[ANALYSIS]: Should I Stake my Polygon (MATIC) tokens on Nexo or directly on Polygon?
So you have decided to invest in Polygon tokens. It is wise to stake Polygon tokens and earn some extra returns on your tokens.
You are debating whether to stake directly on the Polygon network or on Nexo.
As of the date of writing this post,
- Direct Polygon staking earns you a 9–10% return per annum in Polygon tokens.
- Depositing on Nexo can earn up to 16% in Polygon tokens and up to 18% if you choose Nexo tokens.
Its obvious. Choose Nexo, right?
Hold on a minute. With every higher return opportunity, we must understand the risk too.
Quick tip: For folks who have a working knowledge of Nexo, you can skip to the summary at the end. But we highly recommend reading the whole post.
Disclaimer: We run a validator on Polygon called Girnaar Nodes, which some may consider as the reason for our bias. However, we have tried to stick to the facts throughout the article. We are open to genuine comments and counter-analysis and will incorporate the valid arguments into our analysis in the future.
With that out of the way, let’s analyse.
- Key Difference 1: Lending to a corporation vs earning returns from Treasury
In the real world, if you held US dollars. And I give you 2 options: a.) lend to a financial institution (with no government guarantee), or b.) lend directly to US Treasury. Would you consider the risk to be the same?
No. Lending to the US Treasury is considered generally safer than a financial institution (FI). Why? Because the US Treasury can print its own money. The biggest risk in lending is default. If the FI runs out of money and cannot pay you back, it will simply default. But if the US treasury runs out of money, it will simply print more to pay you back. Now, printing money is catastrophic for the economy in the long-term but at least in the short term, you are repaid and don’t loose your money.
That is the same difference between Staking on Polygon with validators and lending to Nexo.
When you lend to Nexo, they lend it further down to institutions who might be borrowing to trade or simply do some business. If they default, chances are Nexo may default to you. But when you stake with validators on Polygon, there is no default. Validators earn a return for running nodes from the Polygon Treasury itself. As Polygon prints its own tokens, it will not default to validators and delegators alike.
Want to understand who is a delegator and who is a validator? Check out our previous blog here.
So, Nexo v/s Direct Polygon Staking is same as Lending to Corporation v/s Deposits with Treasury. The risk of default is dramatically different.
- Key Difference 2: Opaque business model v/s simple smart contracts
Now, to understand how Nexo can pay you higher returns, we need to understand how it earns higher returns. Here is where it gets all opaque. Nexo claims that it lends out money to FI to earn an interest. This we understand. That’s what banks do. They take deposit from us and lend it to others. But they are able to make money by doing 2 things
- Lend at a higher interest rate than what they borrow from depositors.
- Use the Fractional Reserve System to lend more money than the cash deposits that come in.
Nexo is doing neither. Nexo has a tiering system which puts depositors and lenders in Base, Silver, Gold and Platinum Tiers. Here is their latest blog on how much can earn based on your tier. If you go to their website, you will realize that as a Platinum customer, I earn more interest by depositing to Nexo and pay less on borrowing from Nexo. This is inherently broken.
Nexo says its loans are safe because they are over-collateralized by 200–500%. This basically means, if I want to borrow 100 MATIC tokens, I need to deposit 200 to 500 MATIC tokens worth of any crypto. Now this is not inherently bad because I can deposit say USDT to borrow MATIC, take advantage of a trade and pay back. This all works in very active bull markets where short term opportunities and borrowing exists. But the real long-term borrowers are companies and individuals that put money to long-term use. They don’t deposit 200 to borrow 100. If they had the 200, they would simply put it to use.
Hence, this business model doesn't seem long-term sustainable anyways.
If that is the case, how is Nexo still paying out interest currently? More on that coming up later.
How does staking on Polygon pay? Through smart contracts. Because staking returns are just like mining returns, they are paid out automatically from the Treasury tokens through smart contracts. No lending, no collateralization, no human intervention. Simple, beautiful, automated code.
Which brings us to our next point.
- Key Difference 3: Centralized v/s Decentralized
Nexo is centralized. Staking on Polygon is decentralized. PERIOD.
Nexo’s T&C clearly state that they can pause withdrawals at any point in time for an unstated time. Which is exactly what banks do when there are bank runs. Isn’t that the reason why we all came to crypto in the first place? To get rid of centralization, to own our money?
When you stake directly on Polygon, you do it through a smart contract on the Ethereum. You can see it in your Etherscan account a token.
If you wish to withdraw your principal or rewards earned tokens, neither Polygon nor the validators can block you. You click on withdraw, the smart contract gets called and you receive the tokens in your Ethereum wallet. PERIOD.
This GUARANTEED LIQUIDITY has immense more value than a little extra return in the long-term.
- Key Difference 4: Nexo Tokens for the extra returns?
Nexo offers an additional return for Nexo token holders. That’s the catch. You need to hold Nexo tokens to earn that extra return.
Without the Nexo token, your return is same as direct staking on Polygon. With all the reasons described above, it is a no-brainer to stake directly on Polygon rather than on Nexo.
To earn the extra return, in addition to a view on Polygon token, you need to have a view on Nexo token too. Will it go up or down? Good or Bad Tokenomics? Will I be able to liquidate?
I will not delve deeper into whether holding Nexo token is good or bad but I do recommend watching this deep analysis video on the hidden side of Nexo. You would want to understand this before you go buy some Nexo.
- Key Difference 5: Fees
As Nexo’s economics are driven from their token, the fees are minimal to nil. As for direct staking on Polygon, you will incur Ethereum gas fees to stake and withdraw. Plus the validator charges a commission out of your rewards. On an average it is 5% of your rewards. In other words, nearly 0.5% of your capital.
In effect, if you don’t hold Nexo tokens, you might earn 0.5% annually by direct staking on Polygon rather than lending on Nexo. Which is a no-brainer price to pay for the security of capital that you get.
(For folks, pointing me to Nexo capital security, Nexo’s insurance is only good for tech failures, and not defaults. Plus their over-collteralization is just a promise, no legal contract, no smart contract, nothing. Just a promise.).
Here is a quick summary of the comparison between Direct Staking on Polygon v/s Lending on Nexo.
Girnaar Nodes
If you are convinced on staking directly on Polygon, consider Girnaar Nodes as your validator.
Girnaar Nodes is an Indian-origin VALIDATOR on POLYGON with top performance and currently offering 0% commission. Stake your MATIC tokens with us directly on the Polygon blockchain. See your Polygon (MATIC) bags grow while we work on the tech under the hood.
Check/ reach out to us out here:
