The practice of staking, a method of earning rewards on a blockchain network, has reportedly seen a surge in the Ethereum ecosystem, with 20% of all Ethereum currently tied up in staking, according to an analysis published on Monday. Some Ethereum developers predict this figure could climb to 50%.
The rise in staking has sparked interest among regular investors who are looking for safe and savvy ways to put their cryptocurrency to work, particularly in the bear market. However, experts have advised caution and due diligence when engaging in staking.
Felix Lutsch, an advisor at staking company Chorus One, compared betting to buying U.S. Treasury Bills. He suggested that personal-level staking is primarily done to avoid inflation from newly minted tokens. Despite the allure of exotic staking opportunities with obscure coins offering high rewards, Lutsch emphasized focusing on why one is staking in the first place.
Paweł Łaskarzewski, a DeFi expert and CEO of Nomad Fulcrum, warned against what he termed as "incestuous collateral," where the collateral backing an asset class is identical to the asset it's backing. He used the example of the 2008 financial crisis when banks' questionable mortgages were backed by similar risky mortgages.
"In the crypto world, the staking solutions are very often connected to some kind of over-collateralized lending protocols," said Łaskarzewski. He cautioned that such over-leverage could result in massive liquidations in crypto with billions lost by users.
Lutsch further advised rookie stalkers not to overlook the underlying project due to being enamored with staking returns. He recommended investing first in a project or token one believes in — like Ethereum — and then considering staking as an additional benefit.
Staking pools like Lido, Stakewise, and Rocket Pool (NASDAQ:POOL) have been highlighted as innovative ideas by Dr. Steve Berryman, CBO of Attestant, a staking company. These pools do, however, contain some extra risk, such as "slashing" or the fact that collateral in Rocket Pool is held in RPL, so a plunge in RPL could leave investors exposed.
Experts have urged investors to vet the underlying project thoroughly and not to get swayed by high yield during a bull market without understanding the system. Lutsch stated, "If you don't trust the underlying project, don't trust the yield."
Above all, experts have suggested embracing boredom as a key principle in staking. According to Lutsch, earning a steady but relatively modest yield over time is the right way to approach staking.
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