What Are the Top 3 Things People Get Wrong About Staking Crypto?

Staking can be performed through several projects in the blockchain community, and they include: Ethereum, Tezos, Cosmos, Cardano, Polkadot, Terra, Solana, Binance, Avalanche, and more.

To stake, investors decide on the cryptocurrency of choice, learn the minimum staking requirements; choose a wallet that supports staking of the desired coin, and commence the process.

A wide range of information exists on staking, some is accurate, but there is a lot of misinformation too.

Below are the top three things that people get wrong about staking:

1) You Need a Huge Bankroll to Stake

Although it is a well-known fact that various cryptocurrency projects utilizing the POS protocol require a considerable sum of investment for being a staking validator (e.g. For Ethereum, 32ETH is required), the belief that one cannot stake without having a massive sum of money is inaccurate.

Investors without the complete sum needed to become full validators can stake by becoming delegators to a staking pool. In fact, delegating is recommended for the average crypto investor because validating generally requires high-end equipment and an industrial-grade internet connection.

A staking pool permits investors to combine their assets to expand their chances of earning rewards. However, staking power is directly proportional to the percentage of total assets staked.

Many network participants do not have significant assets to validate alone; hence many like to contribute their resources to a staking pool by delegating what they have. Stakers are compensated with a portion of the profit from block rewards. These pools typically have administrators who handle their operations and activities. Operators tend to charge a commission that is shown upfront.

Additionally, some staking assets incentivize more continuous and prolonged staking periods: the more you keep your resources in the pool, the higher your returns are. The presence of staking pools rules out the necessity of investing the minimum staking requirement to be a validator. Instead, the collective pool harmonizes the resources and allows for fair profit distribution.

2) Staking Rewards are Always Secure, Consistent

Despite the numerous benefits of blockchain technology ranging from increased trust, security, and transparency, the consistency of profit generation cannot be fully guaranteed. The rate of return cannot be guaranteed because validators are chosen randomly, ensuring some ups and downs in returns. In addition, validators charge a commission that can be changed. Depending on the validator you choose this can result in less rewards for some pools than others.

A good illustration of both these points is Cardano. Of the top 10 pools by blocks produced in Cardano’s lifetime, the Return on Stake (ROS) ranges from 0% (a pool that charges 100% commission) to 4.98%, with some pools giving out returns in the 2% and 3% range.

There are also instances where you can lose some of your staked assets. This is due to something called slashing. While not an aspect of every POS crypto, it does exist for assets like Polkadot, Cosmos and Solana.

Slashing occurs when the validator acts badly. This could mean sending through a transaction twice, being offline for too long, or a number of other reasons. As punishment for bad acting, the validator is generally hit with one of two different penalties.

1. The validator is “jailed”, which just means they don’t receive rewards for a set period of time (12-24 hours usually)
2. The validator has either their rewards or their stake slashed, and this includes the users’ assets who have delegated to the validator. This is the more serious penalty but it’s still usually only a small percentage of 1-5%.

This reinforces the importance of adequate due diligence and analysis by prospective stakers before proceeding with their staking decisions. If a proper investigation is done, staking rewards can be ensured by choosing a validator with good history, and rewards will remain steady.

Fortunately slashing is fairly rare and most stakers don’t experience it.

3) Staking is Bad for the Environment

Compared to other consensus mechanisms such as the POW, POS is more environmentally friendly and has greater transaction throughput and capacity. From inception, the POW model has generated controversies regarding energy consumption and its substantial harmful impact on the environment.

POW, which powers major projects such as Bitcoin, Litecoin, and Dogecoin, requires members of the network to undergo specific tasks involving solving arbitrary mathematical problems as stated above for network verification and to maintain the integrity of the block chain. The increased competition evident in this model led to miners making high-grade investments in sophisticated computers to mine more proficiently. Consequently, there was a rise in energy consumption and electricity cost.

According to the Cambridge Centre for Alternative Finance (CCAF), Bitcoin – one of the projects powered by the POW model- consumes one hundred and ten Terawatts per year. A value which is equivalent to 0.55% of global electricity generation or energy drawback of countries like Argentina and Mali.

In comparison, the POS model addresses these persisting challenges and rewards participants (stakers) in the process.

It is very common for people to lump together the consensus mechanisms of cryptocurrency projects as a whole for collective criticism.  However, in the case of staking, it has minimal environmental impact.