In crypto, there are few ways to earn rewards on your tokens. Two of the most popular are staking and providing liquidity. In this blog, we’ll take a look at the pros and cons of both staking and liquidity provision.
Should I stake my crypto tokens?
Staking has become an increasingly popular way for cryptocurrency holders to earn rewards on their assets. Essentially, staking involves locking up your cryptocurrency in order to help validate transactions on the blockchain network. In return for your contribution, you receive a reward in the form of more cryptocurrency.
But as with any investment strategy, staking comes with its own pros and cons. There’s been a lot of talk and speculation around crypto staking lately. On February 9th, SEC chair Gary Gensler made matters worse by proposing that most staking providers fail to provide customers with proper disclosures, such as how a company is protecting a user’s staked assets. Those providers should register their staking services with the SEC, Gensler added. This led to the crypto exchange Kraken saying it would be ending its on-chain staking service for U.S. clients. This was followed by Coinbase CEO Brian Armstrong saying a ban on staking for U.S. retail customers would be “a terrible path for the U.S.” Coinbase currently offers a staking service to its U.S. customers, but there are fears they might be targeted next by the SEC.
Pros of Staking
- Earn Passive Income
By staking your cryptocurrency, you can earn rewards without doing much work. This is especially attractive for long-term investors who are looking for a way to generate a steady stream of income.
- Help Secure the Network
By staking, you’re helping to validate transactions on the blockchain network. This is an important function that helps to keep the network secure and running smoothly. In some cases, staking may even be required to participate in the governance of the network, allowing you to have a say in its direction.
- Hedge Against Market Volatility
Staking can also be a way to hedge against market volatility. By staking, you’re essentially locking up your assets for a period of time. This means you won’t be tempted to sell them during a market downturn, which can help you avoid losses.
Cons of Staking
- Risk of Loss
If the value of the cryptocurrency you’re staking drops, you may end up losing money. Additionally, there is always the risk that the network you’re staking on could fail or be hacked, resulting in the loss of your assets.
- Limited Liquidity
Staking typically means locking up tokens for a set period of time, which can limit your liquidity. If you need to sell your assets before the staking period ends, you may be subject to penalties or loss of rewards.
- Technical Knowledge Required
Staking can require a certain level of technical knowledge. In order to stake your cryptocurrency, you’ll most likely need to set up a node and run it on the network. This can be a complex and time-consuming process, and may not be suitable for everyone.
- Token Inflation
When projects allocate rewards for staking, it is typically in the form of their own native token. When adding more tokens into circulation to boost yield opportunities, token inflation may be present.
Should I become a liquidity provider?
As the cryptocurrency market continues to evolve and mature, there are increasingly more ways for crypto holders to participate and benefit from it. One such way is by becoming a liquidity provider (LP) for decentralized exchanges (DEXs).
Before we dive into the pros and cons, it’s important to understand what liquidity provision is. In the context of DEXs, liquidity refers to the amount of tokens available for trading on the platform. LPs provide liquidity by depositing pairs of tokens into a liquidity pool. These pools allow traders to swap between different tokens without relying on a centralized intermediary.
Pros of being a Liquidity Provider
- Passive Income
One of the biggest advantages of being a liquidity provider is the opportunity to earn passive income. LPs earn a portion of the trading fees generated on the platform. The fees are typically a small percentage of the transaction value, but they can add up over time.
- High Returns
Providing liquidity can be very lucrative, especially if you choose to provide liquidity to new tokens in high demand. In some cases, LPs can earn annualized returns of 100% or more.
- Token Rewards
Many DEXs offer token rewards to incentivize LPs to provide liquidity. These rewards can be in the form of the platform’s native token or other tokens being launched on the platform. These rewards can be a significant source of additional income for LPs.
- Flexibility
Being an LP is a flexible activity that can be done anytime. There are no minimum deposit requirements, and most liquidity providers allow users to retain ownership of their tokens so that LPs can choose to withdraw their funds at any time.
Cons of being a Liquidity Provider
- Impermanent Loss
One of the biggest risks of being a liquidity provider is the potential for impermanent loss. This occurs when the price ratio of the tokens in the pool changes significantly. In such cases, the LP may end up with less value in tokens than when they deposited, despite earning trading fees. Impermanent loss can be mitigated by providing liquidity to stablecoin pairs, as the value of stablecoins is more stable.
- Exposure to Market Risk
Providing liquidity exposes LPs to market risk, as the value of the tokens in the pool can fluctuate significantly. If the value of one of the tokens in the pool drops significantly, LPs may end up with fewer tokens than they started with.
- Transaction Fees
While LPs earn trading fees, they also incur transaction fees for depositing and withdrawing tokens from the liquidity pool. These fees can add up and eat into LPs’ profits.
- Technical Complexity
Providing liquidity can be technically complex, especially for those unfamiliar with smart contracts and blockchain technology. It can be challenging to navigate the various DEXs and choose the right pairs in which to provide liquidity.
Conclusion
ICHI solves many issues regarding staking and providing liquidity by being a Concentrated Liquidity Market Maker. ICHI aims to improve the capital efficiency of decentralized exchanges and provide better yield opportunities for liquidity providers. Unlike traditional automated market makers (AMMs) that spread liquidity across a price range from 0 to infinity, ICHI’s CLMM algorithm concentrates the liquidity in the price range where most trades occur, making the most of the deposits. This reduces slippage and improves capital efficiency for LPs, allowing them to earn greater rewards for their deposited assets. In addition, by designating liquidity for trades within a specific price range, LPs can make their assets work harder for them and maximize their returns.
Learn more at app.ichi.org or jump into our Discord if you have any questions.
Until next time, stay cozy!
