How does Crypto Staking Works?
Crypto staking is a decentralized way of contributing to blockchain security by locking your assets in a contract for a specific period. Based on the amount of assets you lock, you may be selected as a validator, allowing you to run node software that validates transactions and adds blocks to the blockchain. In return, you receive rewards in the form of coins for your contribution.
Alternatively, if you don’t want to run node software yourself, you can delegate your assets to someone else or a third party (such as a crypto exchange) that runs the node software on your behalf. In this case, you receive a portion of the rewards based on the amount you staked.
It’s important to note that you typically earn more rewards if you run the staking process yourself, as you won’t have to share the rewards with a third party. However, delegating your assets can be more convenient if you don’t want to manage the technical aspects of running a validator. Traditional crypto staking involves assets whose value can fluctuate based on market demand, which means both the rewards and the value of the staked assets may vary over time.
How does Stablecoin Staking Works?
Stablecoin staking is similar to crypto staking, where you lock your assets in a contract but these assets are used for liquidity, lending or other purposes. Another key difference is that you are using assets with a stable value. Stablecoins are typically pegged to real-world assets like USD, or they may use other mechanisms to stabilize their value. When you stake these assets, you can potentially earn a predictable amount, since the value of the stablecoin does not fluctuate significantly.
Both decentralized and centralized platforms offer stablecoin staking services, with decentralized platforms often providing higher rewards due to lower fees and operational costs.
Cryptocurrency Staking: Risks & Rewards
The major risk in crypto staking is crypto price volatility. The price of cryptocurrencies fluctuates based on market demand, trading volumes, and macroeconomic events, such as regulatory changes affecting trading platforms. For example, if you stake a specific amount of ETH and the price of ETH decreases before the staking period ends, the value of both your staked assets and the rewards could be lower. Therefore, understanding price trends and market conditions is important when deciding the right time to stake.
Other risks include slashing, where you could lose a portion of your staked assets if the validator you are using is penalized by the blockchain network for misbehavior (such as double-signing or being offline for too long). Platform security risks are also involved if you’re using a third party (such as a crypto exchange) for staking, as the security of your assets is dependent on the security of the platform.
The rewards you get for staking depend on the APR rate (Annual Percentage Yield), which in turn depends on the supply of staked tokens, blockchain network usage, transaction fees, and the reward distribution system of the blockchain. Ethereum and Polkadot are the prominent blockchains offering good reward rates, around 4-6% and 10-15% respectively. On the Binance platform, you get an APR of 2.63% for ETH staking, which is slightly lower due to operational costs. On the other hand, you get an APR of around 3% on ethpool for ETH staking, which is a decentralized pool staking service. Typically, decentralized staking services are a better option since they offer higher rewards while also providing full control over funds.
Stablecoin Staking: Risks & Rewards
While the risk of crypto price volatility is reduced in stablecoin staking, other risks come into play. One major risk is the vulnerability of smart contracts, which could lead to the loss of funds if a hacker exploits this vulnerability. Additionally, the platform you’re using to stake stablecoins may experience liquidity issues, preventing withdrawals or trading of the crypto. The safety of your assets can also be compromised if the platform doesn’t implement necessary security measures. Apart from these risks, one potential issue could arise from the stablecoin itself. If the real-world asset to which the coin is pegged devalues, the value of the stablecoin may also decrease. Furthermore, the stability of algorithmic stablecoins relies on the smart contract design of the underlying algorithm. It’s preferable to use reputable stablecoins like USDT or USDC for staking to minimize exposure to unnecessary risks.
Although profitability of stablecoin staking depends primarily on the APR (Annual Percentage Rate), it is also influenced by features such as auto-compounding, platform fees, and lockup periods. Auto-compounding, through continuous reinvestment, increases the rewards over time. Locked staking typically offers higher APR but requires you to lock your funds for a specific period. While stablecoins’ stable value reduces price risk, other risks like liquidity and platform security remain. Overall, stablecoin staking is a low-risk investment option with moderate rewards.
Profitability Comparison
The primary factor determining the APR (Annual Percentage Yield) is the activities for which your locked assets are utilized. Cryptocurrencies such as ETH, SOL, and DOT, which are native coins of their respective blockchains, are staked to secure blockchain networks. This activity provides substantial rewards to validators contributing to the network’s security.
On the other hand, stablecoins are typically staked for lending purposes or liquidity provision. These are low-risk activities and, as a result, yield lower returns. This is why stablecoins generally offer a lower APR compared to other cryptocurrencies, as the risk factor is minimal. Despite their lower profitability, stablecoins offer advantages such as predictable returns, making them a worthwhile investment.
For those seeking higher profitability with stablecoins, alternative options are available. For example, on PancakeSwap, currently you can earn an APR of 65% by providing liquidity to a USDT-ETH liquidity pool. The high rewards result from the strong demand for these cryptocurrencies, combined with compounding features.
Concluding Remarks
Both stablecoin staking and cryptocurrency staking come with their own unique risks and rewards. For risk-averse investors or beginners, stablecoin staking might be the best option, as it provides predictable rewards. On the other hand, professional investors who can perform technical analysis and track price trends may stake high-risk assets at the right time for good profits.
It’s also important to be aware of risks such as impermanent loss, which occurs when the price of an asset in a liquidity pool changes compared to when you deposited it, as well as platform security risks. Despite the low profitability of stablecoin staking due to its lower risk, you can still earn good rewards by staking high-demand coins with auto-compounding features.