REASONS FOR NOT STAKING IN AN EXCHANGE

In this post, I will give a brief overview of the possible reasons why it is not advisable to stake or “delegate”, in any existing Exchanges. Especially if what we want, in addition to making our ADAs grow, is to help and promote the development of the Cardano Project.

The following are the main considerations when staking or delegating in an Exchange:

Property: you’ve probably heard: “if you don’t have the keys, you don’t have your money.” This means that if you do not have your ADAs in a wallet secured with your seed words (usually 15 words that are the key to managing a wallet) you are not directly managing your ADAs. Therefore, the real owner is the one who manages the ADAs in his own wallet (in this case an Exchange) and he can do or undo what he wants and at any time. Unfortunately, there have already been enough cases of hacking of the Exchanges or worse still, an Exchange with hundreds of thousands of users who have disappeared from one day to the next with all the cryptocurrencies in their pocket (Mt. Gox case and last case: Thodex in Turkey).

Security: having your ADAs in an Exchange makes you depend on them to do their job well and take all adequate security measures so that no one can hack them. Performing a hack is something that, while difficult, is not impossible to do. Proof of this are the various cases of hacking to Exchanges that have happened so far. It should also be kept in mind that a personal wallet with – in the best case scenario – a few thousand ADAs is much less tempting for a Hacker than an Exchange where there are literally millions of ADAs and other cryptocurrencies. Your personal wallet gives you greater security, especially if you use a cold-wallet, then the security level goes to an almost unbeatable level.

Rewards: unfortunately for the “delegators” the Exchange Pools are usually very close to saturation or directly saturated. This means that Cardano’s rewards algorithm penalizes them for exceeding a certain amount of ADA delegated to said Pool. Therefore your annual rewards will be lower than 5% per year.

Blocked Funds: when staking in an Exchange they force you to block your ADA funds for a set period of time if you want to obtain a reward. This prevents you from having access to your ADAs at all times. Meaning, if you choose to move your ADAs before the period of time is complete you will lose any possible rewards associated with those delegated ADAs.  On the contrary, if you delegate directly to a Pool, you are free to move your delegated ADAs (all or a portion) at any time and you will always be given the proportional part according to the time and the amount of ADA that you delegated. So essentially your ADAs are blocked by the Exchange.

Compound Interest: in the Exchange they never apply compound interest to the blocked funds, that is, those rewards that you are obtaining are not added to the initial capital. While in the Cardano Pools if compound interest is applied directly. This for a year of staking does not make any difference, but if we see it with a perspective of two years or more, the difference is exponential and in 5 years the difference in rewards can be up to an additional 10%.

Right to Vote: if you have your ADAs in an Exchange, you do not have the right to Vote in the Cardano Project through its Catalyst platform. At this time, if you have 500 ADAs, you can vote for the Projects that you want Cardano to support, and slowly they will be introducing more governance cases. So if you want to be an active participant and have direct decision-making capacity in Cardano,  you must be invested in a pool. As an additional incentive, by participating in the vote you get rewards in the form of ADA that go directly to your wallet.

Project Support: if you delegate to an Exchange, the rewards provided by the work of the Pool Operator go to the total benefit of a private company. While not an entirely terrible outcome, keep in mind that if you delegate to a Pool, you can choose which project deserves that reward the most. Pools usually have a purpose beyond their own activity of being an active node of the Cardano network. Managing their own projects based on the rewards obtained as Pool Operators. By reading about each Pool you can choose the one with a project that you connect with the most. This allows you to support Pools in your area or community, Pools that help technological projects, others with environmental purposes or even, those that support charitable projects. It’s up to you.

Decentralization: This is perhaps one of the most important points to take into account. If you do staking in an Exchange you are not only not helping Decentralization, but you are helping to Centralize the Cardano Project. That is the power remains in the hands of a few instead of many. This fully affects one of the pillars of the Cardano Project, which is to seek a system of participation and balanced governance among all participants. And this balance can only be achieved if many people have similar powers. Cardano’s success has a close relationship with its Decentralization, so if you want your investment to increase in value over time, Cardano should have a great Decentralization.

Only 16.47% are small pools. We need more decentralization if we want Cardano to develop properly.

2 Responses to “REASONS FOR NOT STAKING IN AN EXCHANGE

  • This helped me a lot in understanding the purpose and advantages of pools. Thank you!

    • Thanks a lot Sabrina for your comment. That is the idea, explain this interesting topic. The most people doesn’t know theses items and is really important. Above all when is your money 😉

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