Myths and Game Theories of Crypto Staking

What I love about crypto is how often our perceptions turn out to be completely wrong, and how often the people who “know better” (which, let’s face it, is all of us) are reminded of the importance of learning.

No matter how long you have been exploring the crypto ecosystem, or how much of your personal wealth is wrapped up in digital assets, there is always something new to learn about these perceived axioms of the space.

After all, in crypto, even axioms are rarely constant.

Let’s talk about this phenomenon, where almost everything is built on these so-called axioms, many of which turn out to be misconceptions.

Known Staking Risks:

• Volatility
• Lock-Up Period
• Counterparty Risk

The discrepancy between the myths and facts surrounding staking are truly fascinating, and I hope you find some clarity in the examples below:

Myth #1:

I am better off just holding my assets in a cold wallet until the price is right to sell

Justification: This myth is held as an ironclad argument for institutional investors that hold millions or billions in crypto assets, and who want to avoid a counterparty risk by simply sitting on a nice pile of accumulated coins.?

Indeed, while there is some truth to the notion that holding your coins in cold storage instead of placing them with a third-party exchange removes a certain level of risk, in reality this is a false binary. This either/or mentality does a disservice to the myriad possibilities that exist for market participants eager to explore all the opportunities the digital asset space has to offer.

Reality: You do not need to transfer your assets to the 3rd party. Rather, you can delegate your assets to validator nodes while still holding your assets in a cold wallet (your own or the 3rd party’s wallet). Colloquially known as cold staking, this method has the potential to eliminate middleman risks without having to sacrifice the control of your assets, or your potential to earn rewards.

Myth #2:

My coins can only go up in value eventually, so I am fine without staking

Justification: This works for proof of work coins to a certain degree, such as BTC, or any coin whose supply is limited. However, with every new BTC that’s mined, the perceived value of your BTC can go down given the law of supply and demand. This can also be useful if you choose to seize a sudden spike in your crypto assets price and set up limit sell orders to execute such a move.

Reality:?

About 30% of all validation as of today is being done through the proof of stake, as it is more accurate and environmentally conscious. Ethereum, the 2nd most popular coin in the world and the base network for countless other tokens, has recently moved to PoS as well.?

Thus, PoS is rapidly becoming the preferred way to validate transactions on a blockchain, and is increasingly considered a preferable choice for ESG-minded institutional investors.?

Just like in TradFi, the digital asset space falls victim to inflation. The Blockchain Inflation Level refers to the scenario where your coins eventually lose value year over year due to dilution in the market as a result of newly issued coins. Therefore, one solution investors have arrived at to not lose value to inflation is to take part in network validation and receive a yield on your crypto. In the economy of that currency, the network is secured by you, and the network safeguards your purchasing power.

However, economic laws suggest that if everyone staked their coins, then the value of everyone’s coins would go up in unison with inflation. In this scenario, no one is really beating blockchain inflation. Thus, if you stake your coins, you do need people who do not stake theirs to avoid inflation on your assets.

This raises a logical question: Why be the one missing out?

Myth # 3:?

APY is changing all the time and is not to be trusted

Justification: This works APY can change if you sign up for flexible APY. Also, APY is no guarantee of any positive return or the promise your coins ill be there in a year

Reality: APY is the % of return on a staked coin regardless of its price. When staking crypto, you will get the increase in the coins as promised by the APY. In fact, APY has nothing to do with yield unless we live in a perfect world where the price of your coins stays constant and blockchain inflation does not exist. Even if the APY is 5000%, your yield could wind up being negative if your coins lose value below the 5000% APY.

If you decide to beat blockchain inflation and earn rewards on your asset, there are two ways to approach these outcomes :

Non-Custodial Staking:

In this scenario, you maintain the keys to your wallet and crypto assets, and get to decide where and how to stake your coins. However, it is important to consider that with non-custodial staking, you are responsible for keeping track of your keys. If you lose your keys, you lose access to your crypto.

In an environment where many exchanges and companies are going out of business or “getting hacked,” you might feel pressure to maintain control of your assets.

The risks and hurdles with non-custodial staking are obvious: it is up to you to find a trusted validator who follows all on-chain protocols, runs up-to-date software, and tracks emerging opportunities to not miss out on rewards to receive a maximum APY. While you stand to earn more overall from cutting out third-party fees and/or commissions, non-custodial staking is a great solution for someone with a lot of spare time and technical ability to stay agile and track trends.

For the less tech-savvy but still crypto curious, custodial staking with a trusted exchange is the next best thing to a DIY setup.

Custodial Staking:

In this scenario, you transfer your assets to a third-party, normally a centralized exchange, that helps store your coins and provides an APY you agreed on for your assets.

Depending on the exchange, you can choose between a variety of flexible staking options that meet your knowledge-base and risk appetite, while providing peace of mind that your assets and rewards are both safe and secure.?

Once you find a trusted partner for staking your assets, something to consider is the lock-up period required to start earning rewards. A lock-up period can vary from being instantaneous to as high as a month. It is up to you to decide the correlation between the lock-up time and the APY, as well as gauging your own personal risk appetite.?

Main point is - if you are not actively trading your assets and make money on arbitrage, but prefer to HODL, you are much better off taking advantage of staking and network validation for your POS tokens, while you wait for the right price to sell.

Want to know more? CEX.IO has been in this business for its 10th year this year, from mining to staking - feel free to talk to me how to stake your assets safely and with a full regulatory oversight