Staking your crypto assets with centralized exchanges and staking pools is a bad idea for many reasons, including security and profitability.
In this article, we are going to look at some of the reasons why you should have a second thought about staking with centralized exchanges and other staking-as-a-service (SaaS) providers along with where and how to stake properly.
What is Staking?
Staking is a process where validators (miners) in a proof of stake (PoS) blockchain network bet (stake) their coins to verify the blockchain transactions for a reward.
Why Do People Stake on Centralized Exchanges and Staking Pools?
As clearly stated above, only validators in a proof of stake blockchain network can stake and verify transactions for a reward?
Usually, there is a minimum amount of the coin required for one to become a validator and this amount varies among the different PoS networks.
For example, the upcoming Ethereum 2.0 requires one to have a minimum of 32 ETH in other to become a validator on the network.
At the current price of $225 per ETH, you will need nothing less than $7,200 to become a validator on the Ethereum 2.0 network.
As another example, Tezos (XTZ) –one of the popular PoS blockchains and staking coins requires at least 8,000 XTZ to become a “baker” or validator on the network.
Given the current price of $2.51 per XTZ coin, one will require at least $20,080 to become a baker on the Tezos network.
Not everyone who is interested in staking and the passive income opportunity it presents is willing or even capable of investing these huge amounts.
And that’s why most people stake their small coins with centralized exchanges and staking pools –to participate in and enjoy the passive income that comes with staking without making a relatively huge initial investment.
More so, another valid reason is that most people do not want to get involved in the responsibilities that come with staking or becoming a network validator –voting, verifying transactions, and participating in the decision-making process of the blockchain network.
Thus the easy route is to give someone else your coins who will handle all the technical details while you just collect and enjoy your share of the reward.
Valid reasons –sure yeah! I mean, the convenience and simplicity are awesome.
So should you use these services?
I don’t that’s a good idea for many reasons such as …
3 Reasons NOT to Stake Your Crypto with Centralized Exchanges or Staking Pools
- Fees and Charges
- Poor or Lower Returns
These are the most important reasons why staking your crypto assets with centralized exchanges and staking pools is a bad idea.
Staking your crypto with centralized exchanges and staking pools requires you to send your funds to them and they share the accruing staking rewards with you.
This alone puts at serious risks two critical things:
- The security of your funds
- The security of the blockchain network
a. The Security of Your Funds
Remember, not your keys, not your funds.
And how can you be your own bank when your money is in another person’s vault?
The idea of trusting a third party with your cryptocurrency (for any reason) is against the fundamental principle of cryptocurrency and the blockchain technology –decentralization.
Billions of dollars worth of crypto assets have been lost to exchange hacks, security breaches, and outright exit-scams –most, never to be recovered, ever!
Entrusting the custody of your funds to a centralized exchange or staking pool is one of the fastest ways to get separated from your money permanently for good.
Aside from the argument that the cryptocurrency space is highly unregulated, and in the event that anything bad happens to your funds in some of these exchanges, there’s no guarantee you will ever see your money again.
You are also sacrificing the very thing cryptocurrencies and the blockchain technology was created for –your financial sovereignty and freedom from centralized control of your money.
In most cases, you will eventually lose funds you entrusted to third-parties in the long-run, and that is really an unnecessary and avoidable risk
b. The Security of the Blockchain Network
When you “stake” your crypto assets with exchanges and staking pools, you’re inadvertently giving them your rights to contribute to the decision-making process and ultimately shape the direction the blockchain network should go in terms of development.
And most importantly, theoretically, you’re empowering them (the CEXs) to be able to effectively carry out a 51% attack on the network if they wish by concentrating staking power or network resources in a few hands.
To understand this clearly, let’s examine how a Proof of Stake blockchain works, why staking is required, and what actually happens with staked coins.
How a Proof of Stake Blockchain Works
In a PoS blockchain network, validator nodes help in producing new blocks of transactions –similar to what miners do in a Proof of Work (POW) blockchain network such as Bitcoin.
As compensation for securing the network, these validators receive what’s called the block rewards –paid in the native cryptocurrency of the network.
The more of the coin a validator has staked in the network the higher their chances of being chosen as the validator of the next block of transactions.
For instance, if you hold 25% of the total circulating supply of the cryptocurrency your chance of producing the next block of transactions is theoretically 25%.
Therefore, the size of your stake determines your chance of being selected as the validator of the next block of transactions. And ultimately, the higher your earning (reward) potentials.
More so, in most PoS networks, before any changes are made on the blockchain or before any project is sponsored by the network there must be a consensus (agreement) among the majority of the nodes or validators (stakers).
And this agreement is represented via a voting system.
This is similar to shareholders voting in corporations, in which the more shares (staked coins) you have, the more your vote matters; and the more influence you have in the affairs of the network.
Therefore, if a particular exchange, staking pool, or entity acquires the majority of the stake in the system, they can essentially dictate what happens on the network going forward.
Take as an example, the infamous attempted Steem network takeover masterminded by Justin Sun of Tron and backed (implemented) by a few exchanges –Binance, Huobi, and Poloniex.
The exchanges, using their users’ funds (STEEM) and obviously acting in the interests of Justin Sun, voted against the community to single-handedly take over the Steem chain.
The community seeing the intentions of Justin and his associates decided to give them the middle finger and forked the Steem blockchain to create Hive.
This story is still fresh and the dust from this battle hasn’t even settled yet –a perfect scenario of what can happen when investors ignorantly and irresponsibly assign their stake in the network to third parties.
In most cases, they will vote for their own interests with your stake and there’s very little you can do about that because they control the funds.
These two cases highlighted above are the ways staking your crypto with centralized exchanges will put the security of the blockchain network and ultimately your investment at risk.
2. Fees and Charges
Crypto exchanges that provide staking-as-a-service and staking pools take a cut from every reward you earn through their platform.
For example, on Poloniex and Coinbase, users pay as much as 25% fees on their staking rewards as operating and management expenses.
If you stake your assets with us, your reward will be determined by the protocols of the applicable network. Coinbase will distribute this reward to you after receipt by Coinbase, minus a 25% commission” ~Coinbase.
On KuCoin’s Pool-X, the fee is about 8% and several other pools and exchanges charge between 4% to 25% depending on the cryptocurrency involved and their individual fee policies.
You’re indirectly or is it directly, “sharing” your returns with these ‘legit scammers’ and high street robbers called exchanges.
3. Poor or Lower Returns
Your take-home reward is lower when you stake on exchanges and staking pools compared to staking directly on the network or via decentralized platforms.
This is an obvious and expected outcome of excessive fees and charges by exchanges and most staking pools.
Though some exchanges like Bitfinex and Binance strive to charge the lowest fees possible (zero in some cases) to cover operating costs, the crux of the matter is that you’re not actually going to get the full rewards from staking your coins on exchanges and staking pools –period!
How and Where to Stake Your Crypto Assets
Haven seen the ills of staking on centralized exchanges and staking pools, where it is most appropriate for you to stake even small amounts while maintaining custody of your crypto assets, pay zero fees, maximize profits, guarantee the safety of your funds and helping maintain the integrity of the blockchain network?
Available alternative places to stake properly are:
Decentralized wallets Decentralized Exchanges and Staking Pools.
a. Decentralized Staking Wallets
One of the most sophisticated decentralized, non-custodial multi-cryptocurrency staking wallets used by most people is the Atomic Wallet.
The wallet does not charge extra fees, has several validators (nodes) to choose from, is truly anonymous, decentralized, and non-custodial.
What’s more? You maintain full control of your crypto assets with private keys.
Other notable alternative decentralized staking wallets include:
b. Decentralized Exchanges and Staking Pools
The two other alternatives to staking on decentralized wallets are decentralized exchanges and staking pools that offer the service.
There are very few in this category as much as I know but two of the most popular decentralized staking exchanges are Waves Exchange and IDEX where you can stake with them without sacrificing custody and security of your funds.
Learn how to stake on IDEX and earn Ethereum ETH for helping keep the exchange running securely.
A third is RocketPool –a decentralized Ethereum proof of stake network that supports the incoming Ethereum 2.0 staking.
If you must stake, then stake properly for the security of your funds, profitability, and network security.
According to Paolo Ardoino –the chief technology officer (CTO) at Bitfinex: “Education on the importance of staking from own wallets will be a key factor in order to reduce centralization.”
Staking on centralized exchanges and staking pools is a threat to decentralization, the safety of your funds, your profitability, and the security of the network.
However, it is understandable that not everyone will want to go through the trouble of setting up a node, maintaining custody of their crypto assets, and learn how to stake properly.
Thus, the reason we have decentralized wallets, exchanges, and staking pools that offers this service to fill the gap without compromising on the fundamentals of cryptocurrency.
Embrace and protect decentralization (network security), increase your profitability, and guarantee the security of your funds –avoid staking with centralized exchanges and staking pools.
I especially recommend the Atomic Wallet for your decentralized staking. It’s secure, non-custodial, supports multiple cryptocurrencies, and does a lot more than just storing your crypto assets.
What do you think about staking on centralized exchanges vs staking on decentralized platforms? Share your opinion with us in the comments section below.