Pros and Cons of Staking on Crypto Exchanges

Staking offers on Central Exchanges (CEX) like binance, eToro, Coinbase, octopuses or Kucoin are very popular. They promise their users high returns from Proof-of-Stake (POS) staking within their customer account. At first glance, this type of staking is simple, clear and saves the user from interacting with different networks and wallets.

As is so often the case, however, the devil is in the details and a closer look reveals some disadvantages and criticisms of this variant of staking, which will be discussed in more detail below.

The security of staking

Not your keys – not your coins. Of course, what applies to hodlning also applies to staking. If you stake on central exchanges, you don’t do it yourself, but let the exchanges stake. The operators of the platforms can restrict access at any time. This can have individual, technical, economic or even regulatory reasons and, in the worst case, lead to the total loss of the stake. Even if access restrictions are announced at short notice, the assets may not be withdrawn in time due to lock-up periods.

Crypto staking and hidden costs

Of course, the exchanges do not offer their service without self-interest. The platforms themselves operate active POS validator nodes on which the customer assets are then staked under the same conditions that apply to all users and delegators of the network. The rewards from staking on central exchanges are therefore significantly lower on average than the users achieve natively within the POS projects. Some exchanges try to lure their customers into CEX staking with significantly higher percentages. So offers binance For example, over 30 percent staking yield (APY) for 120 days lock-up on Cosmos (ATOM), although the staking rewards for native on-chain staking are currently hovering around 18 percent.

However, these high rewards are only limited to small amounts, in the case of Cosmos Hub (ATOM), to a maximum of 5 ATOM. Larger amounts of ATOM can currently only be invested for a good 10 percent. And that, although the binding period on Binance is 30 days, a whole 9 days longer than the 21-day period that applies on-chain. It can therefore pay off for Hodler in particular to stake one or more of their projects natively in order not to leave a significant proportion of their rewards to the exchanges.

Staking on Crypto Exchanges: Decentralized?

The security of a POS blockchain depends to a large extent on the amount of all staked coins being distributed as decentrally as possible across many validator nodes and not being bundled within a smaller group. With native staking, network users are free to choose from all validators. binance, Coinbase, octopuses and KuCoin, however, operate their own validator nodes and, due to the large number of their customers, bundle a large proportion of the entire stake on their own nodes. The projects suffer from the increasing centralization of their own security mechanisms. Exchanges can now be found in many POS projects within the top 10 validator nodes. For example, when it comes to staking Solana (SOL), Coinbase takes second place, Binance sixth and Kraken seventh among the validator nodes. At Cosmos (ATOM), Binance is ranked second, Coinbase fourth, and Kraken sixth.

read too

Governance, co-determination and participation

The stakes centralized on exchanges can have even more serious effects on the governance mechanics of individual POS projects. The size of the stake that is delegated to a validator also determines his voting power, ie the weighting of his vote when voting, for example, on changes in the code of a chain. However, since trading exchanges do not allow their staking customers to participate in on-chain voting and usually do not participate in voting themselves, a large part of the voting stake remains unused.

In the worst case, this can lead to the minimum participation in voting not being achieved and necessary updates not being able to be carried out. Hodlers who are concerned about the progress of their POS projects are therefore particularly recommended to get involved in the ecosystem through a native stake outside of the top validator nodes and by participating in governance and not to make it more difficult by conveniently staking on a central crypto exchange.

Airdrops when staking

In addition to numerous airdrops from dodgy sources, which are known to be better off, there are actually those that pay off. In some POS ecosystems, it is common practice that coins or tokens of new projects are initially distributed to loyal users. For example, ATOM stakers have been able to quintuple the value of their portfolios in the past 12 months solely through the airdrops of Osmosis, Juno and Evmos. In total, over 25 airdrops were distributed to eligible accounts within the Cosmos Hub ecosystem. In most cases, however, the accounts of the central trading platforms are not authorized. These are excluded by means of an upper limit for whales, so-called whale caps.

Accounts holding a very large amount of staked assets are often ineligible. Participation in governance is also often taken into account – another reason for exclusion from CEX accounts. Even if an exchange is technically eligible for an airdrop, the coin gifts end up on the exchange’s accounts and are not passed on to customers. They often don’t even know what they’re missing. Central exchanges such as Binance try to compensate for this effect with their own Airdop formats with appropriate marketing. However, these often do not correspond to the dimensions that are distributed natively.