Staking with CEXes
Why did I write this article? Some time ago I saw an ad: Coinbase now allows its users to stake their $SOL. Considering that Coinbase has huge marketing resources, and millions of viewers, a lot of people will probably consider staking with it. Well, the purpose of this article is to explain the downsides of intransparent pseudo-staking to give you the facts you need to make an informed decision.
“Not your keys, not your coins”
Big, centralized exchanges really helped the crypto community in a lot of ways. User-friendly interfaces and clear guidelines led to wider crypto adoption, since almost anyone can buy BTC with a good old credit card at Binance, Coinbase, FTX, or any of a hundred other centralized exchanges (or CEXes).
However, there is a growing, substantiated opinion that using one of these platforms to actually store your digital assets is not secure and generally contradictory to the very idea of crypto. And yes, it’s easy to see where this is coming from.
A CEX always controls the keys to your tokens: in fact, the tokens are technically not yours, but stored in the CEX’s wallet, while the platform’s internal database shows that it “owes” you the corresponding assets. This is called a custodial account — as opposed to a non-custodial option where the funds remain in the user’s own wallet, like Solana’s Phantom, or the ERC20-compatible MetaMask. With non-custodial wallets, you and only you hold the keys.
Both custodial and non-custodial mechanisms have their pros and cons
Let’s look at the upsides of each option.
Using a CEX is not without merit.
- If you lose your keyphrase, your wallet is gone forever; but if you forget your Binance password, you simply change it using your recovery email address.
- The fees for trading within the platform are extremely low compared to the cost of Bitcoin or ETH blockchain transactions (this offers no advantage for Solana users though).
- CEX is an easy entry point if you are new to crypto: set up an account, buy your first coins using a credit card, and you’re good to go (although nothing prevents you from withdrawing to a non-custodial wallet right away).
However, there is a lot to say for the non-custodial wallets — or against the centralized exchanges.
You are the only one holding the keys to your funds.
Observe simple rules of crypto security, and most of the time your assets are absolutely safe in your wallet. Exchanges have been hacked before and there will most probably be new hacks in the future.
CuKoin users probably thought the popular exchange was totally secure back in 2020, when hackers stole over $22M. In 2019, UpBit was exploited for $45M, and even Binance, which is considered the largest crypto exchange in the world, lost $40M in the same year due to a hacker attack. It’s not a problem of the past, too: as recently as 2022, Crypto.com got hacked for $34M, and the Hodlnaut project (not an exchange per se, but a custodial staking service) seems to be defaulting (literally at the very moment I’m writing this article)[https://twitter.com/hodlnautdotcom/status/1556583257159790592].
Sometimes users are reimbursed for the lost funds, sometimes they are not.
One important thing to add here in light of the recent (attack on Solana wallets using a vulnerability in the Slope app)[https://news.bitcoin.com/solanas-investigation-indicates-wallet-exploit-tied-to-slope-mobile-app/]: any funds you don’t need on a daily basis should be stored in a hardware wallet, period. As soon as your crypto savings reach an amount you are not comfortable with losing, get one.
You also have 24/7 access to your assets
Exchanges have been known to limit your ability to manage your tokens in several ways. There are maintenance or upgrade downtimes, lockdowns due to suspicious activity or any other reason; an exchange can as well freeze your funds in one click for whatever reason, ranging from a warrant issued by a law enforcement agency to mere suspicion because your wallet interacted with another wallet on some watch list.
Such a scenario can seriously harm your portfolio: imagine being unable to buy/sell in a period of high volatility. Also, dunno about you, but I’m very serious about the “what’s mine is mine” concept. Hands off my coins!
Last but not least, and based on the above: centralized platforms arguably go against the core principle of blockchain
This may sound somewhat libertarian, but for many the main idea of crypto was to get away from under the control of governmental institutions, banks, and big corporates. With a non-custodial wallet, the opportunity is there.
Conclusion: keeping your crypto in a centralized exchange does have its advantages, but the risks and limitations usually outweigh them.
Now let’s talk staking!
Let’s move on from simple safekeeping of your digital assets to actual staking. This needs one more important preface though:
“There is Staking and then there is Staking”
It may become pretty confusing when the same term is used with very different meanings in similar contexts. So let’s start at the beginning: definitions!
“Staking” to a Solana validator:
- You delegate your SOL to the validator
- The SOL are placed into a staking account which stays in your own wallet
- You receive your rewards from Solana blockchain’s built-in smart contract, with a transparent calculation based on the validator’s performance
- The staking account is locked and you cannot access your SOL until you unstake
“Staking” to a Solana stake pool, AKA “liquid staking”:
- You delegate your SOL to the pool and receive the pool’s SPL token in return (e.g. JSOL)
- Your SOL are delegated by the pool to a number of validators
- The rewards are generated by Solana’s smart contract, clearly and transparently, and the pool’s token appreciates every epoch
- You get your SOL + rewards when you return your pool tokens
- Staying liquid with your pool token, you use it on any DeFi platforms to gain additional yield
“Staking” to a CEX (spoiler: not really staking):
- You transfer your crypto to a centralized exchange
- Sometimes the lock-up period is fixed (e.g. you can’t withdraw your funds for 3 months or even1 year)
- The CEX does something with your funds
- You get back more than you “staked” (if everything goes well)
The important part, which I allowed myself to emphasize in bold, is that in case of CEX “staking” their delegation strategy is always non-transparent. You never know what they do with your tokens: are these really staked to a validator (if it’s SOL or another PoS-type coin)? used for lending? what’s the risk/return ratio?
If they are in fact staking to a validator, is it perhaps one that belongs to the exchange and has 5M SOL stake already — so your SOL are contributing to the network’s centralization instead of improving it? And as a delegator, you might be missing out on the additional rewards you would get by simply staking to a better validator.
Once again, let’s look at the pros and cons of “staking” via CEX:
✅ Simple: mostly one-click, user-friendly interface
❌ Mostly custodial*: you don’t hold the key to your funds
❌ Various risks, as explained above
❌ Lower (sometimes very low) APY
❌ No transparency
❌ Locked liquidity
❌ Sometimes long lock-up periods
* Coinbase seems to be an exception here as they offer direct staking to a Solana validator, however with only 3.85% rewards vs. usual direct staking rewards of at least 5%, even when delegating to a low-performance validator
What about “real”, liquid staking then? What are the pros and cons of a Solana stake pool?
✅ Simple: yes, most Solana stake pools have interfaces that are just as user-friendly as Binance
✅ Risk-free staking opportunities*
✅ High APY (varies from pool to pool)
✅ Full transparency
✅ Liquid: use your pool token on a number of DeFi platforms for additional yield
✅ Unstaking possible instantly or within 1 epoch (2–3 days)
* Technically, Solana stake pools are custodial (you transfer your SOL into the pool and get SPL tokens back). However, if you choose one of the pools using a non-altered, non-forked Solana Foundation’s stake pool program, your funds are as safe and secure as the Solana blockchain itself. As of the time of writing, at least two pools use the original program: (JPool)[https://jpool.one] and (SolBlaze)[https://stake.solblaze.org/]. Most other popular pools have also passed several audits, and their well-respected, doxxed teams are not likely to pull the rug on their projects.
Any stake pool will offer you over 5% APY. For example, JPool’s pure staking APY was 6.18% in the last epoch. If you’re up for some DeFi, you can add at least another 6–8% on top of that. In comparison, Coinbase offers only ~3.85%.
When you look at all the pros and cons, it really begins to look like the centralized exchanges’ only ‘advantage’ is better marketing: with their huge user base, they are able to attract way more delegators than Solana’s validators and stake pools could ever reach. Don’t get me wrong, they are doing an important job of popularizing Solana staking. But once you’ve learned you can stake SOL, there’s not much point to not stake it properly.
PS. Would love to hear some feedback on this article! Have you been staking your SOL? Did you delegate to a validator, a stake pool or a CEX? What was your experience?
PLEASE NOTE: This article mentions DeFi, and most DeFi instruments carry inherent risks, mostly caused by the so-called impermanent loss. We’ve mentioned it in an (earlier article)[https://jpoolsolana.medium.com/solana-defi-95105fe67c72], and a good explanation of impermanent loss can be found here: https://academy.binance.com/en/articles/impermanent-loss-explained.
Always DYOR and make sure you are comfortable with the risk/reward ratio of your investments.