For a very long time, crypto has allowed traders to invest and earn sufficient passive income by just moving coins across the market, setting a higher bar than traditional currencies. Now as this digital income is expanding, various ways have been introduced to get deeper into the cryptocurrency business – and staking is one such way that is now widely adopted.
Staking can be equated to locking up your digital coins in a vault in order to earn rewards on it over time, pretty much how traditional saving accounts work. But is it that simple? Is it safe? And if not, then how risky is it? In this article, we will try to address the potential risks involved in DeFi staking and how we can make it work in our favor for long-term financial benefits.
What’s DeFi staking?
Decentralized staking aka DeFi staking is a way of locking your digital assets in a blockchain through smart contracts. In return, you get rewards in your locked accounts in the shape of financial interest. But here is the most exciting part, there are no middlemen in between you and your locked assets. You have total hold of it.
Staking is done on decentralized platforms, which eliminates the need for any centralized bank accounts or financial institutions to join in. It seems like a golden opportunity to earn good passive money, right? Yes, but it’s pretty complex. Where it gives financial freedom, it also has some security concerns. Let’s see how safe DeFi staking is.
Risks involved in DeFi staking
To understand how safe it is, it is important to look at the risks that are involved. Let’s take a quick look at them.
1. Impermanent loss
The crypto market is always going up and down with its price ratio. Staking in a liquidity pool can put you in a spot where you may suffer a bad loss. Let’s just say at the time when you deposited your assets into staking, the price ratio was good to go with and you must be expecting a hefty reward. But it is very much possible that the price ratio drastically goes down compared to when you deposited. Such uncertainties are very much present in staking.
2. Regulatory uncertainty
Just as mentioned above, uncertainties are a part of staking. Governments or financial organizations can create some rules that may affect the working of staking, which in turn can affect your investments too. So it is better to keep yourself updated with any kind of regulations by the authorities that may affect your staking activities.
3. Protocol risks
Choosing the right protocol is the first step towards success. But if you choose one that is not good for your assets, it can be disastrous. Some platforms lure investors into high-profit schemes and eventually disappear with all their funds, so it is a wise decision to research the credibility of the protocol before staking assets.
4. Smart contract vulnerabilities
Just as it is essential to choose the right platform, it is crucial to use staking platforms that have undergone third-party security audits. The reason to say this is because if the smart contract platform has some bug or security issue, hackers can easily use them to drain all the money (including yours). There are stories of highly reputable smart contracts failing and facing major losses because of some bugs or exploits, so be careful.
5. Market instability
Since crypto and DeFi staking come with a lot of financial freedom, the market is still unpredictable. You may be earning sufficient staking rewards, but the value of those staked rewards can drop, causing you potential losses. So bear in mind that with rapid growth in your rewards, you may have to face price fluctuations at unpredictable times.
5. Liquidity issues
While locking up your assets in smart contracts some platforms might ask you to lock them up for a fixed time. Now if you want to withdraw your funds before the staking period concludes, you may face some charges or at times it is possible that you may not be able to access your funds at all. So always opt for flexible staking options that enable you to withdraw your funds whenever needed easily.
Which popular DeFi staking platforms are safe?
Mentioned below are some of the best (and safe) staking platforms. To fall into this category, our criteria cover several factors like security, liquidity and user experience.
1. Binance
DeFi staking on Binance gives a variety of flexible features and amazing rewards. It is secure and user-friendly for beginners. The protocol has strong security features with multi-layer encryption and two-factor authentication.
2. Lido
Unlike other platforms, Lido gives complete authority to the users to stake their assets while maintaining liquidity. It supports a range of coins like Ethereum, Solana, Terra, Polygon and other proof-of-stake networks.
3. Curve Finance
Curve is one of the best platforms to invest in as it allows staking stablecoins with light volatility. It also works in a decentralized manner so that people have governance rights.
These are a few of the best DeFi staking platforms, each having unique features and advantages. Choose one that aligns with your investment criteria and risk management.
How to improve security in staking?
To successfully grasp the art of DeFi staking, it is vital to opt for tried and tested security practices to save your assets and produce a big turnover.
- Diversify your investments as much as you can. Do not make the mistake of investing in one platform only.
- Follow the latest news and trends for better understanding. Stay away from potential threats and the latest security updates.
- Avoid placing large amounts of your funds on web-based wallets, and keep your private key safe and secure.
This is all there is to know about DeFi staking and how safe it is. If you follow the above mentioned security practices and understand the risk that comes with it, staking can turn out to be a rewarding investment for you in the crypto world.
