Why is it called Staking, and why does it not work as I think?

Today I will talk about Staking and why it seems, in the majority of cases at least, not to work like you would think it should. If this sounds intriguing then please follow along on this staking journey.

If we take a look backward we can see that staking has been around for quite some time one of the people who probably is best known for their staking is Vlad Tepes or Vlad the III. But he is probably better known by the moniker Vlad the Impaler. Wait a minute… That is a completely different type of staking. Ops my bad, sorry for that. And google at your own risk is probably something that should be added here as well.

The type of staking I was referring to has also been around for some time, but maybe not as long as the Vlad type of staking. When you stake someone it means that you give them, the money they need in order for them to partake in a business venture. Typically this has been mostly used in pop culture and cinema with horses or poker. But the practice could be applied to virtually anything.

To clarify what exactly it lintels. If you have a business venture you want to undertake. I could then stake you. Meaning I give you the money you need. But before you get the money we must come to an agreement on how any profits should be split. Usually, this is a standard 50/50 split. But it can be any split we can agree on.

The thing to note with staking someone is that the person staking takes on all financial risk. This is probably the main reason for this type of practice not being used that frequently. And probably why most people might be unfamiliar with it. So the difference between taking out a loan to undertake a business venture and getting stakes is quite different. It is all about who assumes the risk.

In crypto, you can see staking all over the place. A lot of DEX- and CEXes, if not all of them, offer it. And there are plenty of other DApps that also offer it. And they usually offer two types of staking. The first type requires you to “lock” your tokens for a set period of time. This will however usually result in a higher return compared to the other version. This is what often is called “flexible” staking. And this is where you stake the tokens but you do not lock them. So you can move them and swap them freely. But doing so obviously will result in you losing the return from that point on. This however requires you to have the tokens out of your immediate possession.

There are even some DApps that have what they call “automatic staking” meaning you do not have to do anything, other than just have the tokens in your wallet.

This new type of staking seemingly only shares the name with its predecessor. As there appears to be no risk involved with this type of staking at all. Unlike its predecessor. The only risk that seems to be here is when you transfer your tokens to stake them. They are leaving your possession. So if the place you staked them in goes belly up. Then the odds of you getting the tokens back are very slim.

the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.

Something that was made clear by Coinbase a while back, and it made its rounds in the headlines. And is in accordance with US law. This might mean that if the place you staked the tokens is located anywhere else then their bankruptcy laws will apply. But I would argue that the odds of this happening out of the blue is about as close to 0 as you can get.

This new type of staking has virtually nothing in common with its predecessor other than its name. Witch is the reason I think it should be called something else. As it has nothing to do with staking something. All you do is put your token in a pile and after some time passes you get more tokens than you had before.

What should it then be called instead, well I don’t really have a name for it. But off the top of my head Hoarding or Piling seems way more fitting than Staking. Or maybe Stacking is a much better and more fitting name?

There however are some outliers. You probably have heard of Ethereum 2.0 or “the Merge”. What this is is Ethereum moving from Proof of Work, or PoW, to instead be a Proof of Stake, or PoS for short.

Here we have staking again. Is this the same type of staking? No, this on all accounts appears to be more in line with the original staking. How so? Well to be able to mint a new block in the ETH Blockchain you first have to stake a minimum of 32 ETH. Yes I know that is a lot. If you then get randomly selected to be the one who gets to mint the new block. You then have to do that work. If it is done correctly you get paid by getting more ETH. But here is the difference.

Here you can lose your stake. Is it likely, hopefully not? But it is done as a quality and security measure for the Blockchain. If you want to know exactly how you can lose your stake, there are plenty of posts that go into detail about how the PoS works for ETH 2.0. I will however not cover that here.

There are probably other PoS Blockchains that work in a similar way. Just that I am not aware of them. But if you know of some, please share this with me in the comment section below. this I think should still be called Staking. It is just the other type I think is misleading. Here you actually put up your money or capital, in the form of ETH. And you have a risk associated with the financial venture. And you get a return.

I hope that you have found this post to be of interest to you. Do you agree, or disagree with me? Please share your thoughts on this whole staking thing in the comments down below. And please share any name suggestions as well.

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See you on the interwebs!

Picture provided by: Picture of Vlad Tepes; AnonymousUnknown author, Public domain, via Wikimedia Commons, https://pixabay.com/

Resources

1. https://d18rn0p25nwr6d.cloudfront.net/CIK-0001679788/89c60d81-41a2-4a3c-86fb-b4067ab1016c.pdf
2. https://cointelegraph.com/ethereum-for-beginners/ethereum-2-0-staking-a-beginners-guide-on-how-to-stake-eth

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