Staking Risks: What are the Risks of Staking Crypto

#TL;DR

• Staking can be lucrative, but it carries a range of risks every crypto investor must understand
• Market volatility, slashing penalties, and validator risks are all major factors that can affect your staking rewards. Other factors such as technical complexities, regulatory uncertainties, and smart contract vulnerabilities can also affect staking rewards.
• Staking is not a set-and-forget passive way of earning money, but it requires active management and high vigilance. Being knowledgeable about staking mechanisms and staking risks is important in decision-making.

This guide provides a comprehensive overview of crypto staking risks. I'll cover the economic, operational, technical, and regulatory challenges, along with practical tips to help users make informed staking decisions.

#What is staking in crypto?

Staking is a method of earning rewards by utilising your cryptocurrency to secure the blockchain, thereby enabling the blockchain network to operate smoothly. When you stake, you lock your assets, typically for a particular period, and get a reward.

Stakers on the blockchain are like bookkeepers who check every transaction, ensure its validity, and propose new blocks to maintain the integrity of the blockchain. They help verify transactions and ensure that the person sending the transaction has the necessary funds.

In essence, stakers ensure that only legitimate transactions are added to the network, and for their efforts, they get fresh emissions of cryptocurrency for every block they help to validate.

#How does staking work: Different types

In recent years, crypto staking has evolved from simple validator nodes to a sophisticated financial infrastructure, processing billions of dollars in staked underlying assets. Over time, staking has evolved from just locking cryptocurrency for fixed rewards to more complex mechanisms, which include:

• Liquid staking: Where you get a tradable Liquid Staked Token (LST) that represents the value of your staked assets.
• Delegate Staking: You delegate your tokens to trusted validators or node operators without transferring ownership of the tokens.
• Restaking: Pioneered by protocols like Eigenlayer, Restaking allows previously staked assets to be restaked to secure additional services, helping to increase capital efficiency.

#What are the risks of staking crypto?

As staking evolved from simple staking to token delegation and into complex layers involving liquid staking, restaking and modular shared security, the surface area of risks has also increased. For example, staking allows assets staked in one protocol, such as Ethereum, to be used to secure additional services like data availability layers. Even though this expands utility, it also increases the risk surface.

For this discussion, we will classify these staking risks into four broad umbrellas, which are:

• Economic risks include illiquidity and market volatility.
• Operational risks, which include slashing and validator downtimes
• Technical risks, which include smart contract vulnerabilities
• Systemic risks, centralisation, and government regulation

#1. Illiquidity risk

Traditional staking involves locking your assets for a time period. During this time, you can't access or sell your tokens. This can pose challenges if you need your staked assets during emergencies or during market downturns. Market volatility can also affect the value of staked tokens and can lead to price drops that, if very severe, could outweigh the staking reward rates.

Liquid staking attempts to solve this by issuing tradable Liquid Staked Tokens (LSTs) to represent staked assets, but redemptions are still subject to the original network unbonding period delays of 2-21 days, during which the tokens remain locked and illiquid, making them vulnerable to price swings.

#2. Slashing and penalties

Slashing results from double signing by attesting to conflicting blocks, extended downtime, or a prolonged period of inactivity by a validator, leading to a full loss or partial loss of staked assets, affecting both validators and their delegators. Slashing serves as an incentive for proper consensus and acts as a deterrent for malicious or irresponsible behaviour within the blockchain network.

Active network participants function as whistleblowers, detecting and reporting rule violations. When a validator is found guilty of misconduct, they face penalties, and as a form of incentive, whistleblowers receive a portion of the collected penalties as a reward.

This is a penalty that validators agree to as a commitment to both the network and their delegators. Slashing and penalties work to stop malicious actors from attacking blockchains. Slashing can lead to loss of your principal stake, especially if you delegate it to a misbehaving validator. The extent of this loss depends on protocol rules.

Pro Tip: Before choosing a validator, take a holistic look at the validator and check strong track records, consistent uptimes, and also prioritise validators that offer slashing protections. This adds an extra cushion of safety.

#3. High validator fees

Validator fees in cryptocurrency staking are fees accrued when you delegate your coins and tokens to network validators. These fees compensate the network validators for their technical and operational efforts, such as server maintenance and electricity costs. Validator fees range from 5-20% and very high validator fees can reduce your profit margin in staking, as these fees are deducted from generated staking rewards.

Pro Tip: Use on-chain analytic tools to compare validator performance and fees before delegating.

#4. Smart contract risks

As an individual looking to stake your cryptocurrency, you can choose to delegate staking responsibility to centralised exchanges or use staking providers. These two options provide a unique smart contract dilemma.

A key feature of the use of DeFi platforms is smart contracts. Smart contracts are self-executing contracts with predefined terms that are triggered automatically when certain conditions are met. By automating and simplifying many processes, they are at risk of technical issues (coding errors) and security vulnerabilities like hacks. Major hacks such as the Ankr exploit that led to a loss of over $5 million show how smart contract flaws can undermine staking.

Defi platforms are also ‌less regulated, meaning they are not subject to strict regulatory and security standards as centralised platforms.

Pro Tip: Stake with platforms that have gone through an extensive audit by top auditing firms and well-established staking platforms. To reduce the risk of bugs in a single software client, encourage robust multiple independent client implementations.

#5. Operational complexity

Like every other aspect of cryptocurrency, staking is full of technical terms and processes. One wrong move can lead to financial loss, and so it's important to make informed decisions. There might be a long tail risk of bugs or vulnerabilities in the code, and there is also a risk of loss of funds. Those new to the field may face obstacles in managing staking operations effectively.

Pro Tip: Understand how staking works, the underlying technology, and how to prevent slashing penalties. Alternatively, you can stake with trusted providers and always learn before acting in order to make informed decisions.

#6. The regulatory risky ride

The regulatory landscape presents an evolving challenge for stakers. The government’s classification of staking rewards as securities, registration requirements for staking services, and compliance obligations for participants raise a lot of regulatory uncertainties.

The European Union passed the MiCA bills, which aim to safeguard investors' interests. Under the MiCA legislation, one has to provide all the details that could avoid the possibility of money laundering. In the US, the SEC crackdown on staking-as-a-service models such as Kraken shows increasing scrutiny over staking programs.

The topic of taxation is also another important talking point. Many countries regard rewards from staking as taxable income. With the government trying to increasingly regulate staking and other cryptocurrency services, new regulations can significantly affect staking rewards or even freeze your assets.

Pro Tip: Always be on the lookout for changes in regulation, depending on where you live, and be prepared for changes in regulation and tax implications in the future.

#The centralization dilemma

In most Proof of Stake (POS) networks, stake is highly concentrated in the hands of a few large validators, and as such, the staking process is exposed to increased centralisation and increased risk and vulnerabilities that come with centralisation.

As of early 2025, Lido alone accounts for over 30% of staked ETH, raising concerns about governance captures and liveliness failures if dormant operators go offline.

What’s more, staking incentives are often structured to favour the biggest players due to their higher visibility, delegation, and slashing insurance, and this undermines decentralisation and makes networks vulnerable to coordinated censorship and downtime.

Risk of running your validator node: Running a validator node comes with specific risks, and it requires extensive technical knowledge. Building and maintaining a staking system can entail substantial costs, which include hardware, infrastructure, security, and ongoing maintenance expenses.

Little mistakes in setup and maintenance can lead to significant problems. Running your node also means that you are solely responsible for security and providing infrastructure. The high cost of hardware, software, and electricity can be financially burdensome. You also run the risk of protocol slashing when nodes malfunction or are mishandled.

#The (s)takeaway: Is staking crypto worth it?

Staking strengthens blockchain security and offers returns. This is not without its own unique risks or complexity. Staking is a security function, a capital commitment, and a technical responsibility. And ignorance is not forgiven but punished.

To properly utilise the technology and benefits of staking, you need to do your research, understand various protocol designs, and choose staking options that align with your technical comfort and risk tolerance.

Please note: This content is offered solely for informational purposes and does not constitute investment advice, financial advice, or any form of trading advice. It is important to remember that staking, like any other cryptocurrency or financial activity, is not without risks, and users are liable for any loss accrued.