[Fish Talk] Fractional staking – JK

Hi, this is JK from stakefish. Today I’m here to talk about fractional staking. I wanted to introduce the concept and make sure that potential stakers are able to assess what fractional staking is and take that into consideration when they’re thinking about whether or not to use exchange staking services. so, if you’re in the proof of stake space you would well know that exchanges have started to entered staking in a big way since last year. Notably, they’ve entered into Cosmos and Tezos mostly, and if you look at the validators leaderboard that stakefish has put together for both networks, you can see on Cosmos, Binance is creeping up the rankings which right now ranked to number five, which will likely constantly increase as time passes. On tezos you can see Coinbase Kraken and Binance are all in the top five validators rankings on Tezos. There’s definitely pros and cons to exchange staking. The biggest advantage of course is that it’s extremely convenient.

You don’t need to worry about managing your own private keys, you don’t need to worry about how to compound your staking rewards, all these will be done by the exchange for you. Also, most of the exchanges all they require users to do is keep their deposits on the exchange for them to receive staking rewards. This means that you don’t need to lock your coins up, the exchange will let you trade your coins right away, and so you have a perfectly liquid coin that is receiving staking rewards from exchanges. Also, exchanges are providing staking services at low or almost no fees at all. Now, there are a few disadvantages to staking on an exchange. The biggest, of course, is "not their keys not your coin", meaning that if the exchange does get hacked, you might lose your coins with them. There’s also a risk of centralization because if you have a coin of a certain network, it means that you want to support that network and you want to see it first decentralized, but by keeping your coins on an exchange, and then also using their staking services, you risk centralizing the network you’re a fan of.

And then the final disadvantage that I wanted to touch on today is that possibly you might be earning lower staking rewards due to fractional staking that exchanges will have to do. Now, to explain what fractional staking is, let’s set up a hypothetical scenario. Let’s imagine there’s a new network called Shark Network and they have a native coin called SHARK coin.

It’s a Proof of Stake based chain, and they’re providing staking rewards of 10%, and they have an unbonded period of 21 days which means that if you stake and then you wish to unstake and move your coins around, you’ll have to wait 21 days before your coins are transferable. You have two choices, one is Pro Exchange which is an exchange staking service that says, hey just deposit your SHARK coins with us and we’ll provide all the staking rewards, we’ll do all the dirty work for you, and we’re not even charging any fees. On the other hand, there’s Fish Validator which is an independent validator, and they charge four percent fees. Now you as a user, let’s imagine that you have a thousand dollars worth of SHARK coins, you like the project and you want to stake it and then you want to support the Shark Network.

Who should you stake to? Obviously, you know, looking at just the fees itself it looks like Pro Exchange is the way to go, and you’ll be earning all these staking rewards you can. Well, let’s first dive into how much staking rewards you’ll be earning in a year if you stake with Fish Validator. The calculation is pretty simple, you’ve staked a thousand dollars, you would be earning staking rewards of 10%, but you are also paying the Fish Validator 4% of these staking rewards as fees. This means that you are paying 4 dollars to the Fish Validator and you are earning 96 dollars worth of staking rewards on the thousand dollars worth of assets that you have staked.

Now, before I dive into how much you would earn on Pro Exchange, let me previously briefly now introduce and touch on what fractional staking is. Now exchange funds are all comprised of users funds, so when users ask for their coins when they ask their for their coins back, the exchanges must provide, you know, provide all the coins that the users have deposited back. So, in the case of SHARK coin, remember I mentioned that the unstaking period will be 21 days, for Pro Exchange, it would be very very risky to stake all of users’ assets. What if some of the users suddenly asked to withdraw SHARK coins during one of those 21 days? This means that Pro Exchange will not be able to fulfill that withdrawal request which is a huge huge risk. So it’s very likely that the Pro Exchange will not stake all of users assets, there will be only staking a portion of the users coins that are deposited and they will set aside the rest to fulfill withdrawals.

And going through the example, let’s just say that Pro Exchange assess that they foresee at most 7% of all users SHARK coins deposits potentially being withdrawn. So they decide to set that aside and not stake them, in order to make sure that they’re able to fulfill all users withdrawal requests. So that means that they’re only staking 93% of the users funds. so now going back to our calculation of how much staking rewards you would earn on Pro Exchange. Now you’ve deposited a thousand dollars worth of SHARK coins but the Pro Exchange is going to only stake 93% of those, and then you calculate the 10% staking rewards rate out of that 93% of the thousand dollars that are staked. This means that you are probably earning gonna earn only 93 dollars worth of staking rewards on a yearly basis on Pro Exchange, compare that to how much staking rewards you received on the Fish Validator, there is a 3 dollar difference. And at the end of the day, despite Pro Exchange charging 0% fees, you would be earning more staking rewards on the Fish Validator. So, fractional staking will put lower the amount of staking rewards that an end user could receive on exchanges, even if the exchange advertises that they will not charge any commissions.

So, I really recommend that you take this into account when conducting your own due diligence on who to stake your coins with. This was a primer on fractional staking, and I will come back at another point, to introduce an interesting concept to our community..

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