Staking 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) 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 hides in detail and on closer examination there are some disadvantages and criticisms of this variant of staking, which will be discussed in more detail below.
The safety of Staking
Not your keys – not your coins. Of course, what applies to Hodln also applies to staking. Those who stake on central exchanges do not do it themselves, but let the exchanges stake. Access restrictions by the operators of the platforms may occur 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 deducted 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 at 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 natively achieve within the POS projects. Some exchanges try to lure their customers into CEX staking by significantly higher percentages. For example, Binance offers over 30 percent staking yield (APY) for 120 days of lock-up on Cosmos (ATOM), although the staking rewards for native on-chain staking currently commute by 18 percent.
However, these high rewards are only limited to small amounts, in the case of Cosmos Hub (ATOM), to a maximum of 5 ATOMS. Larger amounts of ATOM can currently only be applied for a good 10 percent. And this is despite the fact that the binding period on Binance is then 9 days longer with 30 days than the 21-day period that applies on-chain. Especially for hodlers, it can therefore pay off to stake one or more of their projects natively so as not to leave significant portions of their rewards to the stock exchanges.
Staking on Crypto Exchanges: Decentralized?
The security of a POS blockchain largely depends on the fact that the amount of all staked coins is distributed as decentrally as possible to many validator nodes and not bundled within a smaller group. With native staking, the users of the network have the free choice of all validators. However, Binance, Coinbase, Kraken and KuCoin operate their own validator nodes and bundle a large proportion of the total stake on their own nodes due to the large number of their customers. The projects are suffering from the increasing centralization of their own security mechanics. Exchanges can be found today in many POS projects within the top 10 validator nodes. For example, Coinbase takes second place in the staking of Solana (SOL), Binance ranks sixth and Kraken ranks seventh of the validator nodes. In Cosmos (ATOM), Binance is in second place, Coinbase is in fourth and Kraken is in sixth place.
Governance, co-determination and participation
The centralized stakes for the governance mechanics of individual POS projects may have even more serious effects on exchanges. The amount of the stake delegated to a validator also determines its voting power, i.e. the weighting of its vote in votes, e.g. 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 fact that minimum voter turnout is not achieved during voting and necessary updates cannot be carried out. For hodlers who are concerned about the progress of their POS projects, it is therefore particularly recommended that they get involved in the ecosystem by a native stake outside the top validator nodes and by participating in governance, and not make it more difficult by conveniently staking on a central crypto exchange.
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Airdrops during staking
In addition to numerous airdrops from shady sources, which it is known that you should rather keep your fingers off, there are actually those that pay off. With 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 increase their portfolios fivefold in value in the past 12 months thanks to the airdrops of Osmosis, Juno and Evmos alone. In total, more than 25 airdrops were distributed to eligible accounts within the Cosmos Hub ecosystem. However, in the vast majority of cases, the accounts of the central trading platforms are not eligible. These are excluded by means of an upper limit for whales, so-called whale caps.
Accounts that hold a very large amount of staked assets are often not eligible. Participation in governance is also often taken into account – another reason for exclusion for CEX accounts. Even if an exchange is technically eligible for an airdrop, the coin gifts end up on the accounts of the exchange and are not passed on to the customers. They often don’t even know what they’ve missed. Central exchanges such as Binance try to compensate for this effect by their own airdop formats with appropriate marketing. However, these often do not correspond to the dimensions that are distributed natively.