Trying to determine where is the best place to park your cash? It is a happy problem to solve and there are always the standard considerations:
1. How much is the return?
2. Is there and how long is the lockup period?
3. Will 100% of the capital be preserved or is there a risk that the capital can totally be lost (or in between)?
4. Does it come coupled with other complex plans (e.g. insurance)
5. How reliable is the issuer/provider of the financial product?
The traditional avenues for investing comes into bonds, stocks and maybe simply putting it into banks for (low) interest. If you are already into cryptocurrency play, staking might be one new area for you to consider.
What is Staking? And what is Soft-Staking?
Without being too technical, Staking has a slight resemblance to a time-deposit or cash deposit. In time-deposit, you put in a fixed amount of cash into an institution (e.g. a bank) for a fixed duration. Upon maturity (typically after a year or more), you get back your capital plus a fixed interest, which is often higher than what you get from your bank account. The interest on a time-deposit typically range between 1% to 3.5% (unless you are in countries with very high inflation – then you might be better off holding other currencies).
Its quite similar for Staking, just that instead of putting cash with a bank, you lock up your cryptocurrency (e.g. into the blockchain network. The % returns from staking is significantly higher than that of a time-deposit and can range from 5% to 20% return per year. Hence, if your cryptocurrency (e.g. Polkadot (DOT), Ethereum 2.0 (ETH)) does not drop in value, you might had gotten much higher returns compared to a Time-Deposit. Staking is a part of a new approach called Proof-of-Stake (POS) in validating blockchain transactions in a bid to minimise what Bitcoin (BTC) is doing now – under a Proof-of-Work (POW) concept where you have miners chalking up enormous electrical usage to raw computing to get the block reward. This is a pretty interesting topic by itself but I’ll leave it out of this post.
Pros and Cons of Staking
Crypto value fluctuates pretty wildly. Staking your cryptocurrency means it is locked up for a specific period and you will not be able to transact (i.e. sell) it if you urgently needed to cash out or if you believe the crypto-value is going to crash. This can be bad for the heart. Soft Staking softens the restriction of a traditional staking by allowing a more timely withdrawal (a few days) and a daily payout. The drawback is the net payout is lower than traditional staking for that added flexibility and the ease from which you can soft-stake.
Additionally, due to the price fluctuation of cryptocurrency, locking up your cryptocurrency can mean opportunity lost from trading which may offers a higher return compared to staking. If the crypto-value goes down, the net returns in USD will be lower even if you sum up the stake rewards. Conversely, you get a double boost if the cryptocurrency goes up in value.
Cryptocurrencies that support Staking
|Cryptocurrency||Staking Rewards (average yearly returns)|
|Ethereum 2.0 (ETH)||~7%|
If you are already holding cryptocurrency and you intend to HODL (Hold On for your Dear Life), you can consider soft-staking your cryptocurrency since it will be idling around with no return anyway. Ideally, your trading platform allows you to stake the cryptocurrency else it will be much more complicated to go the traditional staking route.
If you have not been holding cryptocurrency yet, KIV this post for now. It’s just a new investment avenue to be aware of and for you to do more research on.