Risks of staking CELO
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 Celo Tokens to ensure that you are fully informed before locking up your CELO.
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 CELO at a rate of 20% APY but the value of CELO drops 65% as a result of market conditions, you will still have made a loss despite gains from your APY.
Before locking up your CELO 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 CELO is locked. Once you commit your CELO 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 CELO, there is a 3-day waiting period from the time you unstake until the time you regain liquidity over your CELO 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. When running a validator with Celo, possible penalties include:
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.
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 forfeited 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.
Suppression of future rewards - Every validator group has a slashing penalty, initially set to 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 the slashing penalty reset epochs.
The entire guidelines for running a validator with Celo 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 CELO with a reputable validator like Figment.