Staking and creditingEndy Callahan
In the familiar financial world, you can increase your funds in several ways, depending on the risk. Traditionally, a bank deposit is considered the most stable, almost in-frangible. You give some of your money to the Bank, voluntarily refusing any operations with them, and in return, you get some interest (and, of course, the entire initial amount). At a higher level, in the economy, there are other instruments, such as certificates of deposit, government bonds, etc. But the mechanism is the same: one party gives control of their funds to the other (which, in its opinion, can dispose of the funds more effectively), in return receives part of the income, except for the main amount.
Cryptocurrency has brought new concepts of freedom, primarily financial freedom, into everyday life. But the methods of making a profit may well be traditional. As if this did not go against the basic libertarian freedoms that are declared (and are in the basis of the source code of cryptocurrencies), but the idea of deposits and passive income has firmly penetrated the crypto world.
Staking is a generalized name for a large number of financial and technical techniques, algorithms and schemes that work as a deposit system. At the same time, often, the level of risk is much lower, or even absent (or rather comparable to the basic risk of a particular cryptocurrency as a whole).
Please note that there are a lot of rumors and misconceptions in this area of the crypto economy, so let's try to sort everything out and clarify all the nuances.
In the first place, staking implies a passive income. This means that the maximum that is required from the user is to send a transaction to start staking, the rest is taken over by the network and the node, without requiring any manual control. The parameters of staking can be put directly into the coin Protocol, which in some cases raises the principle of passivity to almost absolute - it is enough just to have coins in your wallet and not spend them. Such a user does not directly participate in the operation of the network of the selected coin for betting, only provides funds.
This part is easy to understand. But then the scheme becomes more complicated. The basic and fundamental difference in the types of staking is in the model of the use of funds. And that's where most of the misunderstandings are. For example, you should not think that staking as a phenomenon is a product of a modern day already sufficiently developed, crypto market. No, certain forms of staking appeared at the very dawn of cryptocurrencies, almost immediately after the birth of the concept of crypto-economics.
And so, let’s explore how are steaks used and how income is generated. The first thing to mention is the blockchains with the Proof-of-Stake consensus algorithm (PoS) and its variants, for example, DPoS (Delegated PoS, the brightest representative - the EOS network, Bitshares and the future Ethereum 2.0), LPoS (Leased PoS, one of the most interesting and the only representative - Waves). The algorithms that use staking can also include a rather rare variant, Proof-of-Importance (PoI), which is used in the NEM cryptocurrency.
The main difference between traditional consensus algorithms PoW and PoS is that in the first case, for a competitive advantage in the network, it is necessary to increase the capacity of the equipment, and in the second - to get user support depending on the specific conditions of the blockchain platform.
And here are the PoS modifications with their own nuances. For example, in DPoS, network members delegate their votes to selected block producers by staking their balances. In the implementation of LPoS, users are presented with the possibility of putting WAVES tokens, for a fee, in leasing to full-nodes of other miners. The larger the balance of the full node, the higher the probability that the node will be selected to create a new block in the network.
The PoI algorithm implements a rating model, which is formed based on the balance of the user and his activity in the project ecosystem. Unlike PoS, where there is a risk of accumulating more balance in one hand and, as a result, centralized control, in the POI consensus, one balance is not enough. A miner may have a higher confidence rating and a lower balance but will get more opportunities to mine a new block.
Currently, about 140 cryptocurrencies operate on PoS, which is about 26% of the total number of cryptocurrencies on its own blockchain (520 + total according to CoinMarketCap), and 5.3% of the total market capitalization as of November 22, 2019.
This percentage, although small, is promising in view of the upcoming update of the second-largest cryptocurrency Ethereum ($16,170,957,930) and its transition to the PoS consensus algorithm (Proof of Stake), which is already fueling interest in staking not only crypto-enthusiasts, but also influential market players.
Recall that the launch of Ethereum 2.0 is announced in 2020, And the Ethereum Istanbul hard fork is scheduled for December 4.
The PoS family algorithms have differences in each of the implementations. For example, oddly enough, the EOS Constitution explicitly prohibits promises and payments of any remuneration for attracting steaks from users. Other projects have their own, different views and can present significant freedom to validators.
In general, the validator in dPoS systems attracts users ' steaks in order to be in the top (in terms of the volume of steaks) and to be able to form blocks, which means to claim the network's reward. These funds itself are not used for anything else rather than rating validators. The actual work (and costs) are borne by the validators themselves, providing the infrastructure for the operation of the blockchain.
At the moment, the lion's share of the market is accounted for by EOS - $2,444,969,445 billion dollars, followed by Tezos, Cosmos, Algorand, Tron, NEM and other major coins. However, despite the high rating of the coins, this does not make them the most profitable. For example, EOS offers from 2.3% per annum, and Livepeer - 81.26%, despite the small volume.
For more clarity on how much this is profitable for validators, let's give the example of EOS, where block producers receive a daily reward of 950 EOS at a price of $2.60 (the price per token on the evening of 22.11.2019), which is about $1 million per year at the current rate. Plus an additional reward of up to 5%, in the form of distribution from the annual issue of tokens, which is also a large sum with six zeros.
Some researchers incorrectly compare Proof-Of-Work consensus and PoS. Despite the obvious differences reflected even in the name, this does not mean that the strengths of both approaches can not be combined. There is such a mechanism as masternodes. And it turns out that this is generally the first version of staking in the entire crypto industry. The concept of mining using masternodes does not depend much on the consensus mechanism. There are also options with PoW and PoS and other options.
Masternodes are nodes in the blockchain network and often work together with conventional mining, although they perform several other functions, receiving a percentage of the reward for the blocks found. For example, Dash masternodes are responsible for conducting instant anonymous transactions, and their owners have a voice in discussions about the further development of the Protocol.
Note: this is a very large market and it has its own rules, it deserves a separate article, there are very interesting points to go over.
Unlike staking in PoS networks, in masternodes you will have to part with your coins in the literal sense - to work, they must be physically transferred to the wallet of the masternode operator. In return, you get a portion of the node's revenue, which can be either fixed or floating. As far as I know, there are no profit sharing mechanisms and return guarantees directly in the protocols, which requires trust in the masternode operator (unlike PoS, where it is at the level of the basic network protocol).
Examples of cryptocurrencies with the ability to purchase masternodes: DASH, BLOCKNET, STAKENET, IMAGECOIN, ZENON, and others. The full list of cryptocurrencies with masternodes can be found at masternodes.pro.
LeasedPoS has gone even further in ensuring safety, without requiring the user to send coins anywhere. On the one hand, leased coins are considered by the network as a node balance and participate in the formation of consensus, on the other hand, they are physically stored on the user's wallet and under his full control.
A reservation must be made. Despite the fact that PoS algorithms and masternodes have been around for many years, the heyday of betting as an economic phenomenon (so much so that some researchers started talking about the introduction of a new term - Staking economics) came only this year. And this is due to the fact that there are convenient and user-oriented services. There were companies that specialize only in staking and if earlier it was purely technical entertainment and available to those who could install a node and play with transactions in the command line, now you can become a participant in the staking economy by simply going to the site and clicking several times on the beautiful and convenient buttons. And then just wait, watch nice graphs of growth of your accumulated income or immediately reinvest it, just like in the best online banking.
Okay, we've looked at stake for PoS networks, where it plays a key role, in fact, as a rating tool to help the network choose a validator for blocks. If we draw an analogy with the real world, this is if the banks received money from the government every year, depending on the amount of deposits attracted. If you got to the top, you will receive money, depending on which place you took.
There is also a variant of “Vice versa" staking, which is difficult to find an example from the usual economy. It is correct to call this option, locking. This is when users freeze some of their coins for a while, getting rewarded for it. However, such a freeze is not the same as in the case of a PoS network. There it is used to provide the internal mechanics of the network. Locking also implies a voluntary rejection of any management of their coins, and no one else, neither the user, nor the organization, nor the algorithms, do not use these funds (or knowledge about them) for any activity.
The economic essence of this action, oddly enough, exists and consists in linking liquidity. This reduces the pressure on the market from the "whales "(holders of large balances of cryptocurrency). This can also be a voluntary step, for example, the management of an ICO project, which has a large number of tokens on hand, voluntarily freezes funds for a long period, a year or two. Market performance from such a step can improve, while there is no loss of capitalization, as when burning coins. Ordinary holders are thus sure, and not just on words, but in fact, that the market will not be flooded with team tokens, which can significantly outnumber tokens for the open sale, and for which often no one paid in real money.
Exchanges, especially large ones, are other players in the locking market (and the first in PR opportunities). For them, this is beneficial, since the offer for locking is often irrevocable or with large fines (that is, you can take the funds ahead of time only after losing part). On the other hand, limits on this can be set in such a way as to attract the part of the audience that, on the one hand, is active and involved in constant trading, on the other, has a significant amount of tokens that may otherwise be put up for sale. And there is a fine line in the gray area. Locking does not carry, as we have already found out, an economic essence and does not serve as a mechanism for multiplying coins (unlike staking in PoS), which means that the exchange must take these funds from somewhere to pay interest. Often this is done by a project deposit (for example, a listing or marketing fee). Or, the exchange, having insider capabilities, knows and takes into account what is not available to others. For example, the imminent introduction of a new trading pair with this token or news about the project that has an impact. And in this way, the exchange attracts new capital, often contributing to the fact that traders have to either go to the market and buy at a higher price assets or "open stashes”, bringing funds to the exchange from their personal wallets.
The locking principle can be used for any asset, native blockchain coin with any type of mining and consensus or any token. If the network supports smart contracts, then all the mechanics are implemented through the contract and you should not worry about your funds (but interest is another topic, unless it is explicitly stated in the code of the smart contract that holds the funds - and this is one of the differences from PoS / dPoS or masternod, where on the contrary, the protocol can guarantee interest payments, but not a refund of the base amount). It should also be noted that locking may not imply accrual of interest - and this is the approach most often used by ICO projects to remove the possibility of pressure on the market supply of tokens. The ultimate case of locking is the burning, voluntary destruction of coins in circulation, after which no operations can be performed with them. The reward for such an action will only be an improvement in the market situation of the coin as a whole (the brightest example is Binance with their burning of the BNB token).
And one more thing - locking is well compatible with another financial principle, Quanto. This is when a certain financial instrument is denominated in one currency, and the settlement of the transaction may be in a completely different one. For example, you buy Bitcoin for dollars, but you pay the commission in ETH. The popular DeFi project Maker DAO, which produces stablecoin DAI, uses something similar.
In our case, exchanges can offer a reward for staking any token or coin, for example, in their exchange token, while the amount of the reward will not be connected in any way either technically or economically with the economy of the coin that is in the stake.
Speaking of Binance, at the end of September, users of the exchange were able to stake coins directly on the platform. At the moment, there are 12 cryptocurrencies available, including: TRON, NEO, Ontology, Vechain, Stellar, Komodo, Algorand, Qtum, Stratis, ONE, Fetch.ai and Elrond. The minimum percentage of coins varies from 1-3%, and the maximum percentage of profit will be 12-14%. For staking, you can make your own deposit or buy coins on the trading platform.
Also since March 2019, Coinbase has launched support for Tezos, which promises investors a 5% return on betting.
However, we know the saying that "money should work” and we would like to see money (coins) bringing benefit directly to both the blockchain network itself and the owner. And there are also such options, all of them are somehow related to lending to other users.
We are talking about landing (Landing or p2p loans) and lending for margin trading.
With landing everything is more or less simple and clear. Some users want to borrow cryptocurrency, others lend it to them. The service brings both of them together on the site, providing some level of security and checks, in return takes a percentage of commissions. The service also allows you to create pools of lenders to issue one large loan to a large borrower. This activity is very close to the classic banking, despite the fact that the assets are understood as cryptocurrencies, the rest is the same as in conventional lending. Including the risks of non-returns, unfortunately.
As an example, you can use the Blockfi service. The service works with Bitcoin, Ethereum and stablecoin GUSD. Since September 2019, restrictions on deposits have been removed, and therefore you can place any amount in cryptocurrency at interest. It is also necessary to take into account that each coin has its own conditions and limits for withdrawal.
Next, let's look at margin lending, this is a purely cryptocurrency invention.
Margin lending is the process of lending money to traders to open their positions in exchange for a daily interest rate.
In the case of a successful trading strategy, the use of credit funds allows you to multiply the profits of traders trading with the leverage.
The cost of a loan directly from the exchange is somewhat more expensive, and therefore the lending market among the platform's users is most interesting. For the exchange, this is also additional risks, so large platforms are increasingly using the p2p margin lending scheme.
If you have a balance on the exchange, you simply place a request for the provision of borrowed funds, like a regular order, and specify the desired percentage of profit per day. This method of making a profit is the safest and does not require a high level of knowledge or experience. In addition, the trading platform itself provides protection for margin lenders and in the case when a trader miscalculated, his position is automatically liquidated, and the borrowed funds are returned to investors.
How much can you earn on exchange lending
Most exchanges allow you to set your own daily interest rate. For example, if you specify a rate of 0.05%, the annual profit will be 18.5%, while the daily interest rate of 0.1% will bring 36.5% interest per annum after interest is accrued.
Note that margin lending is a fairly highly competitive market. There may be offers with more favorable terms, and low demand for loans may mean lower interest rates.
When calculating profits, you must also take into account the commission that the platform charges for each transaction. For example, Poloniex and Bitfinex charge 15% Commission on any interest, while other platforms may have their own margin lending terms.
Margin lending is available on almost all top cryptocurrency platforms. When choosing an exchange, you should pay attention to its reputation, read all the documents and terms of the platform for a better understanding of the provisions and fault-tolerant mechanisms for protecting funds. Well, it should be understood that margin trading is high-risk speculative operations.
Piece of advice
No matter how tempting the offer of long-term loans may seem, keep your positions short. By offering a long-term loan, you risk incurring losses as a result of sharp fluctuations in prices and the inability of the platform to pay off debt on loans. Also, offering a short-term loan guarantees that your balance will be free, for more profitable opportunities, as the situation among lenders changes daily, as well as the average loan rate, you will have the opportunity to provide loans when the interest rate increases.
To minimize risk, you can distribute margin loans on multiple platforms, which will provide better protection in the event of a hack of the exchange. Unfortunately, such situations still happen, only in 2019 there were several hacker attacks on cryptocurrency trading platforms.
Just a few years ago, it was enough to buy bitcoin or collect a portfolio of top cryptocurrencies to get the cherished x's as a percentage after a while. In 2019, crypto enthusiasts expect more opportunities and tools to interact with crypto assets and make a profit. Given how the market is changing in the direction of DeFI, the transition of Ethereum to PoS and the announcement of the launch of projects such as TON and Libra, it is safe to say that the blockchain industry continues to grow and develop, creating an alternative to traditional financial systems and offering more advantages for both investors and ordinary users.
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