Hello, friends! This is James Agenda here.
Many people on Reddit still use Crypto Savings platforms to earn interest in DOT instead of Staking on Polkadot blockchain.
Despite being a great option for other coins, I recommend you avoid using Crypto Savings to earn interest on DOT.
And I'm going to show why by comparing these two options to receive passive income on DOT.
In this post, I'm going to cover:
If you want to save some time, you may navigate through the underlined topics.
What is Stake on Polkadot? Is this passive income?
When you Stake DOT Tokens, you put them "to work", providing security for the blockchain and generating more DOT as rewards.
For example:
If today you Stake 100 DOT, next month you will have 101 DOT (approximately).
When you are staking DOT, you receive rewards every day.
But that's not 100% passive income since you need to take some actions, like choose good validators to avoid slashing.
You can understand more about staking at this post about my 5 favorite places to Stake Polkadot.
You can also check the technical details of Staking at Polkadot's wiki page.
What is Crypto Savings? Which are the best to earn Interest in Polkadot?
Crypto Savings platforms offer accounts for people to deposit their crypto and earn interest on them.
For example,
You can deposit 1 BTC and receive ~0.001 BTC on interest every week.
And Bitcoin blockchain is Proof-of-Work instead of Proof-of-Stake, so how is this possible?
This is possible because Crypto Savings platforms do not use your DOT tokens on Proof of Stake to provide security for a blockchain.
Instead, the platform uses your tokens to lend money to other people.
So it's just like regular savings account in the bank, where the institution pays you interest on your asset while operating them.
These are the most famous and the 4 best platforms for crypto savings to earn passive income on Crypto:
But I don't use them for DOT tokens.
I only use them just for other coins, like Bitcoin and stablecoins.
And I recommend you do the same.
I'll show you why by comparing Staking DOT versus using DOT on Crypto Savings platforms in the following topics.
🤑 Rewards Staking DOT Vs Crypto Savings Interest
This aspect is likely the foremost important aspect for most people.
"How much money will I make Staking DOT versus Earning Interest on my DOT tokens?"
Lets check:
APY% of Staking Rewards on Polkadot
When Staking DOT, the staking rewards range from 12% to 16,6%.
It depends on whether you are staking on exchanges like Kraken or directly staking on the blockchain using a wallet.
APY% of Earned Interests on Crypto Savings
On the Crypto savings, the interest rewards vary on platforms:
BlockFi doesn't offer an option to Earn Interest on Dot Tokens, yet.
I bet they will add it in the future.
Still, the earned interest will likely be around the interest on the other Crypto Savings platforms.
On Celsius you can earn 8,86% APY interest on DOT
On Nexo, you can earn up to 8% APY interestes on DOT
And finally:
On CDC, you can earn interest up to 14,5% APY interest on DOT
But in this platform, there is a trick:
On CDC, you need to lock you tokens for 3 months to achieve the highest interest.
Let's see more about this liquidity aspect in the following topic.
⏳ Liquidity – Staking DOT Vs Crypto Savings
Liquidity means how long it takes to remove your assets from the platform and then be able to transfer/sell them.
Liquidity Staking DOT
If you Stake DOT directly on the blockchain, you must wait 28 days to transfer/sell the staked tokens.
However, you may stake your DOT on Kraken, where you have instant liquidity.
Also, in the future, we'll have decentralized solutions enabling instant liquidity on Staked DOT, for example, in ACALA.
DOT Liquidity on Crypto Savings
Most Crypto Savings accounts offer instant liquidity on your DOT tokens.
CDC is the only one offering higher interest options that lock your assets for 1 month or 3 months.
💻 Usability – Staking DOT Vs Crypto Savings
How easy is it to Stake DOT or use Crypto Savings accounts?
And how "true passive" are the passive income that they offer?
Usability Staking Dot
Staking DOT can be straightforward if you use a service like Kraken but also can be a little complex if you try to use the blockchain directly.
After you learn how to do it for the first time, it's easy to stake more times.
But you'll need to keep tracking if the validators are doing a good job.
So technically Staking DOT is not 100% passive income since it requires that you take a look on it periodically.
Usability on Crypto Savings for DOT Tokens
Using Crypto Savings is very easy.
The platforms have great layouts, just like the centralized exchanges for staking, like Kraken or Binance.
You barely need any skill to earn interest: Knowing how to transfer your tokens properly is enough.
But you need to trust the centralized service, as we are going to cover next.
🛡️ Security and Risks – Staking DOT Vs Crypto Savings
Here is another crucial difference between those two options.
Many people don't understand the real risks.
Security and Risks Staking Dot
When you Stake on Polkadot, your tokens are used as collateral by the validators that you nominated.
If a validator that you nominated misbehave, part of your Staked Dots will suffer Slashing.
That's is the reason why you need to choose good validators when staking Polkadot.
Even if you stake in the exchanges like Kraken or Binance, they will likely compensate users if a slash happens.
Also, good validators are likely to do that, even if you are staking directly on the blockchain.
That was what happened at ERA 470 on Polkadot, in this case, where the validator ALLNODES/1 suffered a slash.
The validator made a small mistake that resulted in a slash event, cause him to lose 1.03 DOT and the nominators to lose 236.71 DOT.
Fortunately for the nominators, ALLNODES/1 compensated all of them for the slash by sending to each one the respectively lost amount.
This case exemplifies why staking with good validators is safe:
Good validators will likely compensate their nominators for any slash, in oder to keep their good reputation.
This is precisely what we are doing here on holdpolkadot.com!
We already have a validator on Kusama, and we are participating in the 1000 validators program.
And we will soon have a validator on Polkadot.
Although we didn't suffer slash, we are already building an insurance treasure to compensate nominators if mistakes happen.
Security and Risks on Crypto Savings for DOT Tokens
When you use a Crypto Savings platform, your DOT tokens are used as collateral on financial operations.
The platform may organize the financial operations in a theoretically risk-free arrangement.
This would mean that it's impossible to lose the DOT tokens used as collateral.
But that doesn't mean that putting your tokens on Crypto Savings is Risk-free.
On the contrary, there is a significant risk on the Crypto Savings platform: custody!
Since, at least for now, they are all centralized and control your tokens.
Always remember: Not your keys, Not your coins!
In the future, we'll see some decentralized solutions to earn interest on DOT.
Still, for now, we just have centralized options.
Conclusion: Do NOT use Crypto Savings to earn interest on DOT: Instead, Stake on Polkadot blockchain or through exchanges
It doesn't matter which aspect you value most:
Right now, Staking on Polkadot is clearly a better than using Crypto Savings platforms to earn interest on DOT.
That is because Staking on Polkadot is better than (or at least equal to) Crypto Savings in every aspect:
Let summarize each one.
Regarding Rewards:
Staking DOT APY% rewards are about 12% to 16,6%;
Crypto Savings APY% interest is about 4% to 14,5%.
Regarding Liquidity:
You can have instant liquidity when Staking DOT if you use Kraken;
You have instant liquidity on Crypto Savings.
Regarding Usability:
You can have easy usability when Staking DOT, if you use centralized services;
You have easy usability on Crypto Savings.
Regarding Security and Risks:
At first glance, it may appear that Staking DOT is riskier due to the risk of losing some tokens on a Slashing event.
But the risk of losing all of your assets using centralized Crypto Savings (by abdicating the custody) is much more plausible.
And it and already happened many times through history.
And that's why, right for now:
I recommend only Staking DOT for generating passive income with DOT Tokens.
Use Crypto Savings for other assets like Bitcoin and Stablecoins.
In the near future, there will be more opportunities to make passive income using your DOT tokens.
For example:
Participating in Crowdloans for Parachains Auctions
Providing a liquidity pool in ACALA (a future parachain).
Subscribe for free, and I will keep you update about these other options when it's time.
Cheers! 🥂
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