Many people are interested in the possibility of staking altcoins. Altcoins are not as well known as Bitcoin, although they are gaining popularity due to their volatility and possibilities for growth. However, there are risks associated with staking altcoins that potential investors should be aware of.
Before we start looking at the risks, let’s define what staking altcoins is. Staking is when a coin holder uses the coins to validate transactions on the blockchain. Each time a transaction is validated, the holder earns more coins. These coins can then be sold for profit or held to increase their value. The most common way for a developer to manipulate the staking process is by creating multiple accounts and sending them coins from a single wallet address. For example, if a developer has 500 coins in his wallet, he could create three new accounts with 200 coins each and send them all from his main address. The result would be that his accounts would have a higher chance of staking because they were created more recently.
The main advantage of staking altcoins is that they can provide a steady income without too much work. It’s also less risky than day trading and has similar potential for growth over time.
PoS attacks and double-spending
While the mining process is energy-intensive, it is also extremely secure. It’s highly unlikely that a PoW attack would successfully override the existing blockchain (although it can happen). The same cannot be said for proof of stake. The protocols around staking are constantly evolving, but there are some weaknesses. You can gain more knowledge on Altcoins through https://learn.bybit.com/altcoins.
A double spend can occur when an attacker controls more than 50% of a network’s hash rate. This allows them to spend their coins twice, once on the original chain and again on an alternative chain they control. Double spending has occurred in PoS networks, like BlackCoin in 2014 or NAV Coin in 2016. The difference is that it doesn’t require 51% of the network’s hash rate to pull it off. Only 30% is needed because a PoS attacker can validate both transactions at once. Since they own more than half of all coins, they get to choose which chain survives.
Some pools pay on a fixed schedule (e.g., weekly or monthly), while others payout immediately after validating a block. The delay between block validation and reward payment may increase the risk of losing rewards in the case of a fork.
You can only mitigate this risk if you control your coins, e.g., by staking them yourself or running a node connected to a trusted pool. Otherwise, you have to accept the terms proposed by the pool operator, which may include delayed payments.
The most common risk is that the staking pools fail to produce rewards due to bugs in their code or other failures. For example, the pool may fail to accumulate enough stake or process transactions incorrectly and lose money. The risk of such failures is not high for pools with a good reputation and track record. Nonetheless, you should be prepared for this possibility before you start staking.
Loss of anonymity
The main drawback to staking altcoins is a loss of anonymity. Most privacy coins such as Dash and PIVX stake their coins. However, when you stake these coins, your anonymity is lost if you are using them on a web wallet or an exchange that is not anonymous. For example, if you stake 100,000 coins at once and then sell them all on an exchange, you will probably get flagged by the exchange for unusual activity. The same is true if you stake 1,000 coins per week and sell them. If you want to avoid this, it’s best to break up your trades over a long period or use more than one exchange.
Also, other problems may arise when getting your coins back out of cold storage. For example, if you stake a coin but fail to move the appropriate funds from cold storage to your hot wallet before it matures, you may be stuck with the coin until it matures again or until you can convince someone else that it’s worth their time to stake the coin for you.
In cases where you have to send in your private key for staking, there is always the risk that your private key will be stolen. That’s why it’s so important to research any service that requires a private key before sending in yours. You might also want to create a unique wallet just for staking purposes and keep only a small portion of your holdings there.
Stake grinding is a risk for altcoins with a large supply and low market cap. This can be seen in Reddcoin. The attacker has enough money to buy large amounts of the coin (with low market cap coins, this would be in the millions and could be an insignificant amount of money for the attacker).
The attacker then buys them, leaving them on one account, but only staking them from another. Since the coin has a low market cap, the attacker can buy such a high amount of coins that they own more than 50% of the total supply. He then transfers those coins to another address (without moving them off the exchange), which means he has 100% control over those coins. He now has two wallets – one with all his coins which are unstakeable, and one with no coins but with a large amount of weight since it’s been staking for a long time.
The attacker starts a stake grind attack by sending small amounts of these coins to himself repeatedly to generate as many blocks as possible. The transaction fees would be very low since he is only sending small amounts of RDD at once – perhaps 1 or 2 RDD at a time, or even less.
There are also financial risks associated with staking altcoins, including liquidity risk (liquidity risk: In finance, liquidity refers to how easily an asset can be converted into cash without affecting its price.) and interest rate risk (interest rate risk: In finance, interest rate risk refers to the probability that interest rates will change in such a way as to impact upon returns or liabilities).