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Staking — All You Need To Know

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Staking
Savl
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Introduction To Staking

Crypto staking is a relatively new concept that has gained popularity in the blockchain and cryptocurrency space. Staking involves holding and locking up a certain amount of your cryptocurrency in a specialized wallet or smart contract to earn rewards on that investment.

Staking is a way for individuals to contribute to the security and efficiency of a blockchain network while earning passive rewards. It's a process specific to proof-of-stake (PoS) blockchain networks, which use staking as a consensus mechanism instead of the traditional proof-of-work (PoW) system.

  • Proof-of-work (PoW) uses computational work for block validation.
  • Proof-of-stake (PoS) uses staked crypto and validator consensus.

With PoS, for example, if you ask the group how many grams are in a kilogram and everyone agrees the answer is 1,000 grams, then there is broad consensus over the transactions in each block, and it will validate.

In PoS, validators are chosen based on the amount of cryptocurrency they have staked on the network and are responsible for validating transactions and creating new blocks in the chain. By staking, users pledge their crypto to verify the answer in exchange for generous yields annually on their staked holdings.

Rewards can take the form of newly minted coins or transaction fees distributed in proportion to the amount of cryptocurrency staked. So, the more a user stakes, the more rewards they can earn. Some staking networks also have minimum staking requirements and lock-up periods, meaning users must stake a certain amount of cryptocurrency for a specific minimum time frame to participate in the network and earn rewards.

Many networks offer staking - here are some of the most popular:

Ethereum (ETH), Cardano (ADA), Solana (SOL), BNB Chain (BNB), Polygon (MATIC), Tron (TRX), Algorand (ALGO), Avalanche (AVAX), Cosmos (ATOM), Near (NEAR), Velas (VLX)

But What's Really At Stake?

While crypto staking can be lucrative, like any investment decision, it isn't without risk, and there are drawbacks and perils you should be aware of before jumping in.

  1. Capital At Risk: When staking cryptocurrency, users are required to lock-up their funds for a certain period of time, known as the staking period. During this time, the staked funds cannot be moved or traded, which means users may be unable to access them in the event of a market downturn or other unexpected circumstances.
  2. Crypto Market Volatility: Cryptocurrency markets are notoriously volatile, which means the value of staked funds can fluctuate significantly throughout the staking period. If the value of the staked cryptocurrency decreases significantly, users may lose underlying asset value - even if they earn staking rewards.
  3. Centralization: Some staking networks may become centralized over time, as prominent players with significant amounts of cryptocurrency can exert more control over networks - this could lead to decreased decentralization and security of the network.
  4. Regulatory Risks: The regulatory landscape for cryptocurrencies and staking is still evolving. Governments and regulatory bodies are introducing new regulations and restrictions that may impact the ability to stake cryptocurrency or earn staking rewards.

Liquid Staking - An Alternative To Traditional Staking

We previously mentioned the lock-up period, where users cannot access their assets for selling, exchanging, or collateralizing. In other words, their assets are illiquid.

It's because of this sacrifice that many are hesitant to stake - although you can always stake a percentage of your assets versus going all in, which presents greater risk as per above.

However, liquid staking on specific protocols solves this lock-up/liquidity issue by allowing holders of staked assets to get liquidity in the form of a derivative token that they can use as their staked assets continue to earn rewards. This allows them to access other DeFi services, such as lending and borrowing. It's a way to maximize earning potential while having the best of both worlds, but there are risks here too:

  1. Complexity: Liquid staking involves several complex technical processes, including creating and managing liquid staking tokens and integrating multiple protocols and systems. This complexity can make it difficult for non-technical users to understand.
  2. Security: Liquid staking networks rely on specialized wallets and smart contracts to manage the staking process and generate liquid staking tokens. Any vulnerabilities or flaws in these systems could result in the loss of staked funds or other security issues.
  3. Liquidity: The value of liquid staking tokens may be influenced by market conditions and other factors, which can impact the liquidity and tradability of these tokens making it more difficult for users to convert their liquid staking tokens back into their original cryptocurrency or other assets.
  4. Fees: Liquid staking may involve additional fees and costs compared to traditional staking, including transaction fees and fees for creating and managing liquid staking tokens.
  5. Regulatory Risks: Liquid staking is novel, and there is a risk that regulators may introduce new regulations or restrictions that could impact the ability to participate in liquid staking networks. See 'controversy' below.

Controversy

The U.S. Securities and Exchange Commission (SEC) has not been shy in its opposition to most cryptocurrencies - which they view as illegally unregistered securities in violation of U.S. securities laws.Interestingly, Bitcoin (BTC) does not fall under this categorization in the U.S., where it is treated as a digital commodity.

The SEC aggressively pursued Kraken in the U.S. Supreme Court as it decided its pooled liquid staking program created "investment contracts" and, therefore, is a form of a security.While staking continues to be available in the United States, the SEC took exception to Kraken's pooled service, and many other staking providers are considering their positions.It's important to note that the SEC didn't go after Coinbase or pursue legal action against decentralized liquid staking protocols.

Kraken was forced to pay a $30 million penalty and immediately cease its U.S. staking service.

Luckily, no custodial penalties were handed out, which would have led to calls of #ReleaseTheKraken - sorry, we couldn't resist.

Conclusions

Staking is a novel, unique, and potentially lucrative way for users to earn passive rewards while contributing to the security and efficiency of blockchain networks.

Staking is not without risk, and we favor decentralized, self-custodial staking, where users can delegate their assets while retaining custody of their private keys. As with all investments, there is no such thing as a "sure thing" - your original assets are at the mercy of market conditions.

However, as the popularity of cryptocurrencies continues to grow, staking is likely here to stay but will face more regulatory scrutiny over time.

Key takeaway: You must do your research, understand the risks involved, and only invest what you can afford to lose.

The Self-Serving Savl Bit

Savl is a self-custodial crypto wallet and operates a decentralized staking service.

Presently Savl users can stake their assets on the Solana (SOL), Rose (OASIS), and VLX (Velas Native) networks to get rewards of between 4% - 10% APY. You can learn more here or simply download Savl and head to Services > Staking to explore.

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