Risks of Multi-Asset Staking and Ways To Solve Them Using CeDeFi
Crypto staking has become a popular way to earn passive income in the cryptocurrency industry for hodlers as well as crypto traders and investors who want to diversify their exposure.
As of September 15, 2021, more than $147B worth of assets is locked in staking contracts across 170 assets. However, the crypto market has only just begun to scratch the surface of the possibility that staking provides.
On average, only about 28% of the token supply of proof-of-stake blockchains are actively staked, and the assets locked in staking contracts only account for about 23% of the market cap of the staking sector of the cryptocurrency market.
At its core, staking is a tool used by proof-of-stake blockchains to get the participants on the blockchain to commit to the wellbeing of the network by committing (staking) their assets directly or through third parties.
In exchange, these stakers get a chance to earn more tokens similar to the way Bitcoin miners earn Bitcoin for running the blockchain. The best part is that staking is more ecofriendly than Bitcoin’s proof of work and it democratizes participation in the running and governance of the blockchain.
Multi-asset staking is a superior form of staking in which participants get to earn rewards paid in multiple different assets when they stake a single asset.
Hence, in contrast to single-asset staking, such as staking Cardano’s native $ADA where you earn only $ADA tokens as rewards; multi-asset staking rewards you with multiple tokens from the same or different blockchains.
For instance, multi-asset staking of $ZCX token on a CeDeFi platform such as Unizen enables you to earn more $ZCX, tokens from Uniswap, tokens for the Binance Smart Chain, and tokens from other blockchains as well.
3 Major Types of Risks Assumed in Multi-asset Staking
Multi-asset staking is potentially more rewarding than single-asset staking, and when executed with the right strategies on the right platform, it could be the perfect passive income vehicle for digital assets.
Nonetheless, multi-asset staking still embodies some overt and covert risks for crypto investors across the financial, operational, and security paradigms.
Financial risks
Probably the most obvious risks assumed when participating in multi-asset staking are the financial risks. To start with, cryptocurrencies are still inherently volatile assets with wild price swings up and down.
As such, locking up crypto assets in staking contracts means that the assets will be locked when the market suffers a downturn and whatever staking rewards you earn may not be enough to account for the loss of value for your crypto assets.
Another financial risk assumed from multi-asset staking is liquidity risk. When assets are locked, some staking platforms may not allow you to exit the position until the end of the staking period.
The lock-up period, in turn, makes your assets illiquid, if the underlying project suddenly runs into trouble and other investors are exiting their positions, it might be difficult for stakers to sell the staked assets in good time.
Another financial risk is the slashing penalty if you stake your tokens with a validator that acts against the network. One of the core tenets of proof-of-stake blockchains is that the stake forces the “miners” to act in the best interest of the network; otherwise, they’ll get punished and lose part of their stake to slashing.
When the “validator” using your stake to participate in the network, contravenes the consensus rule, the stake in their care might be slashed, and all investors whose crypto-assets are staked with the “validator” will lose a pro-rated amount of their staked assets.
Operational risks
A major operational risk that is assumed from multi-asset staking, and indeed, all forms of third-party staking is the counterparty risk that the platform through which you have staked your assets becomes insolvent.
Multi-staking is often custodial in nature and you are trusting another entity with your tokens as well as their private keys. In the event that the staking platform is insolvent, delists the coins, suffers regulatory interference, you may not be able to retrieve the tokens staked on such platforms.
Another operational risk that is assumed in multi-asset staking is that you may never quite know what tokens you’ll receive as rewards. Hence, there is a chance that you’ll be rewarded with tokens of a project with flawed tokenomics, which you might be unable to sell or convert to any other prized crypto asset.
Similarly, depending on the size of your staking portfolio, you may end up receiving dust amounts of some tokens that you won’t be able to sell or transfer to an exchange.
Another operation risk in staking is that the validator node to which your crypto assets were staked might suffer downtime, get corrupted, or struggle to maintain optimal operational requirements; which in turn makes it ineligible to participate in the consensus process and earn block rewards.
The inability of the validator node to earn block rewards will, in turn, impact the staking rewards available to people who stake and you might end up earning lower than expected staking rewards.
Security risks
Crypto investors who invest in multi-staking opportunities also need to be aware of the latent security risks that they are assuming. In 2020, hackers stole about $3.8B from the cryptocurrency industry across 122 hacks and attacks.
Already in 2021, the DeFi industry has suffered about 75% of hacks and attacks, and multi-asset staking falls smack dab in the middle of the DeFi industry. Hence, there’s the risk that the platform on which you are staking your crypto assets could be hacked and you could lose those assets.
Similarly, the validator nodes to which your assets were pledged as part of the staking process could also be compromised due to user negligence or sophisticated attacks that could cause assets pledged to such nodes to be lost.
Innovative Solution to the Risks of Multi-Asset Staking
The risks listed above notwithstanding, multi-asset staking delivers potentially better returns than single asset staking. Unizen is a CeDeFi platform that is mitigating some of the risks associated with multi-asset staking through a mix of organizational and technological innovations.
Unizen is a unique digital asset exchange focused on providing institutional and retail traders and investors globally with access to a fully modular aggregation of CeFi, DeFi, and AI-driven social sentiment indicators: all in one regulatory-compliant seamless user experience.
Starting with organizational innovations, Unizen is pioneering the CeDeFi sector of the cryptocurrency market. CeDeFi, a stylized version of Centralized Decentralized Finance which merges the best features and functionalities of the centralized crypto and decentralized crypto ecosystems.
Hence, when engaged in multi-asset staking, you won’t have to worry about the risks of custodial staking in CeFi exchanges and you won’t worry about liquidity risks of DeFi exchanges.
In response to financial risks, Unizen’s dynamic multi-asset rewards staking platform provides access to staking programs from both centralized and decentralized exchanges to improve the overall quality of liquidity, asset availability, and returns that investors enjoy when they stake their tokens.
Unizen also integrates its multi-asset rewards staking program with Binance Smart Chain (BSC) to provide access to emerging projects and enable exposure to early seed and pre-sale rounds for trendy and up-and-coming projects.
Interestingly, some of those early-stage projects might also allocate some tokens to Unizen, which might, in turn, be vested to people staking on Unizen.
On the security front, Unizen is working on setting up blockchain nodes to distribute rewards to eliminate the reliance on third-party nodes and enable local validation when staking rewards are to be sent to people staking on the platform.
Unizen’s CeDeFi architecture also enables it to vet the quality of projects that its users are exposed to in line with compliance requirements and to ensure access to audited projects.
Is CeDeFi the Future of Digital Assets?
For retail and institutional crypto traders and investors, the emergence of the CeDEeFi sector combining the best of CeFi with the best DeFi holds the potential to usher in the next milestone in the adoption of digital assets.
CeFi has proven itself in delivering regulatory compliance, secure and reliable performance, and deep liquidity. DeFi is marking its mark by ensuring autonomy, user agency, and quasi-private financial interactions.
CeDeFi holds immense potential to attract institutional participation in the crypto economy because it strives to meet conventional financial regulatory standards without compromising on the core tenet of decentralization.
It is somewhat too early to predict if CeDeFi will overtake CeFi and DeFi, but it is fair to expect CeDeFi to trigger the next wave of mass-market adoption for digital assets.
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