Crypto Staking – Sweet Taste, Slow Poison – Cryptopolitan
Since blockchain went mainstream, the bandwagon effect has hit the industry like a hurricane. The relatively young sector tends to follow predictable scripts, with one success story inspiring knockoffs and copycats with redundant innovations built on inadequate preparation, expertise, experience and dedication.
This article will examine why careless promotion of betting programs is the same as selling investors and early birds on a dream. It is symptomatic of myopic projects with rapidly approaching expiration dates.
What is staking?
Staking is a blockchain protocol that allows users to earn rewards for holding a certain amount of cryptocurrency. However, there is a second and more important part – the rewards are issued for the work the staked tokens do according to the Proof of Stake (PoS) consensus mechanism.
PoS systems (as in Ethereum) use coins staked to validate transactions as opposed to PoWs (Bitcoin), where miners commit resources to create new coins and add new blocks to the blockchain. A significant difference between both systems is that stakers must hold a specific number of tokens to validate transactions and add new blocks to the blockchain in the former.
Staking – Diluted
It doesn’t take an expert to know that stake campaigns have gone out of hand. Contrary to recent developments, staking is not the same as committing tokens to a dormant smart contract to earn rewards for doing nothing! Based on the two-part definition, staking as a “token tool” deviates from the term’s actual meaning.
Projects now advertise stakes under the token utility section, encouraging community members to stake to earn reward tokens as the circulating supply increases.
In these scenarios, stake contracts become analogues of traditional savings accounts. However, savings accounts do not offer free rewards as banks engage in lending and other income-generating activities using customers’ deposits.
The alternative, where assets generate rewards for doing zero work, fits the description of a classic Ponzi scheme.
Strike without work
Projects running PoS systems may require community members to commit tokens in contracts to facilitate critical project functions. Even these projects must maintain long-term viability by providing rewards in sustainable models.
In contrast, projects advertise efforts as a tool to encourage community members to commit to vesting periods that may not be in their best interest.
This practice became popular during the 2020-2021 bull run when users came in to make money and the fundamentals didn’t matter as much. Unfortunately, development teams continue to attract investors with big promises and attractive effort rewards instead of committing to building utility.
The global economy is witnessing an epic recession accompanied by soaring inflation rates due to a combination of poor decisions to counter the effects of the COVID-19 pandemic, including the flagrant release of cash into the economy.
Subjecting a crypto-economy to the same conditions will have even more catastrophic effects at an accelerated rate due to the micro-scale of the DeFi economy.
Gray areas
Discussions about economic and financial policy are rarely black and white. Sometimes non-work effort can be part of a bigger picture for the project’s vision – to encourage decentralized token distribution as the project builds towards its ultimate goal.
For example, protocols like OHM and other rebase tokens’ efforts deploy smart contracts to discourage community members from selling their assets. The main goal of these contracts is to maintain the project’s treasury, which is an important part of rebase token projects.
Considering gray areas like these, maintaining liquidity reserves is somewhere along the token utility spectrum. But even if it serves a purpose at the protocol level, it’s still not the ideal situation.
There is no alternative to utility
The play-to-earn industry is a developing sector in the blockchain space, with the success of projects offering tokens as rewards for ecosystem participation, such as Axie Infinity, MANA and SAND, highlighting the potential of this industry.
However, long-term sustainability and token value depends on adjusting reward issuance to counter inflation. Without solid plans to use issued tokens, every unit of cryptocurrency minted will eventually contribute to inflation and token devaluation.
Encouraging users to stick around for life can only take a project so far. Unless a crypto project delivers utility, it will be hit by inflation. Changpeng Zhao, CEO of Binance, shares the same sentiment in this Twitter posts.
The way forward
While not infallible, token prices remain the most accessible and visible indicator of a project’s health. Therefore, project developers encourage long-term commitment to their tokens in order to create false scarcity and increase prices in the short term. But as more tokens enter circulation, the inevitable happens and token prices plummet.
These scenarios usually end with “bag holders” reneging on the decision to stick with the project, while those who jump ship take the winnings and move on to the next project – just like in a Ponzi scheme.
Crypto projects are not Ponzi schemes! That’s why something needs to change before investors get tired of recurring bad experiences.
This piece is a call to refrain from building projects without benefit. Meanwhile, the blockchain needs to know that staking without work is not a token tool.
About Mr. KEY—Karnika E. Yashwant (Mr. KEY) is a blockchain expert with a passion for education reform. He is the founder of KEY Difference Media, a top-3 blockchain marketing agency with over 350 team members. He is also the co-founder and CEO of Forward Protocol.
Mr. KEY has been actively pursuing his passions for more than a decade. His opinions on topics of local and global relevance are based on his extensive knowledge of blockchain technology, decades of marketing experience and education reform advocacy.
