Risks Of Staking

Nov 25, 2021 | 3 minutes read

In this post we’d like to give an overview of the risks involved when staking. Although staking as a concept is the same across different Proof-of-Stake blockchains, the implementations can differ from blockchain to blockchain.

In Cardano, the process of staking your ADA does not add any additional risk. In other words, it does not make a difference in terms of risk whether you stake your ADA or it just sits in your wallet unstaked. This is because your ADA does not actually leave your wallet. You are only delegating your “voting power” to the pool. For that voting power you (potentially) get rewards.

This means, for example, should the pool retire or suffer from some sort of cyber attack it would not put any of your funds at risk. A malicious pool owner cannot take control of your funds in any way. The only thing that can happen is that you miss out on some potential rewards that the pool was not able to generate due to that “bad” event.

However, in order to be able to delegate your ADA to a pool of your choosing you need to be in control of the cryptographic keys of your wallet. On an exchange you can send your funds to other wallets, but you are actually not in control of your keys. You trust the exchange to handle the keys properly, i.e. keep them secure, back them up in case of crashes etc. If the exchange suffered from a cyber attack, your keys and therefore also your funds would be at risk of being stolen. But it actually does not have to be a hacker event that takes your funds. The exchange could be located in a country where the government is less trustworthy and they decide to force the exchange to hand over all their keys in custody… and whoooop gone are your funds. As they say:

Not your keys, not your coins.

On the other hand, if you store your funds in your own wallet (software wallet, hardware wallet, etc.) you are in charge of making sure that the keys don’t get compromised. And that’s where the risk comes in: Where/how do you store these keys? If you have your funds in a software wallet on you laptop, you better make sure that no one can access these funds maliciously (virus, trojan, …) or by accident (your child “plays” on your device). With a hardware wallet you have to think about where to store it physically. You get the gist.

Every option has advantages and disadvantages. Questions that might be helpful for making up your mind:

  • Is it worthwhile for the amount of funds I own?
  • What do I feel comfortable with?
  • Am I in for the short-run or the long-run?
  • How trustworthy is my exchange/bank/government?
  • Do I understand what I am doing/about to do?