considered high risk because:

  • Crypto is highly volatile, so you could lose any interest earned in a matter of days or minutes.
  • The holding period means you can’t access your crypto for a certain period after staking.
  • Unstaking often takes a few days, meaning you can’t sell right away.

Although there are risks involved, there are also advantages to DeFi staking. It’s up to you to decide whether the benefits outweigh the risks.

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