Decentralized Staking vs. Centralized Staking
You have heard of staking but are confused about the different types of staking options. Look no further, as we have you covered with this guide.
Read on to learn what staking is, how it works, and what the differences are between decentralized and centralized staking.
What is Staking & How Does It Work?
Staking refers to cryptocurrency users locking up digital assets for some time to help secure a crypto network. In return for staking a network’s crypto asset, they earn a staking reward paid in the asset being staked.
Staking normally occurs with blockchains that use the proof-of-stake (PoS) consensus mechanism. In a proof-of-stake system, users can stake a set sum of the blockchain’s native asset to support the network by validating transactions and producing new blocks.
Staking crypto is essential in ensuring only legitimate transactions are added to a network. Moreover, staked coins serve as a form of insurance. Should staking participants validate flawed or incorrect data, they will be penalized and lose part of their stake. Therefore, they are incentivized to play by the rules by earning new crypto when they validate correct transactions.
Public proof-of-stake blockchains allow everyone to become a staker. And usually, it is the stakers that delegate their staked coins to validators that manage a staking pool. This serves to lower the barrier of entry for more crypto holders to be involved in staking. The overseer, which is the validator, will be responsible for validating transactions on the blockchain.
Just as everyone can become a staker, becoming a validator is technically also open to everyone. Running a staking pool requires a lot of technical experience and know-how, though. So, while proof-of-stake (PoS) blockchains allow anyone with a computer to run a node and validate transactions, the process of validating is overly technical and can prove costly if done incorrectly.
That is why Trust Wallet offers an easy and secure way to stake cryptocurrencies such as Binance Coin (BNB), Tron (TRX), Tezos (XTZ), and more.
Staking can further be classified into centralized and decentralized staking.
- Centralized staking involves you depositing your crypto assets to a third party staking service that manages the staking process on your behalf and retains custody of your private keys.
- Decentralized staking involves you delegating your assets to a staking pool, while retaining custody over your private keys.
Centralized Staking: The Pros and Cons of Letting Someone Else Hold Your Crypto
Centralized staking enables you to allow an external party, like a centralized crypto exchange or staking provider, to manage the staking process on your behalf.
The act of centralized staking usually occurs directly on a crypto exchange, like Binance, or a staking-as-a-service provider. In this case, the staking services provider will have access to your private keys. You deposit your funds into the platform and the provider will handle the rest in exchange for a fee.
You will need to register and typically undergo a KYC/AML process to use a centralized stake service. This process is relatively easy, especially if you are already a user on an exchange with staking services.
Centralized staking services are good for beginners who don’t have the necessary technical know-how to set up their staking operation and want a simple solution.
Another benefit of centralized staking is crypto exchanges offer superior liquidity and a wide range of stakable crypto assets to choose from. Moreover, the minimum amount of digital coins required for the stake is low. This makes it easy to classify stakable digital assets by ROI and stake them, even if you don’t have large holdings.
Having said that, giving up custody of your assets isn’t without its own set of drawbacks. These include lower staking rewards, staking penalties, cybersecurity risks, and bankruptcy risk.
Crypto exchanges and centralized staking-as-a-service platforms typically charge a fee for staking, which is often deducted automatically from your staking rewards, resulting in lower overall staking returns.
If a centralized staking provider doesn’t follow the staking rules of a particular protocol, staking penalties may be applied to their stakes assets, which would also include yours, affecting your staking returns.
Centralized platforms are exposed to cybersecurity risks as hackers are targeting these platforms to access funds held therein.
In the case an exchange or a staking provider goes bankrupt, chances are that you will lose all your funds held on the platforms. At best, you may receive some of your funds back after years of bankruptcy proceedings. So bankruptcy risk is something to keep in mind when leaving (or staking) your assets on a centralized platform.
Decentralized Staking: The Benefits of Self-Custody and Control over Your Crypto
Decentralized staking or dStaking services deploy a trust-minimized approach when it comes to staking. In other words, the service provider handles validator setup and management but does not have direct custody over your private validator and withdrawal keys. Instead, you can stake your assets from non-custodial wallets like Trust Wallet on dStaking services like Rocket Pool or Lido.
Many decentralized staking services focus on finding the highest APYs for your crypto assets. These staking-as-a-service platforms do not require KYC/AML procedures, and you can sign up using your Trust Wallet.
Moreover, newly minted tokens on dStaking services do not belong to the platform, nor are they ever released to a central wallet. They are released at a set rate per annum and distributed directly to users’ wallets. This makes it more secure than centralized staking services that retain custody of crypto assets.
Secondly, decentralized staking provides you with a more reliable rate of return (in tokens). The platform offers a fixed rate of return per year, and the choice of how much you want to earn depends on the amount you are willing to stake.
However, decentralized staking services are not without their drawbacks. Technical hurdles can make decentralized more challenging, while vulnerabilities in their smart contracts could potentially be exploited by hackers, potentially leading to loss of funds.
Depending on the protocol and the method of decentralized staking, there may be technical hurdles that new(er) crypto users may struggle with. First of all, the use of smart contracts is involved, which may already be confusing to beginners. Moreover, decentralized staking options are typically not as simple and require more user input than their centralized counterparts.
Moreover, smart contract risk is another drawback of decentralized staking. If the smart contracts involved contain vulnerabilities, they may be exploited by hackers, potentially leading to a loss of funds or funds getting indefinitely stuck in a contract.
Centralized vs. Decentralized Staking: Understanding the Key Differences
We have observed that centralized and decentralized staking share some similarities and differences. Both approaches to staking are meant to earn you crypto as rewards and, in both instances, you have to lock up crypto assets and earn staking rewards.
The key difference between both approaches is the custody of digital assets. Centralized staking requires you to relinquish custody of your assets to platform operators, while decentralized staking allows you to retain the self-custody of your assets.
Decentralized staking has been useful in enabling DeFi protocols to incentivize users to lock their crypto assets in exchange for yield. Furthermore, staking has contributed to governance, with staked tokens being used through a vested escrow (VE) model by dApps to moderate community interests and incentivize loyalty to the protocol.
Trust Wallet lets you stake 10+ crypto assets on the mobile app. Moreover, you can use Trust Wallet to stake assets on dStaking services such as Rocket Pool and Lido and thereby retain self-custody of your assets.
Staking is suitable for crypto investors looking to earn a yield paid in the crypto assets they’re invested in.
Centralized staking services are suitable for users (typically beginners) who prefer to use a reputable exchange or staking-as-a-service platform to stake digital assets on their behalf, alleviating the need for technical know-how or actively managing their stake. However, that comes with the added risk of leaving your assets on a centralized platform.
Conversely, decentralized staking offers a more secure alternative that gives the user more control over their staked assets while alleviating the risk of leaving your assets on a centralized exchange. However, it does typically require a certain degree of technical expertise to ensure staking is done correctly and all staking requirements are met.
You can use Trust Wallet to stake several assets natively in the app to earn staking rewards and contribute to the security of blockchain networks now. What are you waiting for? Download Trust Wallet and stake away!