The Truth About Crypto Staking
Is crypto staking all that it’s cracked up to be? What are the downsides, if any?
Covered:
- Magic Fiat Money
- The Anchor Example
- What’s at Stake?
- The Lowdown on Staking
Magic Fiat Money
Crypto staking offers yields that traditional savings accounts would blush at, especially in the algo-stable staking world. In this world, cash isn’t trash after all. Imagine a world where you can earn 30% APY on your fiat. In this dreamy, idyllic utopia, fiat is actually a golden goose—a generous goose laying big gains, compounding and amassing right in front of your awestruck eyes.
This isn’t just a day-dreamed fantasy, though. Don’t believe me? Last Thursday, Justin Sun of Tron announced that the well-trodden protocol will launch an algorithmic stablecoin, meant to mimic Terra’s UST. Pegged to the dollar by $TRX and kept at equilibrium by arbitrageurs, Sun is benevolently bestowing ‘cups runneth over‘ for the masses. Indeed, he promises a 30% yield on this new algorithmic stablecoin.
Will Sun be scooping up Bitcoin for reserves like Terra? It appears so. To administer USDD Sun has devised ‘Tron DAO’. “Tron DAO will also provide custody reserves of up to $10 billion in highly liquid assets to serve as collateral backing for USDD.” Do Kwon, the Terra ($UST) magnate, responded favorably to Sun’s mimicry. As a side-note, because Tron is an Ethereum copy/paste, USDD will be available only on Ethereum and BNB (Binance) Chain.
So what does this have to do with staking? As you’ll see, it’s all about staking. Sun is copying Terra’s Anchor Protocol, which offers nearly 20% just to park your $UST. How will this be possible, considering the demand for $TRX is peanuts compared to $LUNA? Many astute analysts see Tron and $TRX as a flailing relic of yesteryear. Of course, that is quite true. Likely, a direct result of that fact galvanized Mr. Sun. Because $UST is the model, we will explain how staking juices the enterprise.
The Anchor Example
Big staking yields on Anchor have made the network catch fire. So, what’s the catch? Quick example: banks never ‘give’ you more savings interest than the rate at which they themselves are borrowing. Why would banks pay someone more than 0.25% when they can borrow at that same rate? Just like banks, Anchor lends out (a portion) of its deposits. In reality, Anchor deposits, which yield ~20%, are not a function of “staking.” Rather, users loan out their deposited $UST. It’s just the same as loaning dollars to a bank for a yield.
Understand that when depositing $UST, you are depositing fiat. The difference is, this algorithmic fiat, in particular ($UST), is backed by $LUNA. How does this work on Anchor? Simple. Borrowers deposit $LUNA or $ETH as collateral to borrow $UST (basically just margin loans). Then, your LUNA/ETH “staking rewards” and the cost to borrow (APR) are passed onto depositors of $UST, which makes up the 20%.
Moreover, borrowers are actually paid to borrow on Anchor via rewards in the Anchor ($ANC) token. “The protocol distributes ANC tokens every block to stablecoin borrowers, proportional to the amount borrowed.” How can they do this? This gets to the heart of the article. Well, they are just printing the $ANC supply, it’s inflation. Currently, though, the distribution versus borrow APR is net negative.
It costs 5.4% APR to borrow on Anchor right now. However, they are still incentivizing borrowing massively by offering 6% back in $ANC tokens, but the borrow APR is 11.4%, which is where the 5.36% number comes from. This APR coupled with the staking rewards from the collateralized $LUNA is where the ~20% yield comes from. As you can see, staking is at the heart of the wild rise of Terra.
What’s at Stake?
There’s a problem, though. The viability of LUNA, UST, and Anchor itself is contingent on one thing: “Can demand outpace inflation?” Staking, which is minting tokens (inflation), is the major incentive element. If there are not enough borrowers, Anchor cannot pay all the $UST depositors seeking that juicy yield. Currently, there are 4x more depositors than borrowers. The wheels only stay on when borrowers have a high-octane incentive, which is supposed to be the disbursing of $ANC tokens t-shirt cannon style to every borrower.
In short, if demand for Anchors token ($ANC) subsides, then the APY plummets for those depositing $UST. However, giving more ANC to borrowers doesn’t intrinsically make it worth more. That is the fundamental problem with staking. Many crypto holders think staking is just free money. But of course, nothing is free, and something is always at stake. In this case, what’s at stake is trusting the very thing crypto people hate the most: printing money that doesn’t exist.
Staking and Proof-of-Stake systems mostly rely on the emission of coins for incentives, protocol upkeep, and security. So does Bitcoin, though. Miners get paid block rewards every block they win. The rewards (halving rate) are cut in half every four years, making bitcoin asymptotically headed to zero inflation. Because of this “incentive death”, people worry that when the block rewards go to zero and there is no tail emission, who will mine Bitcoin anymore and secure the network? However, this is set to occur in 2140.
With most Proof-of-Stake consensuses, coins are pre-mined and distributed to block validators and delegators without computational “work” needed to mine. These emissions are inflationary, plain, and simple. For consensus, it makes total sense. It’s probabilistic, economic game theory design to ensure a protocol organically functions. However, there are trade-offs to these designs. The rich irony lies in smitten crypto retail. They guilelessly lap up inflation (via staking/mining), yet criticize fiat money printing like puritans.
The Lowdown on Staking
To be clear: staking is locking up a single asset to acquire (usually) more of the same token. This is the yield-farming trap. 100% APY seems like a no-brainer, but in reality, the supply is being printed at full-speed, and people are usually selling the asset into other assets. While you gain token quantity, you lose money, mostly. Why would anyone believe there is a force so benevolent as to altruistically offer 100% APY and print you a lambo?
It’s simple: the higher the risk goes, the higher the return can go. Here’s an example of the cannibalism inherent in staking. If 100% of a token is staked and collecting 20% APY, then the token is inflating 20% too, resulting in a 0% APY. Strange when it’s put that way, right? It goes back to the point about Anchor. The only way to counter this and yield a real APY is to hope and pray that demand outpaces this inflation.
Staking is often posited as easy, free, no-risk, etc. So, it’s common for a network to get a high percentage of its tokens staked, pushing false yield onto the stakers further and further. Getting more coins doesn’t mean getting more money. We are guided in crypto by wariness and skepticism, but happily ape into 1,000% yields with no qualms. That’s quite odd, no?
Inflation and tail emissions are a feasible tool for protocol security (there are strong arguments against that approach, here). Nevertheless, the hot and heavy embrace of staking will likely result in unrequited love. When there’s nothing at stake, there’s nothing to gain. What’s at stake with staking is simply very-high-risk and the need for huge demand. This unfettered risk strategy is not the same as calculated risk. Most staking models are folly, built on poor economic foundations. Remember, keep this fact in mind.
It’s nothing more than a digital crypto printer going brrr.
The post The Truth About Crypto Staking appeared first on CryptosRus.
Text source: CryptosRus
