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Understand the benefits and risks associated with Binance Staking

2022-05-24

Main takeaway

  • Staking can be an excellent way to increase your cryptocurrency holdings.

  • While it has its benefits, there are associated risks such as slashing, malicious attacks, and stringent technical requirements.

  • Binance Staking can reduce some of these risks and will return the number of tokens staked by a user that would otherwise be lost through slashing.

Binance Staking lets users reap the benefits of on-chain staking through their Binance account. However, as with any financial product, you should always fully understand the risks.

If you’ve been HODLing your crypto while looking for ways to earn, you’ll likely have come across staking. There’s a wealth of opportunities and places where you can stake your tokens to begin earning rewards. This may be as part of a network’s validation mechanism, a liquidity pool, or other staking opportunities. 

For many Binance users, it’s simpler to stake through their Binance account. There’s no need to move your funds or deal with external wallets manually. However, staking with Binance doesn’t remove all the risks involved. 

Let’s break down exactly what Binance staking offers and some of the risks.

What Exactly Is Staking?

First thing’s first, there isn’t just one kind of staking. There are multiple places you can deposit your coins and begin staking to earn rewards. However, the most common ways are through a network’s consensus mechanism or a DeFi protocol.

1. What is Proof of Stake staking?

Proof of Stake (PoS) is a less resource-intensive alternative to Bitcoin’s Proof of Work (PoW) consensus mechanism. Users deposit their crypto funds in a smart contract to perform various network functions (such as validating transactions). In return, they receive staking rewards. The stake incentivizes the maintenance of the network’s security through ownership.

2. What is DeFi staking?

Staking in the DeFi world lets you stake your coins in return for rewards. Among other things, you could stake your coins in a liquidity pool to provide liquidity, or you could stake in a protocol’s reward pool. DeFi staking offers a huge range of opportunities depending on your risk tolerance.

What Are the Benefits and Risks Associated with Staking?

While earning interest on your crypto holdings is incredibly attractive, don’t forget there are risks involved. Like any investment, understanding these risks will help you make more informed decisions on how you stake your tokens and coins.

1. Slashing

Slashing is a common risk on PoS blockchains. If a PoS blockchain validator fails to validate properly, both the validator and the delegators could lose part of their staked tokens or rewards. This is the case if the validator has downtime or double signs on the network.

2. Malicious attacks

Wallet attacks and scams are common in the decentralized space. When users stake their tokens themselves, they should understand the risk of dealing with external wallets, platforms, and actors.

3. Technical requirements

Some blockchains have complicated technical requirements for those who want to stake in their consensus mechanisms. An incorrectly set up wallet may lead to a user’s loss of assets due to improper configuration.

4. Unsustainable tokenomics

It’s essential to carefully investigate tokenomic models and also understand that your fiat-value returns can vary with the market. Token values can fluctuate greatly and are subject to high market risk. You may lose some or all of your investment.

How Can Binance Staking Help?

To help combat some of these risks, Binance staking offers some protections to users. However, there will always be risks associated with any form of staking, even through Binance.

Slashing Risk: Binance Staking takes on all slashing risks for users. This promise means that the same amount of tokens that a user staked will be returned to them. However, the fiat value of the staked tokens may fluctuate, and you may have no recourse for any losses. 

Wallet Attacks and Scams: Binance users reduce their risk significantly of wallet attacks, scams, or theft when operating through a centralized exchange like Binance. Without needing to move funds yourself or manually stake, you can let Binance perform these tasks for you.

Technical Risk: Binance Staking provides simple, one-click-to-stake functionality for 100+ cryptocurrencies. You can also quickly receive, remove, or reinvest your staking rewards without any complex technical knowledge.

Stake with Binance and Start Earning Passive Income Today

Use Binance for More Than Just HODLing and Trading

While Binance cannot remove all the risks associated with staking, there are several tangible benefits if you choose to stake through our platform. As always, you can significantly reduce your overall risk by making more informed investment decisions.

If you would like additional information, the following articles may be of interest:

Risk notice: Cryptocurrency trading is subject to high market risk. Please make your trades cautiously. There may be no recourse for any losses.