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Risks of staking ONE

Risks of Staking ONE

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 Harmony Tokens to ensure that you are fully informed before locking up your ONE.

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

Before locking up your ONE it is important to not just consider the APY, but holistically analyze the market.

Liquidity Risks

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 ONE is locked. Once you commit your ONE tokens are 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 ONE there is a 21-day waiting period from the time you unstake until the time you regain liquidity over your ONE 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.

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 Harmony possible penalties include:

  1. Jailing - If any BLS key(s) are detected signing conflicting blocks (i.e. blocks with the same height and view ID but with different block hashes), the validator will be slashed and forever banned from the network.

  2. Slashing - this happens when a validator is double slashing or commits an uptime or unavailability penalty. a certain percentage (i.e. slashing rate) of staked tokens from the validator and its delegators will be forfeited, of which half will be burnt and another half will be credited to the reporter of the double sign event. The slashing rate is calculated by simply summing all the voting power of the double signing keys with a minimum of 2%. For example, if 3 BLS keys with voting power of 3%, 3%, and 4% double signed at the same time, 10% of all staked tokens will be slashed on the validators who hold the 3 BLS keys.

The entire guidelines for running a validator with Harmony 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 ONE with a reputable validator like Everstake.

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