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Risks of staking FTM

Risks of Staking FTM

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.

Market Risks

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 FTM at a rate of 20% APY but the value of FTM drops 65% as a result of market conditions, you will still have made a loss despite gains from your APY.

Validator Risks

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 FTM, possible penalties include:

  1. Jailing (Ejection) - When a validator is slashed, it is immediately removed from the group of which it is currently a member. Since no changes in the active validator set are made during an epoch, this means an elected validator continues to participate in consensus until the end of the epoch. The group can choose to re-add the validator at any point, provided the usual conditions are met.

  2. Slashing - the group through which that validator was elected for the epoch in which the slashing condition was proven is also slashed the same fixed amount. A validator or group's stake may be forfeit while it is registered or, after being deregistered, during the notice period (60 days for validators, 180 days for groups) and before the amount is withdrawn from the LockedGold contract.

  3. Suppression of future rewards- Every validator group has a slashing penalty, initially 1.0. All rewards to the group and to voters for the group are weighted by this factor. If a validator is slashed, the group through which that validator was elected for the epoch in which it misbehaved has the value of its slashing penalty halved. So long as no further slashing occurs, the slashing penalty is reset to 1.0 after slashing_penalty_reset_epochs epochs.

While staking is relatively safe, it is important to stake your tokens with the right validator. Learn more about how to stake FTM.

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