The ranks of miners have thinned considerably since the consensus shift at Etherium. This especially affected retail miners – for most of them, mining cryptocurrencies with video cards has become unprofitable. And ASIC mining requires resources that are not available to everyone.
On the other hand, the number of stackers, including validators, continues to grow. Staking yields are significantly lower, but they are more predictable over the long term. Steaming is easier for the user and doesn’t require purchasing, upgrading, and maintaining hardware that not only glitches or fails from time to time, but inevitably becomes obsolete.
From this arose the rather popular view that cryptocurrency stacking is a lot like a bank deposit: you just have to buy coins, put them in your wallet or deposit on an exchange, press a button and get a steady income.
Running a validator node on Etherium, Solana, Cardano, and other blockchains that do not limit the number of validators requires more effort and a degree of technical awareness, but it is also enough to run it once and then sit in a chair with a laptop and occasionally check how the interest is dripping. Active action from a staker is required only if one wishes to switch to another cryptoasset or in the event of serious incidents.
It would seem that steaking is just a dream for rentiers living on passive income. No more worrisome than long-term holders of stocks and ETFs balancing a portfolio once or twice a year. But is everything so calm in steaking and all the possible problems are solved more easily than in mining?
Let’s try to find all the risk factors that threaten miners, stackers, and validators. And then let’s compare the possibility of their implementation and the degree of impact. Both on the nerves and on the potential investor’s capital.
All estimates and forecasts in the article are considered from the perspective of a conditional “retail investor” with an investment of a few thousand, perhaps a few tens of thousands of dollars. Corporations and industrial miners are not considered: their capabilities, costs, and risks are on a completely different level, so each case must be considered individually.
Steaking and Mining: Costs, Organization, Scaling
Let’s first break down the major costs of running and supporting a mining or steaking operation into a single cost table. Stackers are divided into validators and ordinary users who, for technical or economic reasons, cannot become validators.
The dPoS validators in the table are blockchain validators with a limited number of control nodes (BNB Chain, Tron, Waves, Bitshares), selected by vote of coin holders. PoS validators are blockchain-based validators with no quantity limit and free joins.
Terms
Miner
Steaker
PoS validator
dPoS validator
Primary Costs
Purchase of equipment (multiple of the price of 1 device), rental of premises, other infrastructure costs
Buy any number of coins
Buy as many coins as the Validator needs, buy or rent 1 device
Purchase the required amount of coins, purchase or rent 1 device. The requirements are higher than those of PoS validators.
Operating costs
Electricity, rent, depreciation and repairs
Minimal, can be ignored
Maintaining 24×7 availability on your own or leased equipment
Maintaining 24×7 host availability on your own or leased equipment
Dependence of mining startup
Equipment delivery time, infrastructure readiness, commissioning
Coin lock period, depends on blockchain or intermediary
Fulfillment of validator requirements. Coin lock period, depends on the blockchain
Fulfillment of validator requirements. Winning the Validator Candidate Voting
Dependence of costs and profitability
Crypto-asset price, equipment energy efficiency, minimal downtime, network connection reliability, pool reliability and commission
Crypto-asset price, blockchain reward mechanism, commission and intermediary reliability
Crypto-asset price, blockchain reward mechanism, 24×7 availability, implementation of blockchain protocol rules
Crypto-asset price, 24×7 availability, blockchain reward mechanism, adherence to blockchain protocol rules, winning subsequent votes
Scaling options
Adding or selling equipment. Step – price of 1 device
Purchase or sell any number of coins at will
Buy or sell coins in multiples of 1 validator deposit (subject to a limit).
Not regulated if validator requirements are met
Cost and release dates
Residual price and liquidity of the equipment
Coin unlocking period, depends on blockchain or intermediary
Coin unlock period, depends on blockchain. Forced expulsion for protocol violations is possible.
Coin unlock period, depends on the blockchain. Forced exclusion for protocol violations or defeat in a validator election.
If we summarize all the conditions listed, it is noticeable that for the average steaker, the costs and concerns are indeed less than for all other categories. Miners are tied to the equipment, and the financial and technical requirements for validators are noticeably higher. However, becoming a dPoS validator for the average user is almost unrealistic. In order to join the select few, you not only have to have a fair amount of your own coins, but you also have to convince thousands or even hundreds of thousands of users to delegate their coins to you;
A stacker with a small deposit always has to depend on an intermediary. There is no analogue of the solo-mining function in modern stacking protocols, and “hit the jackpot” will not work, regardless of the number of coins and the time they are in the wallet. All who do not have the opportunity to run their own validator, are forced to work through an intermediary – a pool or exchange. However, delegation mechanisms are more or less secure if they do not require the transfer of full control over the coins.
Now that we have established the requirements and dependencies for miners and stackers, we can move on to systematization and risk assessment.
Types of risks in mining and stacking
There are many different types of risk for the cryptocurrency investor. Miners and stackers are no exception. They are even more vulnerable because they expect to work long term. They usually have to fulfill more conditions and monitor more factors than a stock trader, much less a “hodler. So let’s divide all the possible risks into categories.
Economic risks
The greatest fear, as well as the greatest hope of any cryptocurrency user is its future value. If the costs of miners and stackers in fiat currency are more or less stable and predictable, the final yield always depends on the fluctuations of exchange rates. The forecast horizon does not matter. Whether you sell the coins you receive immediately or want to hold them for many years, the most important thing will be their value in tangible goods and equivalents on the day you decide to sell them.
Miners incur large ongoing costs for electricity, support and equipment upgrades. Most miners sell a substantial portion of their mined coins and pay their running costs, and move the rest of the proceeds into cold wallets, other tools, or new equipment. So for them, near-term forecasts and current mining profitability are more important than long-term. The main task of the miner is to return the primary costs invested in the equipment and infrastructure, after which the “net” profitability begins.
A sharp drop in cryptocurrency rates can put miners without a sufficient financial safety cushion in fiat. To reduce them, you can work on both the side of increasing the basic profitability (dispersal, choosing a pool with low commissions, and so on) and optimizing operating costs (buying used equipment, finding cheaper electricity, facilities, and so on).
Most stackers are focused on long-term coin retention, and a small portion of the current yield or payment of costs from third-party income in fiat currency is sufficient to financially support stacking. For stakers, it is not so much the profitability as the value of the “body” of the deposit that matters. Therefore, their dependence on the exchange rate of the asset is maximum.
If prices remain stable for many years and even less so if they fall, it is unrealistic to “recoup” the initial cost of buying coins.. Stacking yields in most protocols very rarely exceed 10%, and are often in the 2-5% range.
When the exchange rate rises sharply, the value of a stacker’s deposit grows in direct proportion, whereas for miners only the current yield grows. Stakers are therefore more concerned about the long-term economic outlook and prospects for the blockchain they have invested in.
The main economic risk for a staker is the multiple or full depreciation of the coin. In this case, the value of the deposit in fiat currency also tends to zero, and creating a “financial cushion” from the current income, as for miners, is virtually impossible because of the low yield in the short term.
Political risks
As V.I.. Lenin, politics is the concentrated expression of economics. Regardless of your attitude to the leader of the world proletariat, it is difficult to doubt the aptness of this statement. Therefore, when cryptocurrencies have taken a prominent place in the economy, they have also become a political tool. Political risks for cryptocurrency users are realized in the form of all kinds of blockages and restrictions. They mainly affect trade and cross-border exchange, but partly affect the “miners.
Harassment of miners by regulators in different countries has been common knowledge for many years. In particular, Iran has introduced licenses for miners and periodically bans even licensed miners if their consumption begins to affect the supply of electricity to households and businesses. And some countries have completely banned operations with cryptocurrencies, including mining. One of the main events of last year was the mass exodus of miners from China.
Some states in the U.S. and Canada, as well as some countries in Europe, are imposing higher tariffs for miners, while others, on the contrary, are trying to attract them. Such policies are usually associated with a surplus or shortage of local power generation. This year, the situation is exacerbated by the imbalance between electricity generation and distribution due to the resource crisis caused by the anti-Russian sanctions.
Russia still lacks explicit regulation of mining. Therefore, most miners work without much risk. At the same time, there is an active fight against illegal connections to power grids and the use of equipment and other resources for mining in large organizations, including state corporations. Dozens of such cases have already been filed, but they do not involve law-abiding miners.
On the other hand, there are growing complex risks for all holders of cryptocurrencies when exchanging mined coins into fiat currency: payment for goods and services in cryptocurrencies is prohibited, exchange trading is in a dark gray zone, and many foreign exchanges and exchangers have closed access for Russian citizens due to sanctions. And the new bill could significantly change the market in the coming months. Technically, it gives indulgence to miners and could lead to a ban on steaking services. But its wording is not yet clear and adoption is not guaranteed.
In terms of political risk, steakers in most countries are in a winning position. Because of its low energy consumption, steaking does not cause pressure from energy and eco-activists, so there is no reason to limit it. Even in countries with a ban on the use of cryptocurrencies can keep a validator node – it is unlikely that the authorities will engage in identifying such “violators”, technically it is very difficult. And the use of foreign sites and cloud hosting to work with cryptocurrencies is even more difficult to control.
Infrastructure risks
Risks on the infrastructure side include problems with equipment, climate control, power grids, internet connectivity, cloud hosting, and other aspects that keep mining and stacking running on the technical side.
For a miner, compensation and prevention of infrastructure risks is very important and can eat up a significant portion of income. This maintenance and repair of equipment, arranging a backup power line, Internet connections, the purchase of more expensive components and much more.
Mining hotel operators pass infrastructure costs on to customers, and home miners are forced to calculate the ratio of risk and loss of profitability at the expense of additional costs. For a small miner, the failure of a single ASIC can “zero out” income over several months or even force to stop mining. GPU farms are less risky in this regard, since replacing a single component available at retail stores is usually enough. But saving money by buying cheap power supplies, for example, can also lead to constant failures and downtime.
It would seem that steaming is minimally dependent on technical infrastructure. For a simple steaker that does not serve as a validator, it is. The only thing that can interfere with work is disconnection from the Internet, but it will not affect the profitability, since the delegation of coins does not require round-the-clock presence in the network. Worst case scenario is not being able to put or pick up coins in time.
But for validators, the technical infrastructure matters. Prolonged absence from the network can lead to exclusion from the list of validators and even to the loss of part of the main deposit.
Consequently, the validator requires reliable equipment with redundant critical components, as well as UPS and redundant network connectivity. Organizing all this at home is rarely possible, and the costs can be worth the profitability of several years. That’s why so many validators host nodes on rented cloud servers.
But using cloud hosting, even though it is undeniably more technically reliable, is not flawless. Recently, one of the major cloud providers, German Hetzner, forcibly disconnected all identified cryptocurrency-related customers. This caused more than 1,000 Solana blockchain validators to go offline. Hetzner has previously announced a ban on the use of its hosting for mining and stacking
previously.
That said, the share of Etherium validators on cloud servers is still very high. Amazon Web Services (AWS) alone runs more than 50% of validators. An AWS ban could cause a serious, albeit short-term, blow to network stability. But the community has yet to take serious steps to compensate for this risk.
Technological risks
Aside from hardware and technical infrastructure failures, technological risks include software bugs and developer error. They can also include a possible change in the blocking periods of coins at validator addresses.
One of the most serious issues of concern for the Etherium stackers remains the uncertainty of the opening of the stacking addresses for coin withdrawals. For two years now, they have been working “in the table,” waiting for the opportunity to access the ETH blocked in the stacking. And now the steakers have lost the ability to plan at all, as the developers refuse to name even an approximate period of unlocking coins.
Things are no better for the “Etherium killers”. Solana developers promise to fix stability issues in blockchain functioning, but after four major failures within a year, these words need to be confirmed by facts. And BNB Chain is at the manual control of Binance. This proves a complete blockchain shutdown in October to recover stolen tokens after a major hack. By such radical methods Binance compensated mistakes of its developers in the code of the cross-network “bridge” for transferring tokens to other blockchains. A repeat of such incidents is likely.
Security risks
This category includes break-ins, theft, vulnerabilities, and all other risks of direct loss from hackers and other malicious actors. Security risks are the most numerous, unpredictable, and pose the most serious threats. Both miners and stackers are exposed to them to varying degrees.
For miners, the risks of hacking may lie primarily in the use of mining software or ASIC firmware with built-in backdoors that divert a portion of the revenue to the attacker. An inexperienced miner may be hooked, for example, on the promise of higher profitability by allegedly using hidden resources of equipment or accusations against pools of hiding part of their income. He will install malicious software or firmware and wait a long time for his income to grow.. If the attacker is not too greedy and “bites off” a small portion of the hashrate, as well as showing slightly inflated figures in the interface of his program, the miner can notice the problem in weeks or even months.
Another serious risk for miners is trivial fraud when purchasing equipment. Even experienced miners can get caught by an unscrupulous supplier, and with beginners such cases happen
beginners can get into trouble even with experienced miners.
For stackers, the main risks lie in hacking the wallet – both their own and the intermediary’s (if any). The collapse of FTX shows that even the customers of the largest exchanges are not protected from the loss of investments. According to a September study, more than 30% of ETH in stacking is on centralized exchanges. But no one can guarantee that they will not follow FTX. The same goes for all centralized stacking platforms, where the user does not delegate coins but transfers them to the service address.
At least another third of validators come from co-stacking pools. Even if most of them are decentralized, they are also not guaranteed against hacking. The situation is no better in other blockchains.
Why the steaming unlock period doesn’t protect against hacking
Another illusion worth dispelling in this section. Many Proof-of-Stake apologists claim that stacking protects better than mining when personal wallets are hacked.
Indeed, if a hacker breaks into the wallet where the miner puts the mined coins, he can withdraw them immediately. And if he hacked into a wallet connected to the steikings, he can only put coins on the return from the steikings. After the blocking period is over, they will not go to the hacker, but only become available for outgoing transactions at the same address. And during this time, from a few hours to a few days (on Ether – so far, a couple of years), the owner of the wallet will supposedly have time to take action.
But there is not even one nuance here, but as many as two. First, miners rarely keep large sums of money in a “hot” wallet. They take them out to pay expenses, move them into other instruments, etc.. Therefore, from the wallet of even a major miner most often manage to steal his income in a few days, maybe weeks. It’s unpleasant, but it won’t be the cause of bankruptcy.. Staker, on the other hand, is risking all the capital invested in that coin.
The second, even less satisfying detail, is that the “cooling-off period” doesn’t really protect against anything.. If a hacker manages to get the private key of the address or the seed-phrase, he becomes as full owner of the wallet as his victim. And it can perform exactly the same operations.
Once coins are cooldown, they cannot be reversed. You can only wait until the coins are unlocked and put them back on stacking or transfer them to another address. First, the victim may not check the status of the coins regularly and will not know in time about the withdrawal. But even if the user found out about the steaking coins right away, he will not have any advantage over the hacker.
If the user finds out that his wallet has been hacked and the coins are already withdrawn from the steaking account, there is a fully transparent competition between the user and the hacker to see who can withdraw the coins faster. And here, a skilled hacker armed with knowledge of the technology and scripts has a much better chance than the average user, most often using the graphical interface of the wallet and, at best, third-party advice.
So, a “cooling off period” will only protect a hacking victim when using a verified account on a centralized service, when the victim can request the operator to block the withdrawal of assets from the account. But that doesn’t apply to direct blockchain steaking.
The best defense against hacks is prevention, which means following basic security measures, using hardware wallets and multi-signatures.
Global risks
Different types of risks can also be categorized by the breadth of their impact.
Economic risks are the most global – they are the real weapon of mass destruction for cryptocurrency investors. If a coin has fallen sharply – everyone suffers, regardless of the country, jurisdiction or availability of intermediaries. Only the quality of capital management provides relative protection.
Political risks work within a single country or group/union of countries. They are compensated by moving or changing jurisdictions – as long as there is something to change to.
Technology and security risks are the narrowest, because they apply only to one user or group, in the broadest case, within a single platform or blockchain.
The bottom line
So, we found out that both mining and stacking are not safe activities and do not guarantee income. Therefore, anyone who has decided to engage in any form of cryptocurrency mining should take into account a lot of risks. For convenience, they are also summarized in a table. If there are no multivariate reports, the table cells indicate the severity of the risk to the user, and a description, prevention, circumvention, or compensation options are listed in the comments;
Risk Description
(cells indicate importance)
Miners
Stackers
Validators
Commentary
Economic</span
Dependence on the rate of cryptocurrency
High
Critical
Critical
Steakers have minimal circumvention options.
Excess of operating expenses over revenues
Average
No
Very low
.
Politicalpolitical</span
A complete ban on activities
High
Low
Low
Hardware or hosting relocation
Restricting individual transactions
Average
Very low
Low
Relocation, negotiation, bypassing blockades
Exchange restriction
Average
Medium
Medium
Finding alternative ways to exchange, not limited in time
Infrastructural.
Equipment failure
Critical
Very low
Medium
Miners are completely dependent on equipment. Validators can carry the wallet, but downtime can result in a fine.
Prolonged unplugging (downtime) on your own equipment
Medium
Very low
High
Miners lose operating income, validators lose part of their deposit or validator status
Prolonged shutdown of the reseller/hosting operator
Very low
Medium
High
Miners are easily switched, stackers lose income for downtime, validator can be fined or expelled
Termination of the pool/exchange
Low
Critical
No
A miner risks income below the payout threshold, a staker the entire deposit.
Termination of the hosting provider
High
No
High
Miner risks loss of equipment, validator could be fined or expelled
Technological and security risks
Basic protocol changes
Average
Medium
Medium
Blockchain instability
Low
Low
Low
Dropped income for the downtime period. Miners have higher losses in short-term returns, but there is an option to switch.
Breaking into equipment (except the wallet)
Average
Very low
Medium
Miner loses share of current income, validator can be fined for downtime
Hacking a reseller service
Low
Critical
No
A miner risks income below the payout threshold, a staker the entire deposit.
Breaking into a personal wallet
Average
Critical
Critical
The miner risks operating income, the stacker and validator the entire deposit.
We hope that this article will help novice miners and stackers better understand the dangers they may face and make more informed decisions.