Platforms Staking of cryptocurrencies used to be in vogue, but now they are being supplanted by cryptocurrency exchanges that open their own Staking arms, but What is cryptocurrency Staking ?.
Although DeFi loans may be the most talked about investment phenomenon, the crypto staking has a lot more money locked up: more than $ 8 billion instead of just $ 1.1 billion (as of June 2020) in dApps loans like Compound.
Staking owes its rapid rise to cryptocurrency exchanges, many of which went into business last year. Before that, the staking market was dominated by niche platforms like Staked.US, Staking Labs, and Stakin. Exchanges like Binance, KuCoin, Kraken, Tidex, OKex, and Bitfinex now account for the majority of staking volumes.
The fine line between staking and lending
In his desire to offer as many investment products as possible, many exchanges have staking and lending accounts. This can be confusing for some investors, as the procedure is very similar: the user deposits coins in the exchange and receives regular payments.
One could speak at length about the technological differences between staking and lending, the main one being that Lenders actually transfer their coins to someone else for you to use while Stakings 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.
Another attractive feature of participation as an investment tool is that a participation can generally be withdrawn at any time and without losing any of the rewards, while the loans (lending) usually have a fixed term and they cannot be easily settled without a loss.
It should also be noted that only PoS (Proof of Stake) coins are stackable outside 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 the other way around. So for example one could lend XTZ, but non-PoS loan currencies such as USDC, USDT and BUSD cannot be easily staked.
Risks vs. rewards
Staking currencies generally offer higher predetermined reward rates compared to lending accounts. For some smaller currencies, the nominal interest rate (or rather, the reward) can exceed 30%, while current loan rates rarely exceed 8%.
However, investors should carefully assess the historical volatility of each currency. It is not uncommon for a PoS currency to appreciate or depreciate 50% or more in a few months. A good example is ATOM, which has lost 40% of its value since early 2020.
On the other hand, lending stable currencies like USDT and USDC is associated with much lower risks, since its price is not subject to volatility. Of course, one must take into account the risk that the borrower may default on the loan, but this is usually solved through over-collateralization schemes.
A shift towards hybrid products
Both exchanges and betting platforms are looking for ways to Combine the attractive staking coin reward rates with the relative security and liquidity of stable coin lending. The result is a new generation of hybrid investment instruments: the staking out of stable currencies. So far there are only a handful of such offerings, including:
- USDC betting on Staked.US (1.0% per year);
- USDT participation in Tidex Exchange (12% annually);
- DAI bet on OKex (4% per year).
Investors should be aware that whenever a platform offers staking services for a currency that is not easily stackable, one of the following two options is usually true:
- A matching staking is created in a PoS coin, and it is that bet that wins the reward. For example, Tidex uses the decentralized stablecoin USD Neutrino in its USDT staking product.
- Lending is offered under the pretext of staking. For example, OKex announces DAI participation, but the official name of the reward is DAI Savings Rate.
For investors with a low to medium risk appetite, these hybrid products offer several advantages. First, such units may be withdrawn in the short term, unlike loans (lending). Secondly, can be used to store value, something that is impossible with highly volatile PoS coins. Finally, a USDT or USDC share is very easy to liquidate once withdrawn.
It remains to be seen if more exchanges develop their own stable coin staking products. For now, This hybrid staking is still a very interesting trend to watch.