You will best be able to understand this post if you have already read and understood the Advanced DeFi guide #1, but that’s not entirely necessary. I’m going to be using this post to warn about a sort of soft ponzi-scam that developers of protocols often use, sometimes unconsciously.
I have added a Definitions page which will include all of the terms and abbreviations that I use from now on and will be referred to on every post.
Substack has launched an iOS app for those of you using apple devices. I am an android peasant and can’t tell you if its good or not, but check it out if you have an iPhone or some other such trappings of royalty.
Table of Contents
What is Staking, Really
A breakdown of a soft rug
Conclusion
1. What is Staking, Really
A long, long time ago (really just a few years back), staking meant something entirely different than it meant today. When discussing different types of blockchain consensus mechanisms, you know that there are many different methods by which all of the computing power on the blockchain can come to a consensus about which transactions are valid and the final state of the blockchain. Proof of Stake is one of these consensus mechanisms, within which owners of tokens could stake them (put them at risk) for the chance to solve blocks and receive block rewards for doing so. If you solve blocks honestly, you receive block rewards; if you attempt to insert malicious or dishonest transactions, you could lose your “stake.” So a real service is provided to the L1 blockchain, and those participating were taking a real risk in order to gain a real reward.
What has staking turned into today? Basically just a soft ponzi to trick users into not selling their L2 tokens for long enough for the developers tokens to finish vesting so that the developers can sell before you do. There is no reason to be staking any L2 token, especially if you are only getting that L2 token in return. As covered in the advanced DeFi guide #1, most every L2 token begins with massive inflation as token supply must be created through rewards. The strategy outlined in that guide was, of course, to sell early before price fell as a result of that inflation. You can then see the conclusion that the worst thing you could do would be to stake any early rewards received from a DeFi protocol, no matter how high the advertised APY is.
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