Participation offers on central exchanges (CEX) such as Binance, eToro, Coinbase, Kraken or Kucoin are very popular. They promise their users high returns from Proof of Stake (POS) engagement within their customer account. At first glance, this type of participation is simple, clear and prevents the user from interacting with different networks and wallets.
However, as is often the case, the devil is in the details, and a closer look reveals some drawbacks and criticisms of this staking variant, which will be discussed in more detail below.
The safety of betting
Not your keys, not your coins. Of course, what applies to hodlning also applies to staking. If you bet on central exchanges, you are not doing it yourself, but letting the exchanges bet. Platform operators may 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 participation. Even if access restrictions are announced at short notice, assets may not be withdrawn in time due to lock-up periods.
Crypto staking and hidden costs
Of course, exchanges do not offer their service without self-interest. The platforms themselves operate active POS validation nodes where customer assets are put on the line on the same terms that apply to all users and delegators on the network. Therefore, the rewards from staking on core exchanges are significantly lower on average than what users earn natively within POS projects. Some exchanges try to entice their clients to participate in CEX with significantly higher percentages. For example, Binance offers over 30 percent staking returns (APY) over 120 lock-up days on Cosmos (ATOM), although staking rewards for native on-chain staking currently hover around 18 percent.
However, these high rewards are only limited to small amounts, in the case of Cosmos Hub (ATOM), up to a maximum of 5 ATOM. Larger amounts of ATOM can currently only be invested for a good 10 percent. And that, even though the binding period on Binance is 30 days, a total of 9 days longer than the 21-day period that applies on-chain. Therefore, it may be useful for Hodler in particular to stake one or more of his projects natively so as not to leave a significant proportion of his rewards on trades.
Gambling on crypto exchanges: decentralized?
The security of a POS blockchain is highly dependent on the amount of all staked coins being distributed as decentrally as possible across many validating nodes and not pooled within a smaller pool. With native participation, network users can choose between all validators. However, Binance, Coinbase, Kraken, and KuCoin operate their own validation nodes, and due to the large number of their clients, they pool a large proportion of the total stake on their own nodes. Projects suffer from the increasing centralization of their own security mechanisms. Exchanges can now be found in many POS projects within the top 10 validation nodes. For example, when it comes to staking Solana (SOL), Coinbase ranks second, Binance sixth, and Kraken seventh among validator nodes. On Cosmos (ATOM), Binance ranks second, Coinbase 4th, and Kraken 6th.
Governance, co-management and participation
Centralized staking 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 their voting power, i.e. the weight of their vote when voting, for example, on code changes in a chain. However, since trading exchanges do not allow their participating customers to participate in on-chain voting, and typically do not participate in voting themselves, a large portion of voting participation remains unused.
In the worst case, this can lead to the minimum vote share not being reached and necessary updates not being able to be performed. Therefore, Hodlers who are concerned about the progress of their POS projects are highly recommended to get involved in the ecosystem through native participation outside of the main validation nodes and participating in the governance and not making it more difficult. conveniently staking on a central crypto. exchange.
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Airdrops when betting
In addition to numerous airdrops from dubious sources, which are known to be better, there are actually a few that are worth your time. In some POS ecosystems, it is common practice for coins or tokens from new projects to be initially distributed to loyal users. For example, ATOM participants have been able to increase the value of their portfolios fivefold in the last 12 months solely through airdrops of Osmosis, Juno, and Evmos. In total, more than 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 an upper limit for whales, the so-called whale caps.
Accounts that have a large amount of wagered assets are often not eligible. Participation in governance is also often taken into account, another reason for the exclusion of CEX accounts. Even if an exchange is technically eligible for an airdrop, coin giveaways end up in the exchange’s accounts and are not transferred to customers. They often don’t even know what they’re missing. Core exchanges like Binance try to offset this effect with their own Airdop formats with proper marketing. However, these often do not correspond to the dimensions that are natively distributed.
Do you want to buy Cosmos (ATOM)?
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