Staking this year: Did you make money?

Text: Hoho

Source: Fengchao Finance

Editor’s note: This article has been edited without changing the author’s original intention.

It has been a year since Staking set off a new wave of "everyone mining", and those who are optimistic about it called it the "first year of Staking development". At that time, overseas PoS star projects such as ATOM, ALGO, and VSYS appeared. Among the domestic public chains, Qtum and IOST also followed the Staking economy in the ecosystem.

After a year, did the people who participated in Staking make money? Fengchao Finance counted the top ten projects in the current Staking ecosystem by market value, and roughly estimated the gold standard returns of these projects in the past year based on the expected annualized coin returns and the coin price performance a year ago.

The data table shows that among the top 10 staking projects by market value, only XTZ has achieved profitability on the gold standard, while the loss ratio of the remaining projects is between 40% and 60%, making it difficult for ordinary investors who participate in them to make money.

Node operators who use service fees as their main source of income do not seem to be too worried about the negative impact of falling coin prices. Several staking node service providers told Fengchao Finance that they have been profitable overall after operating the nodes for a year.

The performance of the Staking economy that did not meet expectations directly led TwoBitIdiot, the founder of crypto research company Messari, to describe this model as "stupid". He believes that Staking not only dilutes the value of tokens, but a high staking rate will also greatly increase the possibility of malicious actors conspiring to undermine normal governance voting on the chain.

Participants may need to rethink the risks and problems of the Staking ecosystem.

On April 7, Bitfinex, a long-established digital asset exchange, announced the launch of its Staking service, which will initially support the deposit and interest-earning services for mainstream projects such as EOS and Cosmos (ATOM). Coincidentally, trading platforms such as Binance and BitMax have also recently launched their own Staking sections.

However, this once popular field has not attracted much market enthusiasm now. On social media, large-scale discussions about Staking models and returns still remain in August and September last year. The decline in enthusiasm may be related to the market performance of Staking projects in the past year.

In the second half of last year, Staking set off a new wave of "everyone mining", and 2019 was called the "first year of Staking development" by those who were optimistic about it. At that time, overseas PoS star projects such as ATOM, ALGO, and VSYS appeared. Among the domestic public chains, Qtum and IOST also promoted the Staking economy in the ecosystem, providing investors with the function of "storing coins for mining".

The concept of Staking comes from the word Stake in Proof of Stake (PoS), which refers to the behavior of institutions or individuals obtaining income based on their equity by participating in activities such as voting and verifying blocks in PoS tokens. In simple terms, it is similar to "mining coins with coins".

According to statistics from the Staking Rewards website, as of April 8, more than 90 digital assets were open for staking, with a total market value of US$11.3 billion, of which the total amount of staked tokens was US$7.6 billion, the staking rate was 67%, and the average annualized return on the currency standard was approximately 14.89%.

The market value of tens of billions of dollars does reflect the market size and demand of Staking. According to Staking Rewards data, on April 9, 2019, the total market value of Staking was $15 billion, while the total amount of network staked tokens at that time was $4.1 billion, and the pledge rate was only 27%.

According to the market capitalization ranking, EOS currently ranks first with $3.76 billion, followed by XTZ, XLM, TRX, etc. So, did the investors who followed the trend and entered the market last year make money?

In this regard, Fengchao Finance has counted the top ten projects in the current Staking ecosystem by market value, and combined the expected annualized coin returns of the above assets and the coin prices a year ago to roughly estimate the gold standard returns of these projects in the past year. From the data, among the 10 projects, only XTZ has achieved profitability on the gold standard, and the loss ratio of the remaining projects is between 40% and 60%.

Among the 10 projects, only XTZ achieved profitability on the gold standard

Data shows that as the price of currency continues to fall, the increase in the amount of currency brought about by currency-based financial management is far from enough to offset the financial losses incurred by investors during the process of holding currency due to the decline in currency prices.

At the same time, if the price of the currency rises during the period of earning coins by Staking, investors can enjoy a win-win situation of currency standard and gold standard. However, in the past year, among the top ten Staking projects by market value, only one project has achieved a win-win situation, and 90% of Staking projects have suffered serious losses calculated on the gold standard. If you do not choose to exit, you can only hold the currency and wait for it to rise.

Gold Standard Financial Management has performed poorly in the past year, but the staking rate has been on the rise, from 27% a year ago to 67% today. This means that among the projects that provide staking services, more than half of the tokens have flowed into their respective staking pools.

This brings up an important question: since the price performance of most Staking projects has not been good in the past year, why has the Staking rate increased?

"Because for long-term token holders, participating in Staking can get token dividends, which is better than leaving the coins alone." A staff member of a digital asset wallet told Fengchao Finance, "The Staking industry has begun to take shape, and capital institutions, exchanges, mining pools, wallets and other industry organizations have actively laid out their plans. But from the data, wallets and exchanges are still the gathering places for tokens, so exchanges and wallets that provide Staking services often have a natural advantage."

Among the nodes of a large number of PoS projects that emerged in 2019, exchanges and wallet service providers also accounted for the majority. Among them, mainstream exchanges such as OKEx and Huobi have opened their doors to welcome customers, providing platform users with a more convenient entry point for Staking participation. Some trading platforms such as KuCoin and Gate.io have even adopted a passive financial management model, that is, users can passively obtain Staking income as long as they recharge their accounts without any other operations.

Some exchanges that have launched Staking services

Fengchao Finance consulted multiple Staking node service providers of two projects, and they told Fengchao Finance that they were profitable overall after operating the nodes for a year. Among them, some trading platform nodes even regarded Staking nodes as the main means of increasing income in the bear market.

“When the market is bad, it is difficult to maintain the team relying solely on spot transaction fee income.”

A wallet operator who provides staking services told Fengchao Finance that their income mainly comes from service fees. "No matter how much the price of the currency falls, as long as there are users coming to the platform for staking mining, we can charge service fees." The operator said that they are a smaller service provider and "the net profit of running a node for a month is about 10,000 yuan.

It seems that the decline in coin prices has little impact on node operators who earn service fees. However, some institutions have given up the idea of ​​operating Staking nodes.

“In the middle of last year, we thought about doing Staking nodes, but later due to the instability of the currency price and the large fluctuations in the amount of legal currency income, we gave up.”

The above-mentioned person agrees with the profit statement of the Staking node operators, "This is the scale effect at work." He believes that the losses mainly occur among retail investors.

“When Staking became popular last year, many people participated for the token dividends, because they made money in the bull market and hoarded coins in the bear market. Who would have thought that the market would be bearish for so long. Of course, if you are a believer in holding coins, you can at least hoard more coins by participating in Staking mining, but if you become a long-term coin holder because of Staking, you are likely to lose money in the short term.”

It is difficult for ordinary investors to make money. After one year, the wealth effect of Staking has not yet been demonstrated.

In March this year, TwoBitIdiot, founder of crypto research company Messari, pointed out that "Staking is the stupidest thing I have ever seen in the industry. It dilutes the value of tokens." He believes that some project parties reduce the circulation of tokens to avoid a decline in market value and encourage users to hold them. The opening of Staking will accelerate the demise of tokens.

Currently, the incentive coins for Staking come from the issuance of additional tokens, so PoS tokens are often considered inflationary tokens. Users who participate in Staking can obtain benefits from the issuance of additional tokens, but for holders who do not participate in Staking and are active in the secondary market, the value of the tokens they hold is diluted due to the large amount.

As described by rating agency Tokeninsight last October, no matter how the market value of a project changes, users who participate in staking will always receive inflation benefits, while those who do not participate will always bear losses. Too high an inflation rate will cause a sharp drop in token prices, while too low an inflation rate will not bring enthusiasm for staking users to participate. The agency reminded investors, "Therefore, users cannot simply rely on the rate of return to decide on project investment, but also need to start with research on project quality."

"Some projects offer high returns to attract investors, but in fact there is an inflation rate higher than the market behind them. When a large number of investors pledge tokens, the circulating supply of tokens will become smaller, creating the illusion of stimulating price increases in a short period of time." TwoBitIdiot said.

What’s worse now is that not only does the Staking project have built-in value dilution hidden by high inflation, but the cryptocurrency market has also entered a downward channel. When the price of the currency falls, high inflation becomes worse.

On the other hand, large-scale token staking has also distorted the governance model of the public chain network. Messari research shows that some mainstream exchanges currently control more than 50% of the total amount of staked tokens in staking projects, which has greatly increased the possibility of malicious actors conspiring to undermine normal governance voting on the chain. The incident between the Steem community and Justin Sun showed the negative impact of "large coin holders" on network governance.

After a year of development, the staking rate of tokens has increased significantly. However, the data also shows that when the price of coins falls, the staking income of most projects is wiped out. If you are a fiat currency investor, at least from the current point of view, Staking is not a good investment model. In addition to poor returns, the problems of inflation and node centralization predicted by the industry at the beginning seem to be gradually exposed, and participants may need to rethink this model.

Are you still optimistic about the Staking model?