Since the 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 explore why carelessly promoting staking programs is the equivalent of selling investors and early birds on a pipedream. It is symptomatic of myopic projects with fast-approaching expiry dates.
What is staking?
Staking is a blockchain protocol that allows users to earn rewards for holding a specific amount of cryptocurrency. However, there’s 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 (such as in Ethereum) use staked coins to validate transactions in contrast to PoWs (Bitcoin), where miners commit resources to create new coins and add new blocks to the blockchain. A significant distinction between both systems is that stakers must hold a specific amount of tokens to validate transactions and add new blocks to the blockchain in the former.
Staking – Watered down
It does not take an expert to know that staking campaigns have gone out of hand. Contrary to recent developments, staking is not the same as committing tokens into a dormant smart contract to earn rewards for doing nothing! Based on the two-part definition, staking as a “token utility” deviates from the term’s actual meaning.
Projects now advertise staking under the token utility section, encouraging community members to stake to earn reward tokens as the circulating supply increases.
In these scenarios, staking contracts become analogs of traditional savings accounts. However, savings accounts don’t 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.
Staking without work
Projects that run PoS systems may require community members to commit tokens into contracts to facilitate critical project functions. Even these projects must maintain long-term viability by issuing rewards in sustainable models.
In contrast, projects advertise staking as a utility 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 a quick buck, and fundamentals did not matter as much. Unfortunately, dev teams continue to attract investors with big promises and attractive staking rewards instead of committing to building utility.
The global economy is witnessing an epic recession accompanied by sky-high inflation rates due to a combination of poor decisions to counter the effects of the COVID-19 pandemic, including flagrant cash release into the economy.
Subjecting a crypto economy to the same conditions will have even more catastrophic effects at accelerated rates because of the micro-scale of the DeFi economy.
Discussions of economic and financial policies are rarely black and white. Sometimes, staking without work may be a part of a bigger picture for the project’s vision—to encourage decentralized token distribution while the project builds towards its ultimate goal.
For example, protocols like OHM and other rebase tokens deploy staking smart contracts to dissuade community members from selling their assets. The primary aim of these contracts is to maintain the project’s treasury, which is an essential part of rebase token projects.
Considering grey areas like these, liquidity reserve maintenance is somewhere along the token utility spectrum. However, while it serves a purpose on the protocol level, it is still not the ideal situation.
There’s no alternative to utility
The play-to-earn industry is a developing sector in the blockchain space, with the success of projects that offer 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 depend on adjusting reward issuance to counter inflation. Without solid plans to expend issued tokens, every unit of cryptocurrency minted will ultimately contribute to inflation and token devaluation.
Encouraging users to hold on for dear life can only take a project so far. Unless a crypto project delivers on utility, it will be hit by inflation. Changpeng Zhao, the CEO of Binance, shares the same sentiment in this Twitter post.
The way forward
Even if it is not infallible, token prices remain the most accessible and visible indicator of a project’s health. Hence, project developers encourage long-term commitment to their tokens to create faux scarcity and drive up prices in the short term. However, as more tokens enter circulation, the inevitable occurs, and token prices plummet.
These scenarios usually end with ‘bag holders’ ruing their decision to stick it out with the project, while those that jump ship take their winnings and move on to the next project—just as in Ponzi schemes.
Crypto projects are not Ponzi schemes! That is why something must change before investors are fatigued from recurrent bad experiences.
This piece is a call to refrain from building projects without utility. In the meantime, the blockchain must know that staking without work is not token utility.
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 actively pursued his passions for more than a decade. His opinions on topics with local and global relevance are based on his extensive knowledge of blockchain technology, decades of marketing experience, and advocacy for education reform.