Crypto staking platforms used to be all the rage, but they are now being supplanted by crypto exchanges opening their own staking arms, but what is crypto staking?
While DeFi lending may be the more talked-about investment phenomenon, crypto staking has much more money locked up in it: over $8 billion as opposed to just $1.1bn (as of June 2020) in lending dApps like Compound.
Staking owes its rapid rise to crypto exchanges, many of which got into the business last year. Before that, the staking market was dominated by niche platforms like Staked.US, Staking Labs and Stakin. Now, exchanges like Binance, KuCoin, Kraken, Tidex, OKex and Bitfinex account for most of the staking volumes.
The fine line between staking and lending
In their desire to offer as many investment products as possible, many exchanges feature both staking and lending accounts. This can be confusing to some investors, since the procedure looks very similar: the user deposits coins on the exchange and receives regular payouts.
One could talk at length about the technological differences between staking and crypto loans, the main one being that lenders actually transfer their coins to someone else to use, while stakers only delegate their assets, maintaining full control over them. From the investor’s point of view, this means that with staking there is no risk of default, because there are no borrowers.
Yet another attractive feature of staking as an investment tool is that a stake can usually be withdrawn at any moment and without losing any of the rewards, whereas crypto loans normally have a fixed term and can’t be easily liquidated without a loss.
It should also be noted that only PoS (Proof-of-Stake) coins are stakable out of the box.
These include Tezos (XTZ), Cosmos (ATOM), LOOM, USD Neutrino (USDN), KAVA, and several dozen more. Any PoS coin can also be used for lending purposes, but not vice versa. So, for example, one could lend XTZ, but one can’t readily stake non-PoS lending coins, such as USDC, USDT and BUSD.
Risks vs rewards
Staking coins generally offer higher default reward rates compared to lending accounts. For some smaller coins, the nominal interest (or rather, reward) rate can exceed 30%, while current lending rates rarely exceed 8%.
However, investors should carefully evaluate each coin’s historical volatility. It’s not uncommon for a PoS coin to appreciate or depreciate by 50% or more in a few months. A good example is ATOM, which has lost 40% of its value since the start of 2020.
On the other hand, lending stablecoins like USDT and USDC is associated with much lower risks, since their price isn’t subject to volatility. Of course, one should account for the risk that the borrower can default on the loan, but this is usually taken care of through overcollateralization schemes.
A shift towards hybrid products
Both exchanges and staking platforms are searching for ways to combine the attractive reward rates of staking coins with the relative safety and liquidity of stablecoin lending. The result is a new generation of hybrid investment instruments: stablecoin staking. So far there is just a handful of such offers, including:
- USDC staking on Staked.US (1.0% a year);
- USDT staking on Tidex Exchange (12% a year);
- DAI staking on OKex (4% a year).
Investors should be aware that, whenever a platform offers staking services for a coin that is not readily stakable, one of the following two options is usually true:
- A matching stake is created in a PoS coin, and it’s that stake that earns the reward. For example, Tidex uses the decentralized stablecoin USD Neutrino in its USDT staking product.
- Lending is offered under the guise of staking. For example, OKex advertises DAI staking, but the reward’s official name is DAI Savings Rate.
To investors with a low-to-medium appetite for risk, these hybrid products offer several advantages. First, such stakes can be withdrawn upon a short notice – unlike loans. Second, they can be used to store value – something that is impossible with highly volatile PoS coins. Finally, a stake in USDT or USDC is very easy to liquidate once withdrawn.
It remains to be seen if more exchanges develop their own stablecoin staking products. For now, such hybrid staking remains a very interesting trend to watch.