Risks of staking ATOM
As a result of the openness of the crypto markets, there are more ways than ever before to earn passively. Staking cryptocurrency has arisen as a common strategy to generate investment income as a result of its ease and minimization of risk when contrasted with other strategies. Although staking is a less risky way to generate yield on crypto assets, like all forms of investing, staking is not completely risk-free.
In this analysis, we will break down three main risks to consider when staking your Cosmos Tokens to ensure that you are fully informed before locking up your ATOM.
A risk that often gets overlooked by investors before staking their crypto assets is negative fluctuations in the price action of the staked asset.
The crypto market is continuously evolving as new products and upgrades are implemented and market cycles take hold. As these evolutions take place, they can directly affect the value of your staked assets.
For example, if you are staking your ATOM at a rate of 20% APY but the value of ATOM drops 65% as a result of market conditions, you will still have made a loss despite gains from your APY.
Before locking up your ATOM it is important to not just consider the APY, but holistically analyze the market.
Liquidity, or the ability to have access to tokens that can be used readily while minimizing price volatility, is another important risk to consider before locking up your assets.
For example, if you are looking to stake an altcoin with a micro-cap and want to realize your gains by selling your asset or converting into BTC or a stablecoin, it will be difficult as a result of lower demand, higher volatility, and lower trading volume than larger tokens.
It is important to remember that your assets will also be illiquid during the period of time your ATOM is locked. Once you commit your ATOM tokens to be staked, you will not be able to sell, withdraw or swap them for another asset until your lock is complete. If you would like to unstake in order to regain your liquidity, there is an intermediary waiting period for your token to unlock. The unlock times vary between assets but in the case of ATOM there is a 21-day waiting period from the time you unstake until the time you regain liquidity over your ATOM tokens.
To avoid illiquidity make sure to be mindful of staking locks and stake assets with high trade volumes on a reputable platform like Omni.
One of the main risks when running a validator node is overcoming the knowledge barrier to obtain the technical abilities to ensure everything is set up correctly. Staking nodes need to be running all the time to obtain maximum returns and disruptions to the staking process minimize this.
There are also penalties that will impact staking returns if a validator node misbehaves. Some of these penalties include:
1. Slashing - when a portion of the validator’s staked tokens is taken away as a result of harmful behavior. This will usually take the form of a percentage. In some cases, there are different percent penalties based on the severity of the behavior. For example, a slashing penalty for downtime may be a small slap on the wrist (.01% loss), while the penalty for double signing could be more severe (5% loss). 2. Jailing - validators are usually jailed for either having too much downtime or for double-signing blocks. Once a validator is jailed it is no longer considered active until it is unjailed.
When running a validator with Cosmos possible penalties include:
Jailing - this happens when the validator's self-delegated stake falls below the limit (i.e. having missed more than 95% out of the last 10,000 blocks), the validator can send an unjail transaction in order to re-enter the validator set. If the jailing is due to double signing, the validator cannot unjail.
Slashing - this happens when a validator commits one of two faults:
Double signing: If someone reports on chain A that a validator signed two blocks at the same height on chain A and chain B, and if chain A and chain B share a common ancestor, then this validator gets slashed by 5% on chain A
Downtime: If a validator misses more than 95% of the last 10,000 blocks (roughly ~19 hours), they are slashed by 0.01%.
The entire guidelines for running a validator with Cosmos can be found here.
While staking is relatively safe, it is important to stake your tokens with the right validator. Learn more about how to stake ATOM.