Risks for miners, stakers and validators: explaining the difference

Speculative hype blows off one by one. But direct cryptocurrency mining remains a reliable source of income.. What risks lie in wait for miners and stakers at the end of 2022? After the change of consensus in Ethereum, the ranks of miners noticeably thinned out. This was especially true for retail miners – for the majority, mining cryptocurrencies using video cards has become unprofitable.. And ASIC mining requires resources that are not available to everyone. On the other hand, the number of stakers, including validators, continues to grow.. Staking returns are significantly lower, but more predictable in the long run. Staking is easier for the user and does not require the purchase, updating and maintenance of hardware, which not only bugs or breaks down from time to time, but also inevitably becomes outdated. From this, a fairly popular point of view has arisen that staking cryptocurrencies is in many ways similar to a bank deposit: you just need to buy coins, put them in your wallet or deposit on the exchange, press a button and receive a stable income. Running a validator node on Ethereum, 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 check how interest is dripping from time to time. Active actions from the staker are required only if they want to switch to another crypto asset or in case of serious incidents. It would seem that staking is just a dream for rentiers living on passive income.. No more anxiety than long-term equity and ETF holders who balance their portfolio once or twice a year. But is everything so calm in staking and all possible problems are solved easier than in mining? Let's try to find all the risk factors that threaten miners, stakers and validators. And then we compare the possibility of their implementation and the degree of impact. Both on the nerves and on the capital of a potential investor. All estimates and forecasts in the article are considered from the point of view of a conditional “retail investor” with investments of several thousand, possibly several tens of thousands of dollars. Corporations and industrial miners are not considered: their opportunities, costs and risks are of a completely different level, so each case should be considered individually. Staking and mining: costs, organization, scaling. Moreover, we will divide the stakers into validators and ordinary users who, for technical or economic reasons, do not have the opportunity to become a validator. dPoS validators in the table are blockchain validators with a limited number of controlling nodes (BNB Chain, Tron, Waves, Bitshares) chosen by voting of coin holders. PoS validators are validators on blockchains with no limit on the number and with free attachment. Conditions Miner Staker PoS Validator dPoS Validator Primary costs Purchase of equipment (a multiple of the price of 1 device), rent of premises, other infrastructure costs Purchase of any number of coins Purchase of the number of coins required by the validator, purchase or lease of 1 device. Requirements are higher than those of PoS validators Operating costs Electricity, rent, depreciation and repair of equipment Minimum, can be ignored Maintaining 24×7 node availability on own or rented equipment Maintaining 24×7 node availability on own or rented equipment commissioning Coin blocking period, depends on the blockchain or intermediary Fulfillment of the requirements for the validator. Coin blocking period, depends on the blockchain Fulfillment of the requirements for the validator. Winning Validator Candidates Vote Dependency of Costs and Profitability Cryptoasset price, equipment energy efficiency, minimal downtime, network connection reliability, pool reliability and commission Cryptoasset price, blockchain reward mechanism, intermediary commission and reliability blockchain protocol Crypto asset price, 24×7 availability, blockchain reward mechanism, fulfillment of blockchain protocol rules, victory in subsequent votes Scaling opportunities Additional purchase or sale of equipment. Step – the price of 1 device Additional purchase or sale of an arbitrary number of coins Purchase or sale of coins, a multiple of the deposit of 1 validator (if there is a limit). Not regulated, subject to compliance with the requirements for the validator Cost and release dates Residual price and liquidity of the equipment Coin unlocking period, depends on the blockchain or intermediary Coin unlocking period, depends on the blockchain. It is possible to force an exception if protocol rules are violated. Coin unlock period depends on the blockchain. Forced exclusion in case of violation of the rules of the protocol or defeat in the election of validators. To briefly summarize all of the above conditions, it is noticeable that for an ordinary staker, the costs and worries are indeed less than for all other categories.. Miners are tied to hardware, and the financial and technical requirements for validators are much higher. However, becoming a dPoS validator is almost impossible for an ordinary user.. To enter the narrow circle of the elite, you need to have not only a fair amount of your own coins, but also to convince thousands or even hundreds of thousands of users to delegate their coins to you. A staker with a small deposit always has to depend on an intermediary. In modern staking protocols, there is no analogue of the solo mining function, and it will not work to hit the jackpot, regardless of the number of coins and the time they have been in the wallet. Everyone who is not able to run their own validator is forced to work through an intermediary – a pool or an 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 stakers, we can move on to organizing and assessing risks. Types of risks in mining and staking Danger can lie in wait for a cryptocurrency investor from various sides. Miners and stakers are no exception here.. They are even more vulnerable because they rely on long-term work. Usually they have to fulfill more conditions and monitor more factors than a stock trader, and even more so a “hodler”. So, let's divide all possible risks into categories. Economic risks The main fear, as well as the biggest hope of any user of cryptocurrencies, lies in their future value.. If the costs of miners and stakers in fiat currency are more or less stable and predictable, then the final profitability always depends on fluctuations in exchange rates. Forecast horizon does not matter. Whether you sell the received coins immediately or want to keep them for many years, the most important thing will be their value in material goods and equivalents on the day you decide to sell them. Miners incur constant high costs for electricity, support and equipment upgrades. Most miners sell a significant share of the mined coins and pay running costs, with the rest of the proceeds transferred to cold wallets, other tools, or new equipment.. Therefore, for them, short-term forecasts and the current profitability of mining are more important than long-term ones.. The main task of the miner is to return the initial costs invested in equipment and infrastructure, after which the “net” profitability begins. A sharp drop in cryptocurrency rates can put miners out of the game without a sufficient financial airbag in fiat. To reduce them, you can work both from the side of increasing the base profitability (overclocking, choosing a pool with a low commission, and so on), and optimizing current costs (purchasing used equipment, searching for cheaper electricity, premises, and so on). Most stakers are focused on long-term holding of coins, and a small share of current profitability or payment of costs from third-party income in fiat currency is enough to finance staking. For stakers, it is not so much the profitability that is important, but the value of the “body” of the deposit. Therefore, their dependence on the asset rate is maximum. While maintaining stable prices for many years, and even more so if they fall, it is unrealistic to “recapture” the initial costs of buying coins. Staking returns in most protocols very rarely exceed 10%, and are often in the range of 2-5%. With a sharp increase in the exchange rate, the cost of the staker's deposit grows in direct proportion, while for miners only the current profitability grows. Therefore, stakers are more concerned about long-term economic forecasts and the prospects for the blockchain they have invested in. The main economic risk for the staker is the multiple or complete depreciation of the coin. In this case, the value of a deposit in fiat currency also tends to zero, and creating a “financial cushion” from current income, like miners, is almost impossible due to low profitability in the short term. Political risks As V.I.. Lenin, politics is the concentrated expression of economics. Regardless of your attitude towards the leader of the world proletariat, it is difficult to doubt the accuracy of this statement.. Therefore, when cryptocurrencies took a prominent place in the economy, they also became a political tool.. Political risks for cryptocurrency users are realized in the form of all kinds of blocking and restrictions. They mainly affect trade and cross-border exchange, but also partially concern “miners”. The persecution of miners by regulators in different countries has been well known 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 the population and businesses.. And some countries have completely banned operations with cryptocurrencies, including mining.. One of the main events of the last year was the exodus of miners from China. Some states in the US and Canada, as well as a number of European countries, are introducing increased tariffs for miners, while others, on the contrary, are trying to attract them.. Such a policy is usually associated with an excess or shortage of local power generation.. This year, the situation is aggravated by an imbalance in the generation and distribution of electricity due to the resource crisis caused by anti-Russian sanctions. There is still no explicit regulation of mining in Russia. Therefore, most miners work without any special risks.. At the same time, there is an active fight against illegal connection to power grids and the use of equipment and other resources for mining in large organizations, including state corporations.. There are already dozens of such cases, but they do not concern law-abiding miners. On the other hand, for all holders of cryptocurrencies, complex risks increase when exchanging mined coins for 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 citizens of the Russian Federation due to sanctions. And the new bill can significantly change the market in the coming months.. Formally, it gives indulgence to miners and may lead to a ban on staking services.. But its wording is not yet clear and acceptance is not guaranteed. When it comes to political risk, stakers are in a better position in most countries.. Due to low energy consumption, staking does not cause pressure from energy and environmental activists, which means there is no reason to limit it.. Even in countries with a ban on the use of cryptocurrencies, you can keep a validator node – it is unlikely that the authorities will be involved in identifying such “violators”, technically it is very difficult. And the use of foreign platforms and cloud hosting to work with cryptocurrencies is even more difficult to control. Infrastructure Risks Infrastructure risks include problems with hardware, climate control, power grids, internet connectivity, cloud hosting, and other aspects that make mining and staking work on the technical side. For a miner, compensation and prevention of infrastructure risks are very important and can eat up a significant part of income.. This is the maintenance and repair of equipment, the organization of a backup power line, Internet connections, the purchase of more expensive components, and much more. Mining hotel operators pass on infrastructure costs to customers, while home miners are forced to independently calculate the ratio of risks and loss of profitability due to additional costs. For a small miner, the failure of one ASIC can “zero out” income for several months or even force them to stop mining. GPU rigs are less risky in this regard, as a replacement of a single component available in retail stores is usually sufficient.. But saving, for example, on buying cheap power supplies can lead to constant failures and downtime. It would seem that staking is minimally dependent on technical infrastructure. For a simple staker that does not act as a validator, this is true. The only thing that can interfere with the work is disconnection from the Internet, but it will not affect the profitability, since the delegation of coins does not require a round-the-clock presence on the network. In the worst case, you will not be able to deposit or pick up coins on time. But for validators, technical infrastructure matters. A long absence from the network can lead to exclusion from the list of validators and even to the loss of part of the main deposit. Therefore, the validator requires reliable equipment with redundant critical components, as well as a UPS and a redundant network connection.. It is rarely possible to organize all this at home, and the costs can be worth several years of profitability.. Therefore, many validators host nodes on rented cloud servers. But the use of cloud hosting, even with undeniably greater technical reliability, is not perfect.. Recently, one of the major cloud providers, the German Hetzner, forcibly disabled all identified clients related to cryptocurrencies.. This caused over 1,000 Solana blockchain validators to go offline.. Hetzner has already announced a ban on the use of its hosting for mining and staking. At the same time, the share of Ethereum validators on cloud servers is still very high.. More than 50% of validators work on Amazon Web Services (AWS) alone. An AWS ban could cause a serious, albeit short-lived, blow to network stability. However, the community has not yet taken serious measures to compensate for this risk. Technological risks To technological risks, unlike failures of equipment and technical infrastructure, we will single out situations associated with software errors and incompetence of developers. They also include a possible change in the periods of blocking coins on the addresses of validators. One of the biggest concerns for Ethereum stakers remains the uncertainty of opening staking addresses for coin withdrawals.. For two years now, they have been working “on the table”, waiting for the opportunity to get access to ETH blocked in staking. And now stakers have completely lost the ability to plan, as the developers refuse to even give an approximate period for unlocking coins. Ethereum killers are no better off. Solana developers promise to fix stability problems in the functioning of the blockchain, but after four major failures during the year, these words need to be backed up with facts. And BNB Chain is completely under the manual control of Binance. This is evidenced by the complete shutdown of the blockchain in October to return stolen tokens after a major hack.. With such radical methods, Binance compensated for the mistakes of its developers in the code of the inter-network “bridge” for sending tokens to other blockchains.. The repetition of such incidents is quite likely. Security risks This category includes various hacks, thefts, vulnerabilities and all other risks of direct loss associated with the activities of hackers and other intruders. Security risks are the most numerous, unpredictable and carry the most serious threats. Both miners and stakers are affected to varying degrees. For miners, the risks of hacking can primarily be the use of mining software or ASIC firmware with built-in backdoors that redirect part of the income to the attacker. An inexperienced miner may fall for, for example, the promise of higher profitability through the alleged use of hidden hardware resources or accusations against pools of hiding part of the income. He will install malicious software or firmware and wait a long time for income growth. If the attacker is not too greedy and “bites off” a small fraction of the hashrate, and also shows slightly inflated numbers in the interface of his program, then the miner may notice something was wrong in weeks or even months. Another serious risk for the miner is a banal fraud when buying equipment. Even experienced miners can get into an unscrupulous supplier, and such cases happen regularly with beginners. For stakers, the main risks are hacking the wallet – both your own and an intermediary (if any). The collapse of FTX shows that even clients of the largest exchanges are not immune to loss of investment. More than 30% of staking ETH is on centralized exchanges, according to September research. But no one can guarantee they won't follow FTX. The same applies to all centralized staking platforms, when the user does not delegate coins, but transfers them to the service address. At least another third of validators are in collaborative staking pools. Even if most of them are decentralized, they are also not guaranteed to be hacked.. The situation is no better on other blockchains. Why the Staking Unlock Period Doesn't Protect Against Hacking Another illusion worth dispelling within the scope of this section. Many Proof-of-Stake apologists claim that when hacking personal wallets, staking protects better than mining. Indeed, if a hacker hacked into the wallet where the miner puts the mined coins, he can withdraw them immediately. And if he hacked a wallet connected to staking, he can only stake coins for a return from staking. After the end of the blocking period, they will not go to the hacker, but will only become available for outgoing transactions at the same address. And during this time, from several hours to several days (on Ethereum – for the time being a couple of years), the owner of the wallet will allegedly have time to take action. But here there is not even one nuance, but two whole. Firstly, miners rarely hold large sums of money in a hot wallet.. They withdraw them to pay expenses, transfer them to other instruments, etc.. Therefore, from the wallet of even a large miner, it will most often be possible to steal his income in a few days, maybe weeks.. It's annoying, but it won't ruin you.. The staker risks all the capital invested in this coin. The second, even less pleasant, nuance is that the “cooling off period” actually does not protect against anything.. If the hacker managed to get the private key from the address or the seed phrase, he becomes the same full owner of the wallet as his victim. And it can carry out exactly the same operations. Once the coins are set for a return (cooldown), it cannot be canceled. You can only wait for the coins to be unlocked and stake them again or transfer them to another address. Firstly, the victim may not check the state of the coins regularly and will not know about the withdrawal in time.. But even if the user knew about the withdrawal of coins from staking right away, he would not have any advantages over the hacker. If the user “on time” found out that his wallet was hacked and the coins were withdrawn from staking, a completely equal competition between him and the hacker begins, who will withdraw the coins faster. And here a skilled hacker, armed with knowledge of technology and scripts, has a much better chance than an ordinary user who most often uses the wallet GUI and, at best, third-party advice. Thus, the “cooling off period” will protect the victim of a hack only when using a verified account on a centralized service, when the victim can request from the operator to block the withdrawal of assets from the account. But this does not apply to direct staking on the blockchain. The best protection against hacks is their prevention, that is, compliance with basic security measures, the use of hardware wallets and multi-signatures. Globality of risks Different types of risks can be divided according to the breadth of their impact. Economic risks are the most global, it is a real weapon of mass destruction for cryptocurrency investors. If the coin falls sharply, everyone will suffer, regardless of the country, jurisdiction or the presence of intermediaries.. Relative protection is provided only by the quality of money management. Political risks operate within one country or group/union of countries. They are compensated by moving or changing jurisdiction – as long as there is something to change for. Technology and security risks are the narrowest, as they affect only one user or group, in the broadest case, within the same platform or blockchain. But they are also the most unpredictable. Results So, we found out that both mining and staking are far from safe activities and do not guarantee income. Therefore, anyone who decides to start mining cryptocurrencies in any form needs to take into account a lot of risks.. For convenience, they are also summarized in a table.. In the absence of multidimensional reports, the cells of the table indicate the severity of the risk to the user, and in the comment – the description, the possibility of prevention, bypass or compensation. Description of the risk (cells indicate importance) Miners Stakers Validators Comment Economic Dependence on the cryptocurrency rate High Critical Critical Stakers have minimal circumvention opportunities Exceeding operating expenses over income Medium None Very low Political Complete ban on activities High Low Low Relocation of equipment or hosting Restriction of individual operations Medium Very low Low Relocation, negotiation, bypassing locks Exchange restriction Medium Medium Medium Search for alternative ways of exchange, unlimited in time Infrastructural Equipment failure Critical Very low Medium Miners are completely dependent on equipment. Validators can transfer the wallet, but downtime can result in a fine. Long outage (downtime) on own hardware Medium Very low High Miners lose operating income, validators part of deposit or validator status Long term reseller/hoster outage Very low Medium High Miners switch easily, stakers lose income during downtime, validator can be penalized or excluded Pool/exchange shutdown Low Critical No Miner risks income below payout threshold, staker with entire deposit. Termination of hosting operator activity High No High Miner risks loss of equipment, validator may be fined or expelled Technological and security risks Changes to the underlying protocol Medium Medium Medium Blockchain instability Low Low Low Loss of income during the downtime period. Miners have higher losses in short-term profitability, but there is a possibility of switching. Hacking equipment (except wallet) Medium Very low Medium Miner loses a share of current income, validator can be fined for idle time Intermediary service hack Low Critical No Miner risks income below the payout threshold, staker all deposit. Hacking a personal wallet Medium Critical Critical The miner risks operating income, the staker and the validator with the entire deposit. We hope this article will help new miners and stakers to better understand the dangers they may face and make better decisions.