To understand auto-staking, you need to first understand staking.
When investors think about getting into cryptocurrency today, forget about DEX-es. Most think about buying it straight from a centralized crypto exchange. Mining which used to be popular back in the day used to be profitable, but now is becoming increasingly difficult or not worth the resources and time, so is now a less popular option.
After purchasing their crypto off an exchange, you’ll soon realize that there are staking options available within the same wallet. Now, there is auto-staking and it has been creating a lot of buzz lately. The idea of earning the highest APYs is very attractive.
Those who are new to staking should at least try to understand the basics of how it works, so that later on, understanding auto-staking would be a lot easier. Staking is about depositing your asset in the pool/s you choose so you can have returns in the future. The idea and concept are similar to putting your money in a time deposit in a bank to earn interest, however, the fundamentals and tech behind it are a little bit different.
So what is Staking?
Staking in crypto entails the process of having your crypto holdings locked in so they will earn rewards or interest. Cryptocurrencies are on a blockchain technology, where crypto transactions are verified, and the data is kept on the blockchain. Staking describes the validation of those blockchain transactions.
Based on the cryptocurrency and technologies you are staking in, the process of validation is the “proof-of-stake.” Each process is helpful in crypto networks arriving at a consensus or confirming that all transaction data add up.
Now comes Auto-Staking.
Auto-staking has been a new add-on to the world of blockchain and DeFi. With a few key advantages, like helping people who are busy and may forget to stake their cryptocurrencies manually, it can be helpful for new users. It can also help people new to staking and may not be familiar with the process.
When it comes to auto-staking, the mechanism works with tokens with an elastic supply and uses a rebase algorithm, so it can mint new tokens every few minutes. This is also referred to as self-minting.
A rebase or elastic token is a cryptocurrency whose supply is algorithmically adjusted in order to control its price. Similar to stable coins, rebase tokens are usually pegged to another asset. But instead of using reserves to maintain the peg, rebase tokens automatically burn tokens in circulation or mint new tokens.
Rebase tokens cannot defy the laws of supply and demand, however. Simply put, they do not work. You are being over-rewarded in enormous amounts, and subsequently, the token value keeps dropping. The token then falls in value faster than you can earn it. It is simple and basic economics. You increase the supply, the price of the token will fall.
Pros: Here are the Highlights of Auto-Staking
1. You could earn more interest on your deposited funds since you won’t have to worry about manually renewing your stake every period. Auto-staking can help to ensure that you don’t miss a stake period and lose out on potential earnings.
2. There is hope that over time, should the protocol remain popular, the token value could rise with greater demand. This allows you to gain from the accrued interest. And increase the number of tokens in your wallet.
3. Compound interest — You do not have to move your tokens at all — even on another website. When you buy, you are already staking, and you are all set to receive rewards from rebasing. The interest will always yield and compound in your wallet.
4. Auto-burn — The deflation process burns a fixed percentage in every transaction, which allows the token to achieve the highest APY in the entire market. The burned token amount depends on the trading volume. The Fire Pit size increases based on the volume.
In short, all you have to do is leave the tokens in your wallet, and they continue to earn and accrue interest.
Cons: Drawbacks of Auto-Staking
1. Lock–ups — You need to commit to the locked periods, and in those periods, your assets are inaccessible to you. In case the price of the asset dramatically drops, and you are not allowed to unstake it, that will negatively impact your returns. This applies only to locked pools, however, not all pools are locked.
2. Market risk — There is risk in the price movement investors are staking in and it can be potentially adverse. If the price of the underlying asset fluctuates significantly, you may end up losing money overall despite the interest earned on your deposited funds. For instance, if your earnings are 25% APY for an asset but its value drops to 60% for the entire year, it will be a loss.
3. You may not be able to customize your auto-staking settings, meaning that you could end up earning less interest than you would like.
4. In many of these rebase tokens the administration is rather high and can amount to 30% or more. They are even protocols that charge 80% in administration fees should you not auto-compound the earnings for a stipulated period.
Now let’s talk about Sustainability.
Every blockchain network uses different ways of calculating rewards generated by auto-staking.
Some adjustments are made based on block-by-block, which has several factors like how many coins are staked, how many coins are currently staked, the rate of inflation, how long has the validator been staking, and other factors.
In some networks, they have a determined percentage for staking rewards. The rewards are allocated to different validators in order to compensate for inflation. The inflation motivates users to not hold their coins and spend them instead. This in turn increases their cryptocurrency usage. By using this kind of model, validators are able to calculate the returns/rewards they will receive.
Cryptocurrency auto-staking is designed to avoid a flash crash by giving stable prices and significantly reducing downside risks. In addition, the blockchain networks have total control of the supplies because of the token burn system.
What are your thoughts about auto-staking? We hope that we will use these points to make decisions on whether auto-staking is right for you.