5 risks associated to staking and how to mitigate them

As with any type of investment, when it comes to staking, it is also essential to investigate the staking risks you are going to face before putting your funds at stake. Staking, despite being one of the safest ways to generate passive income in crypto today, also presents a series of risks that you need to be aware of and that you need to know how to face or minimize.

Let's take a closer look at the risks associated with staking.

Given that the cryptocurrency market is very volatile, it is advisable to stake projects that you want to keep for the long term. Bear in mind that during the time you keep them in staking, you will not be able to sell the tokens unless you wait for the corresponding blocking period to be able to make the withdrawal, and they may be devalued by the time they are finally released.

The vast majority of PoS networks have a lockout period, known as the unbonding period, which starts from the moment you decide to withdraw your funds from staking. This period is usually one, two or three weeks, and during this time, users cannot use their tokens in staking. The risk of this blocking is linked to the previous point, the volatility of the market, as it may happen that once the tokens are released, their value is lower compared to when you decided to make the withdrawal.

To begin with, you will need a wallet to deposit your funds into, which you will have to connect to the corresponding website from where you can staking. From the moment you connect to the internet, you are susceptible to attack by hackers, viruses or other more elaborate scam techniques, such as phishing.

This is one of the most common risks users face when trading cryptocurrencies and, unfortunately, staking is not exempt from this. Many users, confident that they are dealing with real node operators, hand over the private keys of their wallets to impostors, who then take it upon themselves to empty their funds. Remember that you should never share your keys with anyone; instead, you should keep them in a secure place to which only you have access.

One of the main risks of staking is directly linked to the validator you choose to delegate your funds to. One of the characteristics of PoS networks is that their validators can be slashed if they do not operate correctly. This is a penalty that validators agree to face as a commitment both to the network and to their delegators, since in the event of slashing, the penalty would fall directly on the delegated funds.

What events can cause a validator to be slashed?

• Double signature: in the event that a validator signs the same block twice by mistake, he/she may face severe penalties from the network, such as direct expulsion from the consensus.

• Inactivity: if a validator is downtime and stops signing blocks, it can fall into slashing. This event is more common than double signing, as it can be due to different factors: connection failures, having bad or few peers, having fallen into fork, having limited server resources, lack of node update, etc.

In this case, it is a risk that cannot put your funds at risk, but it can stop you from earning profits. If the validator to which you are delegating your cryptos goes to the inactive validator set, it means that you will stop earning rewards. In this case, it is advisable to keep track of the validators you delegate to in order to re-delegate your cryptocurrencies and not stop earning rewards.

As you have seen, it is essential to make an investment plan and to choose a reliable validator with both a team and a professional service.

In conclusion, there are risks such as market volatility that are unavoidable, and others that can be avoided, or at least reduced, either by keeping your passwords safe, or by choosing the right people to delegate your funds to. It is important that investors conduct thorough research before making a decision about staking and carefully consider the risks and potential rewards. Additionally, it is essential to maintain proper diversification in the investment portfolio, as well as being aware of the news and developments of the project in which you decide to stake.