There’s something liberating about beginning a search for a new staking platform knowing which mistakes to avoid before you step up to the web browser. Detecting mistakes before you make them — particularly when you’re picking a new Staking Platform — will save you time and capital.
Understanding what to avoid beforehand will also assist you to narrow down the number of staking platforms you’ll regard as part of your search, not to say make you save headaches dealing with non-reputable staking platforms.
Mistakes to avoid when picking a Staking Platform
Below is a checklist of 6 things to avoid when picking a staking platform Let us know in the comments section below what you would add to the checklist
Staking presents investors with a method to keep the operations of a blockchain network and create passive-income approaches
1. Falling for a heightened APY %
Annual Percentage Yield (or APY) is the entire amount of interest that you earn on your cryptocurrency balance over a year.
The key element of APY is compound interest, computed each month. This indicates that you earn returns on both the initial investment amount and the interest you’ve acquired every month. Essentially, it is acquiring interest on interest.
A standard measure of returns is annual percentage yield or APY. When you stake your crypto, you will usually be given an APY that you can make on your asset.
Some staking platforms will present you with very heightened APYs to lure investors to their platform, these high APYs are usually idealistic figures and are funded by high token inflation that settles for yield.
A very heightened APY is usually ‘upheld’ by what we called Token inflation
It may appear like you are earning a great deal by making 100% staking rewards, but this is often from new tokens that are being allocated. The issue is that these new tokens usually get traded off and cause the cost of the coin you are owning to drop. So you may have made 100% APY for the year, but the price of the token may be concealed by the selling pressure anually end up with a loss.
A high APY is usually followed by a long lock-up period
2. Are your coins actually staked?
Making reference to centralized finance (CeFi) firms (Celcius, Voyager, BlockFi etc.) who ran into liquidity concerns and ultimately default in some cases as the market downturn and more overall selloffs occurred. Many retail investors decided to ‘invest’ their coins on these platforms while not having proper knowledge of how these yields were being rendered.
However, undisclosed to the users, their assets might be loaned out to market makers or other parties to generate yield – which is much more difficult than staking and often not explicitly revealed to the client. Before picking a staking platform, try and get answers to the following question:
- Are my assets being staked or loaned out?
- How is the yield being produced?
- is the company translucent?
- Is the yield I am earning more elevated than I can get from normal staking?
- if(yes) how are they able to come about a higher yield?
These questions are quite necessary to be answered, many investors tend to ignore this.
3. Can’t differentiate non-custodial and custodial staking
A considerable amount of investors think that when you keep your crypto on a staking platform it is ‘secure’ from hackers. Before staking your crypto, it is noteworthy to understand whether it is a custodial or non-custodial staking service that you are operating and apprehend the risks associated with each one.
What is a custodian?
A custodian is a firm that has physical control of your assets. It’s often a brokerage, commercial bank, or another sort of institution that controls your money and investments for convenience and security.
what is Custodial staking? (Explained)
Custodial staking implies that you are staking your crypto via a centralized firm (for example cakedefi Binance, Kraken, Coinbase). This suggests that the exchange is the caretaker (Custodian) of your assets and you are authorising the management of the private keys to the firm. In addition, you are submitting the control of your assets to the caretaker and abiding by their terms and conditions. There are several advantages/disadvantages to custodial staking which we will draft below:
- No need to manage and keep private keys
- Straightforward to comprehend for beginners
- Investments are typically more liquid
- Security dangers– Centralized exchanges become prey for cyberpunks as they hold a large portion of crypto for users. The issue is that their systems are off-chain, revealing they function as escrows for their customers. This indicates that the trades record are not documented on the blockchain. Historically, this has shown huge violations of security and unsafe storage of information, accounts, and private keys. Nevertheless, security at leading exchanges has improved drastically.
- You give up control of your crypto – The centralized firm that you are staking with is the caretaker of your assets. If the exchange freezes trading or ceases withdrawals of a coin for any grounds– there is nothing you can do concerning it because you have agreed to terms and conditions. On the subject of bankruptcy or a hack of the company, users are usually left powerless with little to no alternative.
- Not your private keys, not your crypto – You don’t possess the private keys attached with your crypto.
- Miniature rewards – Firms take a certain % of your rewards as a service payment
Non-Custodial staking (Explained)
Non-custodial staking indicates that you have exclusive authority over your private keys. This signifies that you hold possession of your assets and that you have control of your own assets. Non-custodial staking is typically adopted using a web wallet like Metamask or a hardware wallet like Ledger.
- Extremely safe
- You have dominion over your private keys
- You have possession of your own assets
- More elevated staking rewards
- Donates to network decentralization
- Newbies might find it difficult – It needs the user to comprehend basic staking concepts and be aware of how to operate wallets
- Private keys must be kept securely – The hold of private keys can be a big task for some individuals
- You ought to understand how to pick a validator
- Assets can be illiquid – Riding on the network, it can take quite a bit of duration to unstake your crypto. The illiquidity can occasionally cause concerns for some people.
4. Keeping your tokens for a more extended period than necessary
Staking involves lock-up duration during which your cryptos are locked and can’t be used. The lock-up period varies between various Proof-of-Stake (POS) networks and usually runs from a few days to a month. Some staking platforms latch your assets for longer than the real lock-up decided by the network, it is vital to compare it to the non-staking period for aboriginal staking. In addition, some platforms might present 120-day lock-ups and propose a higher yield to draw users to their service. There are a few concerns when locking up your assets for extended periods of time:
- Illiquidity – Investors encounter a liquidity concern where they don’t have direct access to their tokens. Crypto markets are particularly volatile and locking up tokens for extended periods of time is usually not the finest idea for fresh investors. Gullible users are enticed to the slightly higher yield presented when locking up tokens for prolonged periods of time but don’t really take into understanding the risk of locking up your crypto for a long duration of time.
- Market risk – Many individuals don’t realize how greatly coin value can decline in a bear market. Usually, when they choose to stake with a staking platform like Binance/Kraken, the yield they can on the cryptocurrency is at the forefront of the offering. The market gamble that you take on by locking up your coins for long spans of time is underappreciated and not explained distinctly by the staking firm.
- Lockups overextending native staking times – Some staking providers lock up your assets for a longer time than native staking does but presents you with identical interest. There is nothing faulty with this, but it is not usually displayed clearly to investors and is consequential for you to take note of.
5. Don’t be tricked by “Earning up to…” versus real yield
Some custodial staking platforms publicise to investors that they can make ‘up to %…’ on specific currencies. This is usually promoted when users log in or on their website. The high staking % being delivered may seem appealing but it is frequently very different from the real interest that will be given, it is just a marketing scheme to seduce investors.
The ‘up to…’ yield is a speculative yield and does not mean the real yield that you will make. This is because of expenses for validators, and other concealed costs. Do not be deceived by a really high staking APY on a specific coin, still do your research before being drawn into a high-yielding reward.
Another instance could be an ‘Estimated APY’ on investment, in the illustration below a CEX is offering an estimated APY of 39.86% and 73.99% for a 90 and 120-day lockup.
However, the yield on aboriginal staking is ~18.5% – so you might ask yourself how a CEX is able to offer much higher yields while still setting fees.
5. Paying hefty fees on Staking Platforms
Staking outlets don’t consistently tell you the fees they take when locking up your crypto with them. New investors may not understand how to prevent the actual yield and may be reluctant to put in the effort to do so. Some staking platforms will take benefit of this and demand a hefty fee for using their staking platform, which the end-user doesn’t usually recognise. Check for fees like:
- Commission expenses
- Network costs
It is not a problem to pay fees on staking platforms, just make sure of what you are spending and whether you are keen to pay the fees for their assistance.
This is a familiar catchphrase amongst the crypto community. It goes that if the source of the yield on an asset is unknown and vague and you can’t truly explain it plainly, then you are the yeild (profit). As a consequence, your activity and involvement ‘creates’ a return and often simply lasts as long as new members join after you – generally referred to as ‘ponzi’.
If you don’t know where the yield comes from, you are the yield
Crypto can be lawless when it comes to absurd yields in Defi, staking and other setups of income-based products. The asset class is still fairly new and the technology is challenging to apprehend for most investors. Hence, most new market players are lured to high-yielding investments without comprehending how that yield is being created.
Consistently take the time to comprehend how the yield comes about and if it is going to last for the long run, if you cannot gather it, ask a friend or an individual who understands crypto staking
Staking can be a complicated method for anyone that is new to the crypto space. We know it is challenging to understand the jargon and see the marketing strategies of various staking firms. Rest guaranteed, if you learn from the facts that we spoke about in this article you will be on your path to a secure and prosperous journey in the world of staking.
I’m a pharmacist by profession, but my passion for cryptocurrency has led me down a different path. I’ve been staking crypto for years, and I’m always eager to learn more about this exciting and ever-changing field.