October 7, 2025 • 41 mins
The source provides a comprehensive overview of compound interest staking, a strategy that combines the power of compounding with cryptocurrency staking to maximize returns. It initially defines compound interest as earning interest on both the principal and previously accumulated interest and explains staking as locking up digital assets to support a blockchain network in exchange for rewards. The episode details how reinvesting staking rewards back into the pool facilitates exponential growth, contrasting this with simple interest and providing the compound interest formula. Furthermore, the source discusses the mechanics and platforms that support this practice, analyzes its key benefits such as passive income and exponential growth, and outlines crucial risks, including market volatility and platform vulnerabilities. Finally, it offers several strategies for maximizing returns, such as choosing high Annual Percentage Yield (APY) opportunities and diversifying investments.
https://tradersuggest.com/how-compound-interest-staking-helps-you-build-wealth-over-time/
“If you don't find a way to make money while you sleep, you will work until you die.”
Warren Buffett
https://tradersuggest.com/how-compound-interest-staking-helps-you-build-wealth-over-time/
“If you don't find a way to make money while you sleep, you will work until you die.”
Warren Buffett
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to the deep dive. So you've gathered a whole
stack of research for us today, all focus on, well,
a pretty compelling goal, how to really boost your crypto
returns without being glued to the trading screen twenty four
to seven.
Speaker 2 (00:14):
That's right. And our job here is to take all
that complex material, the math, the mechanics, the risks which
are crucial, and boil it down into something clear, something
you can actually use.
Speaker 1 (00:25):
And the topic today blends something really old school financially speaking,
with the cutting edge of digital assets exactly.
Speaker 2 (00:34):
Today's mission is all about compound interest taking. We're aiming
to go beyond just looking at those flashy apy numbers
you see everywhere.
Speaker 1 (00:41):
Right, get underneath them, yeah, to.
Speaker 2 (00:42):
Really understand how combining that eighth wonder of the world,
compound interest with crypto staking, how that combination can genuinely
accelerate wealth building in this digital space.
Speaker 1 (00:54):
It jumps out straight away from well pretty much all
the sources, is this idea of acceleration. It's not just
I'm earning some passive income.
Speaker 2 (01:01):
No, it's more than that. It's passive income that then
starts generating its own income. It creates this non linear
growth curve.
Speaker 1 (01:09):
That's the core idea. We want to give you the
blueprint essentially for making your tokens work harder, faster, smarter
for you.
Speaker 2 (01:18):
And this is a big butt we have to keep
coming back to. We also need to really pick apart
the risks.
Speaker 1 (01:23):
They're significant, absolutely essential, and to do that properly, we've
got to start with the basics, Like any good financial strategy,
first things first, defining the key parts before we stick
them together.
Speaker 2 (01:33):
Okay, let's kick off with the engine behind it all,
compound interest. Now, for a lot of you listening, especially
if you're deep in finance, this isn't new, but we
need to be really precise about it in the crypto context.
So put simply, compound interest just means your investment earns interest, right,
but critically, it earns it on the initial amount plus
any interest that's already piled up, right.
Speaker 1 (01:55):
And that's the fundamental difference between you know, linear growth
and exponential growth. Simple interest that's static, It just pays
out based on what you first put.
Speaker 2 (02:04):
In, always the same amount each time, exactly. But compound
interest that's dynamic. The interest you earn gets added back in,
becomes part of the new principle, So the base keeps
growing and the interest payments get bigger over time. The
system literally feeds itself.
Speaker 1 (02:18):
In the math, the formula itself really shows how that
acceleration works. The sources all point to the standard one
A equals P times one plus R over n all
raised to the power of N times T.
Speaker 2 (02:31):
Yeah, one aoap left plus one plus frack. And look,
we don't need to dwell too much on P the
principle or A the future value. What's really critical here
are the levers inside that formula that drive the acceleration.
Speaker 1 (02:44):
You mean R, N and T exactly.
Speaker 2 (02:47):
R is your rate of return, obviously, and in crypto
staking that R can often be well significantly higher than
what you'd see in traditional finance. That's a big part
of the appeal.
Speaker 1 (02:56):
But you're saying, the real magic isn't.
Speaker 2 (02:57):
Just the rate, not solely. No fuel power multipliers are
N and T. T is time the duration. The longer
you leave it, the more cycles of compounding you get,
the more dramatic the effect. That upward curve gets steeper
and steeper.
Speaker 1 (03:10):
Makes sense, more time, more growth.
Speaker 2 (03:11):
But then there's N that's the compounding frequency. How many
times per year is that interest calculated and added back
into the pot.
Speaker 1 (03:19):
Ah. Okay, So compounding daily versus say, annually makes a
big difference, a huge difference.
Speaker 2 (03:24):
Think about it. If you compound daily that's N equals
three to sixty five annually is just N equals one,
You're giving your money three hundred and sixty four more
chances to grow each year.
Speaker 1 (03:35):
Even if the annual percentage rate the R is identical.
Speaker 2 (03:39):
Precisely, just the sheer frequency of adding that interest back
to the principle base makes the effective growth rates speed
up significantly. And that's the first big takeaway in cryptostaking.
Maximizing that frequency is often way more possible and impactful
than in old school banking, which is exactly why we're
digging into this.
Speaker 1 (03:58):
Okay, So we've got this exponential engine compound interest. Now
we need to connect it to crypto, and that happens
through staking. So what exactly is staking and why does
it pay out something like interest in the first place?
Speaker 2 (04:08):
Right? Snaking is essentially actively participating in keeping a blockchain
network secure and operational. It involves you locking up your
digital assets, your tokens within that network's protocol.
Speaker 1 (04:21):
So you're committing your coins.
Speaker 2 (04:22):
Yes, and this is fundamental for blockchains that use what's
called a proof of steak or POS consensus mechanism or
something similar.
Speaker 1 (04:29):
Right, Unlike the old proof of work like bitcoin mining,
which relies on massive computing power, POS is different.
Speaker 2 (04:36):
It is it relies more on an economic incentive. Those
tokens you lock up. They act kind of like collateral.
Validators use the steak to get the right to verify
transactions and add new blocks to the chain.
Speaker 1 (04:47):
So by staking, you're basically putting your money where your
mouth is, signaling you trust the network and want it
to run.
Speaker 2 (04:53):
Correctly exactly that you have skin in the game. If
a validator you've staked with tries to cheat the system,
like approving bad trans actions, they are staked tokens and
potentially yours, depending on the setup, can get penalized. They
call it slashing ouch.
Speaker 1 (05:07):
Okay, So there's risk, but there's also reward, and that's
the key part for our deep dive today. What does
stakers get back for providing this security service.
Speaker 2 (05:17):
They earn staking rewards. These are usually paid out in
the form of more tokens, sometimes newly created ones by
the network. Sometimes it's a cut of the transaction fees
people paid to use the network.
Speaker 1 (05:28):
So that's the passive income stream.
Speaker 2 (05:29):
That's it, And the comparison to traditional interests holds up
pretty well because you're being rewarded for committing your capital.
But here you're not committing it to a bank vault.
You're committing it to the operational health and security of
a decentralized network and.
Speaker 1 (05:44):
Those rewards, that's the interest we're looking to compound.
Speaker 2 (05:47):
Precisely, that's the fuel for the compound staking engine.
Speaker 1 (05:50):
Okay, we've got the building blocks defined compound interest staking rewards.
Now let's get to the core mechanism compound interest staking.
This is where it moves from just holding and earning
passively to well actively pushing for that exponential growth.
Speaker 2 (06:05):
Right, this is the action step. It's simply the practice,
the strategy of taking those staking rewards you earn and
immediately putting them back into the staking pool reinvesting them.
Speaker 1 (06:16):
So it's not usually automatic. You have to choose to
do this often.
Speaker 2 (06:19):
Yes, it's an active choice aimed squarely at maximizing it
that compounding frequency we talked about. The more often you reinvest,
the faster it potentially grows.
Speaker 1 (06:29):
So walk us through that cycle. Let's say a network
pays out rewards what daily or maybe weekly.
Speaker 2 (06:35):
It varies. Could be daily, could be every few days,
could be weekly tied to network eight box. But as
soon as those new tokens hit your wallet or get
credited to your staking account, the strategy is reinvest them
straight away.
Speaker 1 (06:47):
And doing that increases your total staked amount your principle.
Speaker 2 (06:51):
Instantly, which means in the next reward cycle you're earning
rewards on a slightly larger base, and then you reinvest
those slightly larger rewards.
Speaker 1 (07:00):
Which makes the base even larger for the cycle after that.
It's a feedback loop exactly.
Speaker 2 (07:05):
That's the definition of exponential growth in action. You know,
if you earn one token today on a one hundred
token steak, you reinvest tomorrow, you're earning one hundred and
one tokens day after maybe one oh two point zero one,
and so on. It's the consistency of that reinvestment that
really unlocks the acceleration. Hashtag tech tech two point two.
The mechanics of yield APY versus APR.
Speaker 1 (07:26):
Now, when we're looking at staking returns, there are these
two terms thrown around, APR and APY. The sources are
really clear. We need to focus on one. Which is
it and.
Speaker 2 (07:35):
Why we absolutely have to focus on APY annual percentage yield.
That's the standard, and for good reason. APR annual percentage
rate is just the simple interest rate. It tells you
the return based purely on your initial principle, without factoring
in any compounding.
Speaker 1 (07:49):
So ten percent APR means you get ten percent of
your original stake back over the year period.
Speaker 2 (07:53):
Correct, regardless of how often they pay it out. But APY,
that's the effective annual rate you earn after you count
for the effect of compounding those rewards back in. It
reflects the true earning power of your stake if you're
actively reinvesting.
Speaker 1 (08:06):
Okay, that distinction is crucial because if you are compounding,
the APY will always be higher than the APR, assuming
it compounds more than once.
Speaker 2 (08:14):
A year, always higher. Yes, let's use that example from
the research to make it concrete. Say you stake one
thousand tokens. The advertised rate is let's call it ten
percent per year.
Speaker 1 (08:24):
Okay. If that was simple interest ten percent APR, after
one year, you'd have your original one thousand plus one
hundred tokens in rewards total eleven hundred tokens.
Speaker 2 (08:35):
Simple enough. But now let's say that ten percent is
compounded monthly, so N equals twelve.
Speaker 1 (08:39):
Right, you're reinvesting those little bits of reward each month.
Speaker 2 (08:42):
What happens then, well, because you're earning interest on the
interest throughout the year, your total at the end is
an eleven hundred, it's actually around eleven one hundred and
four point seven to one tokens.
Speaker 1 (08:51):
Ah, So that extra four point seven one tokens that's
the compounding bonus.
Speaker 2 (08:55):
That's the difference the compounding frequency makes. That's the APY
effect versus the APR. It might seem small in your one.
Speaker 1 (09:00):
But that's the key, isn't it. That four point seventy
one isn't just extra profit. It's now part of your
principle for year two. You start year two earning interest
on eleven of four point seven one tokens, not just
eleven hundred.
Speaker 2 (09:12):
Exactly, and over five, ten, twenty years, that seemingly small
difference becomes enormous. We'll see that very clearly in the
case study later on.
Speaker 1 (09:21):
Okay, so we understand the mechanics, where do people actually
do this? Where do you go to implement compound steaking?
The sources seem to point to a couple of main avenues.
Speaker 2 (09:31):
Broadly, yes, two main categories of let's call them facilitators,
each with different ways of doing things and definitely different
risk profiles.
Speaker 1 (09:39):
First up are the big proof of steak networks themselves, isolate.
Speaker 2 (09:42):
Think ethereum, post merge. Staking eth directly requires a hefty
thirty two ETH, which is a lot for most people.
But there are staking pools and these things called liquid
staking protocols like Lido or rocket Pool. They let smaller
holders pul their ETH together and they often handle reinvestment,
though the specifics vary.
Speaker 1 (10:02):
And Cardano ADA often comes up here too, right, Yeah,
is being quite easier friendly for this.
Speaker 2 (10:07):
Yes. Cardano is frequently cited because it's basic design makes
compounding pretty straightforward. You delegate your ADA to a stake
pool from your wallet, and for many popular Cardona wallets,
the rewards you earn are kind of automatically included in
your staked balance for the next reward cycle. It's often seamless,
almost automatic compounding without you needing to constantly claim and redeposit.
Speaker 1 (10:30):
Okay, so that's staking more directly with the network or
through protocols closely tied to it. What about other platforms
like exchanges.
Speaker 2 (10:39):
That's the second major category using intermediaries, and here we
split into centralized versus decentralized. On the centralized side, you
have the big exchanges, Binance, Coinbase, crake In and so on.
They offer staking as a service.
Speaker 1 (10:52):
So they handle the technical stuff for you completely.
Speaker 2 (10:54):
They run the validators, manage the complexities. You just choose
your token, choose a staking duration maybe flexible, may be
locked for thirty sixty, ninety days. And often crucially they'll
offer a simple checkbox auto compound, reward convenience, maximum convenience,
minimal friction for the user. But and it's a big butt.
This introduces the highest level of what we call counterparty risk.
(11:18):
You're trusting the exchange entirely. We'll unpack that risk more later,
got it.
Speaker 1 (11:23):
And the other side of the intermediary coin decentralized.
Speaker 2 (11:27):
That's the world of DeFi protocols. Think platforms like a
Herve or compound, though they're more lending focused, but also
specialized yield aggregators. You're in finance being a classic example.
Speaker 1 (11:38):
How does compounding work?
Speaker 2 (11:39):
There?
Speaker 1 (11:39):
Is it automatic?
Speaker 2 (11:41):
It can be, but it's often more complex under the hood.
These platforms use smart contracts, compounding might rely on automated systems,
sometimes con keeper bots. These bots monitor the contracts and
trigger the reinvestment function, maybe harvesting rewards from one strategy
and depositing them into another, or just adding them back
to the main pool.
Speaker 1 (11:58):
So not quite as simple as a checkbox.
Speaker 2 (12:00):
Not always understanding how a specific DeFi protocol handles compounding,
is it truly automatic? How often? Who pays the transaction
fees for it? Is really key to figuring out your
actual net apy and the operational risks involved. You need
to dig into their documentation a bit more.
Speaker 1 (12:16):
Okay, this brings us right to a really practical choice,
automatic versus manual compounding. Auto sounds like the obvious winner, right,
set it and forget it.
Speaker 2 (12:25):
On the surface, yes, automatic compounding is great for consistency.
It ensures you're hitting that reinvestment cycle as frequently as possible,
maximizing the N value. In theory, the platform or the
smart contract does the work, But there's always a butt.
Speaker 1 (12:40):
What's the catch with automatic?
Speaker 2 (12:42):
The catch, and it can be a huge one, is
transaction costs gas fees, Especially on networks like Ethereum. These
fees can be well, really high sometimes, particularly when the
network is busy.
Speaker 1 (12:52):
Right, So if you're automatically compounding daily, you might be
paying a gas fee every single day exactly.
Speaker 2 (12:58):
And here's the dilemma. Imagine you have a relatively small steak,
say five hundred dollars worth of some token, and you're
earning maybe zero fifties and rewards per day.
Speaker 1 (13:08):
That sounds okay, fifty cents a day adds up.
Speaker 2 (13:11):
But what if the gas fee on a theorem that
day to make the transaction to claim and reinvest that
zero fifty census is four dollars.
Speaker 1 (13:17):
You're losing three dollars and fifties every day just by
compounding automatically.
Speaker 2 (13:21):
Precisely in that scenario, daily automatic compounding is completely counterproductive.
You're literally burning capital. The math of high frequency gets
totally wiped out by the real world cost.
Speaker 1 (13:33):
So the benefit of high frequency compounding only makes sense
if the reward you're getting each cycle is significantly bigger
than the transaction fee.
Speaker 2 (13:42):
That's the crux of it, which leads us to manual compounding.
It takes effort, you have to remember to do it,
you have.
Speaker 1 (13:49):
To log in, claim the rewards. Then stake them.
Speaker 2 (13:51):
Again, right, but it gives you control. You can let
those rewards build up for a week, maybe two weeks,
maybe a month, and then you choose a strategic moment
to reinvest them all at once.
Speaker 1 (14:01):
What makes a moment strategic lower gas.
Speaker 2 (14:04):
Fees primarily yes, you wait for a time when network
congestion is low, maybe late at night or on the weekend,
and gas prices dip. For smaller investors, especially on high
fhe networks like Ethereum, mayet compounding manually once a week
or once a month when gas is cheap, even though
it lowers your theoretical and value, can often result in
a much higher net apy you keep more of the rewards.
Speaker 1 (14:25):
So the takeaway is automate if you can, especially if
the platform covers the fees, or if you're on a
low fee network like Polygon or Salana.
Speaker 2 (14:33):
Maybe generally yes, But if.
Speaker 1 (14:35):
You're on an expensive network with a smaller steak, manual
tactal compounding, watching those gas fees might actually be the
smarter play for maximizing your real return.
Speaker 2 (14:45):
That's often the case. It requires more diligence, but potentially
yields better net results.
Speaker 1 (14:51):
Okay, we've laid out the mechanics, the platforms, the costs,
let's talk about the payoff. Why go through all this? Yeah,
the number one benefit, the big headline, has to be
that exponential growth potential, especially with the kind of yields
we sometimes see in crypto staking.
Speaker 2 (15:04):
Absolutely, the sources really hammer this home. Time is the
critical ingredient. Compounding doesn't feel that dramatic in the first
year or two. Maybe the games are kind of modest.
Speaker 1 (15:14):
Yeah, that extra four point seventy one tokens didn't sound
life changing back there.
Speaker 2 (15:18):
Right, But stretch that out over five years, ten years,
twenty years, that growth curve starts to bend upwards sharply.
It becomes incredibly powerful.
Speaker 1 (15:26):
Let's revisit that comparison you mentioned earlier. A one thousand
dollars investment, let's say at a ten percent annual rate
held for.
Speaker 2 (15:33):
Ten years, Okay, with simple interest ten percent pr it's easy.
One hundred dollars profit each year. After ten years, you've
got your original one thousand dollars plus one thousand dollars
in interest, total two thousand dollars, linear, predictable.
Speaker 1 (15:47):
Nice and steady. But now same thousand dollars, same ten
percent rate, but compounded monthly over those ten years, what.
Speaker 2 (15:54):
Happens that one thousand dollars grows to over two thousand,
seven hundred and seven dollars. Sorry, I think the earlier
figure was slightly off. The tenure mark is actually higher.
It's significantly more than the two thousand dollars from simple interest.
Speaker 1 (16:04):
Wow. Okay, so that's over seven hundred dollars extra purely
from the compounding effect exactly.
Speaker 2 (16:08):
And think about what that seven hundred and pei dollars represents.
It's more than seventy percent of your initial principle generated
just by the mechanics of reinvesting over that decade. It
really drives home that compounding doesn't just add to your money,
if fundamentally changes the trajectory of your investment's growth over time.
Hashtag tag track tag three point two Accessibility and ease.
Speaker 1 (16:27):
Beyond the potentially huge numbers, though, another big plus highlighted
is just how accessible this can be, especially compared to
other ways of making money in crypto, like say active trading.
Speaker 2 (16:36):
Definitely, compound staking, once you've set it up, is fundamentally
a passive income strategy. You do the initial work, choose
your asset, choose your platform, or method, set up auto
compounding if it makes sense, or maybe set reminders for
manual reinvestment, and then the system largely takes over.
Speaker 1 (16:55):
You're not having to constantly watch charts, analyze market sentiment,
time entries and exits.
Speaker 2 (17:01):
None of that, No technical analysis skills required, no staying
up all night worried about price swings in the same
way a day trader might. It lowers the mental overhead significantly.
Speaker 1 (17:12):
And the barrier to entry itself seeds lower too. You
mentioned not needing thirty two eh for direct ethereum staking.
If you use pools. It's not like crypto mining either, right,
not at all.
Speaker 2 (17:21):
Mining requires expensive specialized hardware, consumes a ton of electricity,
and you need some technical know how to set it
up and maintain it. Staking many programs have very low
minimum requirements. You might be able to stake just a
few dollars worth of some tokens, and you can usually
do it all through a software wall in on your
computer phone or via an exchange website.
Speaker 1 (17:40):
So it kind of democratizes access to potentially higher yields.
Speaker 2 (17:44):
That's a great way to put it. It opens the
door for you know, the average person, the long term
holder maybe someone just curious about crypto to generate returns
that used to be much harder to get without significant
resources or active effort hashtags tag three trawler three point
three supporting the ecosystem.
Speaker 1 (18:02):
And there's another benefit, maybe a bit more philosophical. The
sources mentioned that by staking, you're actually helping the network.
Speaker 2 (18:10):
Yes, and this is an important point about aligning incentives.
When you stake your tokens, you are directly contributing to
the security, the stability, and the decentralization of that blockchain.
Speaker 1 (18:21):
Your capital is literally helping to validate transactions and keep
things running smoothly.
Speaker 2 (18:25):
Exactly so, your own financial self interest wanting your stake
tokens and the rewards to be valuable, becomes directly linked
to the overall health and success of the network itself.
You want it to be secure, reliable, and well governed
because your investment depends on it.
Speaker 1 (18:39):
That feels quite different from purely speculative trading, where someone
might just be betting on short term price moves without
really caring about the underlying tech.
Speaker 2 (18:47):
It is different. Staking makes you a participant, a genuine stakeholder.
It potentially encourages a more long term perspective, maybe even
participation in network governance votes if the protocol allows it.
It fosters a more invested user base in every sense
of the word.
Speaker 1 (19:04):
Okay, we've talked up the benefits exponential growth, accessibility, ecosystem support.
It sounds pretty great, but we absolutely have to pivot
now and stare unflinchingly at the risks. High potential reward
rarely comes without high potential risk, especially in crypto.
Speaker 2 (19:20):
Couldn't agree more. This is probably the most critical section
for anyone considering this strategy, and the number one risk,
the giant shadow looming over everything, is the volatility of
the underlying asset hashtag tag tag four point one market
volatility the primary threat.
Speaker 1 (19:34):
Right those impressive APIs we discuss five percent, ten percent,
maybe even twenty percent, Those are paid out in the
token you're staking, but the value of that token in
dollars or euros or whatever your local currency is can
swing wildly massively.
Speaker 2 (19:47):
You could be compounding away diligently, growing your stack of
token X by fifteen percent over a year. That feels great,
but if during that same year the market price of
token X crashes by fifty percent, you've actually.
Speaker 1 (19:57):
Lost a significant amount of real world value. Your fifteen
percent gain in token count is completely overwhelmed by the
fifty percent price draw exactly.
Speaker 2 (20:07):
Your net position in fiat terms is deeply negative. Despite
doing everything right on the compounding front, it's absolutely vital
you internalize this compound staking growsier token count exponentially, but
your wealth is measured in fiat value, and that's constantly
at risk for market forces.
Speaker 1 (20:23):
So you have to be prepared for the possibility that,
even with great compounding, a market downturn could wipe out
all those gains in more you do.
Speaker 2 (20:32):
And it also means you need to be careful about
chasing ridiculously high apys, often yields north of say, thirty
forty percent er associated with very new, very small, or
highly experimental tokens. These tend to be extremely volatile.
Speaker 1 (20:46):
So a lower, more stable APY on a more established
may be less exciting token might actually be a safer
long term compounding play.
Speaker 2 (20:53):
It very well could be. Risk management is key hashtag
tag tag four point two Liquidity and timing issues block ups. Okay,
volatility is risk number one. What's next? The sources talk
a lot about liquidity, or the lack thereof. This relates
to locking up your tokens. Yes, when we say you
lock up tokens for staking, sometimes that's meant quite literally.
Many staking programs, particularly those offering higher yields or run
(21:15):
through centralized exchanges, require you to commit your tokens for
a fixed period like.
Speaker 1 (21:20):
Thirty days, sixty days, maybe even longer.
Speaker 2 (21:23):
Could be ninety days, one hundred and twenty days, sometimes
even years for things like initial etherium staking phases. During
this lockup period, your tokens are completely inaccessible. You cannot
withdraw them, you cannot sell them. And the danger there
is the danger is that the market takes a nose
dive or some terrible news comes out about that specific project,
(21:43):
and you are powerless to react. Your capital is stuck
while its value potentially evaporates. You lose all flexibility.
Speaker 1 (21:50):
It comes pretty scary. Is it just the lockup period?
Speaker 2 (21:53):
Not always. You also need to be aware of something
called an unbonding or unstaking period. Even after your initial
lockup might be over. Some protocols require an additional waiting
period before your tokens are actually liquid and back in
your control.
Speaker 1 (22:06):
Seriously, how long can that be?
Speaker 2 (22:08):
It varies hugely by network. Could be a few hours,
could be a few days, could be weeks, sometimes twenty
one days or even twenty eight days on certain chains.
So you need to factor in both the lock up
time and any unbonding time when you assess how quickly
you could actually get your money out if you needed to.
It dramatically impacts your real liquidity.
Speaker 1 (22:27):
All right, so we have market risk liquidity risk. What
about risks related to the platforms or the technology itself.
The sources mentioned things like slashing and trusting third parties.
Speaker 2 (22:38):
Yes, this is about who you're trusting with your assets
and the inherent risks in the tech. Let's start with
third party risk, specifically counterparty risk when using centralized services.
Speaker 1 (22:48):
Like those big exchanges offering staking exactly.
Speaker 2 (22:51):
Yeah, when you stake through binance or coinbase or similar platforms,
you're not directly interacting with the blockchain protocol in the
same way you are trusting the exchanged to stake on
your behalf and pass the rewards back to.
Speaker 1 (23:03):
You, And the risk is that the exchange itself fails Precisely.
Speaker 2 (23:06):
We've seen major exchanges get hacked with customer fund stolen.
We've seen exchanges collapse due to mismanagement or outright fraud
becoming insolvent. If the platform you're staking on goes under
or gets severely compromised.
Speaker 1 (23:20):
Your staked assets could be lost or tied up in
bankruptcy proceedings for years, regardless of how secure the actual
blockchain is.
Speaker 2 (23:29):
Correct, Your primary risk there is the solvency and security
of the exchange itself. It's classic counterparty risk.
Speaker 1 (23:35):
Okay, what about the tech risk you mentioned slashing earlier?
Speaker 2 (23:37):
Right? Slashing is a built in mechanism in proof of
stake networks designed to punish bad behavior by validators. If
a validator messes up, maybe they go offline for too
long and mis attestations, or worse, they try to validate
conflicting transactions double signing, the network protocol can automatically destroy
or slash a portion of the token stake to that validator.
Speaker 1 (23:58):
So if I've delegated my tokens to a validator pool
and that validator gets slashed.
Speaker 2 (24:03):
You could lose a percentage of your stake tokens as
a result of their mistake or malice. Your principle isn't
necessarily safe.
Speaker 1 (24:09):
Wow, how do you even protect against that?
Speaker 2 (24:11):
Or the exchange risk due diligence is paramount. For centralized exchanges,
you look for signs of stability. Are they regulated in
reputable jurisdictions? Do they provide proof of reserves? What's their
security track record?
Speaker 1 (24:23):
And for decentralized options like pools or DeFi.
Speaker 2 (24:26):
Protocols, you need to look at the specifics. If delegating
research the validator pool, what's their uptime history? Have they
ever been slashed before? Do they offer any kind of
slashing protection or insurance? Though that's rare if you're using
a DeFi staking protocol.
Speaker 1 (24:42):
Smart contracts, right those need checking.
Speaker 2 (24:44):
Too, absolutely critical. Has the smart contract code been professionally
audited by reputable security firms? Look for audit reports from
companies like Cerdict, Trail of Bits, open Zeppelin, Peckshield. An
unaudited DeFi protocol is carrying significant technical risk. You have
to verify these things before you deposit funds.
Speaker 1 (25:01):
Okay, market risk, liquidity risk, platform risk, tech risk, anything
else we need to worry about. Oh?
Speaker 2 (25:07):
Yes, the one certainty in life besides death taxes. And
they are definitely not straightforward here, right.
Speaker 1 (25:14):
Staking rewards aren't just free money? Are they? How are
they typically treated.
Speaker 2 (25:17):
In most major places like the US, UK Canada, Australia speaking,
rewards are generally treated as taxable income at the moment
you receive them, based on their fair market value at
that time, and often it's taxed as ordinary income, not
usually as capital gains initially.
Speaker 1 (25:32):
Okay, So every time you get a reward payout, whether
it's daily, weekly, whatever, that's a taxable event.
Speaker 2 (25:38):
That's the common interpretation. Yes, and this is where compounding
adds a layer of complexity or maybe just pain. How So, well,
if you receive say point one tokens today worth two dollars,
That two dollars is income you reinvested immediately tomorrow, That
reinvested point one token might earn you point zero zero
one tokens where it's say zero is reach Ye, tiny
(26:00):
dollars or two cents is also income another taxable event.
Speaker 1 (26:03):
Oh wow, So if you're compounding daily, you could potentially
have one hundreds, maybe thousands of tiny taxable events per
year to track.
Speaker 2 (26:10):
Potentially, Yes, you need to know the daytime amount and
fiat value of every single reward received. It can become
a massive record keeping headache, especially if you're using multiple
platforms or assets.
Speaker 1 (26:21):
That sounds like a nightmare. What's the advice here.
Speaker 2 (26:24):
The only sensible advice echoed across all the sources is
talk to a qualified tax professional who specializes in cryptocurrency.
Tax laws are complex, vary by country, and are still
evolving for digital assets. Don't assume standard.
Speaker 1 (26:39):
Rules apply, and you need to plan for actually paying
the tax too. Right, the tax is ode in fiat
like dollars exactly.
Speaker 2 (26:45):
But your rewards are in crypto. So you might find
yourself in a situation where you have a significant tax
liability but haven't actually converted any crypto to cash. You
might need to sell some of your staked assets, potentially
interrupting your compounding strategy, just to cover the tax bill.
It requires planning.
Speaker 1 (27:01):
Okay, we've thoroughly explored the risks alongside the rewards. Let's
bring it back to strategy. How do we navigate all this?
How do we actually maximize the net return what we
actually keep from compound staking considering all these factors.
Speaker 2 (27:14):
Right, it's about smart optimization, not just blindly chasing the
highest number. First, revisit that APUY and frequency optimization we
talked about hashtag tech check five point one optimizing yield
and frequency.
Speaker 1 (27:25):
So research the different apys available for the assets you're
interested in. But you mentioned being wary of extremely high yields.
Speaker 2 (27:31):
Definitely exercise healthy skepticism. If a platform is offering one
hundred percent or two hundred percent apy, you need to
ask why is it a brand new token with massive
inflation built in, meaning the rewards might dilute the value
of your principle quickly? Is the protocol unaudited or inherently risky?
Is it sustainable?
Speaker 1 (27:52):
So look beyond the headline rate, maybe investigate where the
yield is actually coming from.
Speaker 2 (27:57):
Yes, is it generated from real network usage like transaction
fees shared with stakers, or is it just the protocol
printing vast amounts of new tokens to distribute as rewards.
Yield derive from real economic activity is generally more sustainable
than yield derived purely from inflation. Longevity matters more than
a short term.
Speaker 1 (28:15):
Spike, Okay, it makes sense. And then optimizing the compounding frequency,
linking back to that gas fee.
Speaker 2 (28:20):
Issue exactly, It's about finding the sweet spot for your situation.
If you're on a low fee network or the platform
handles fees automate from maximum frequency daily if possible. But
if you're on an expensive network, like ethereum.
Speaker 1 (28:31):
You need to do that break even calculation figure out
how much reward needs to pile up before it's worth
paying the gas fee to reinvest.
Speaker 2 (28:38):
Correct. Maybe that calculation tells you that for your spake size,
compounding once a week or even once every two weeks
during a low gas period gives you the best net return.
You sacrifice some theoretical value for practical cost savings. It's
about net apy, not gross apy. Hashtag tag tag five
point two defensive strategies.
Speaker 1 (28:58):
Given all the risks volatility, platform failure's defense seems just
as important as offense. Here, what are the key defensive moves.
Speaker 2 (29:05):
Diversification is absolutely fundamental and it needs to be multi layered.
Meaning first, don't put all your eggs in one crypto basket.
Stake across multiple different cryptocurrencies if possible. This helps mitigate
the risk of one specific tokens price collapsing.
Speaker 1 (29:20):
Okay, diversify the assets.
Speaker 2 (29:22):
What else, diversify the method or platform you use for staking.
Maybe put some funds on a reputable centralized exchange, delegate
some directly through a native wallet for another asset, and
perhaps experiment with a well audited DeFi protocol for a
third portion. This spreads your counter party and technical risk.
Don't rely solely on one single point of failure.
Speaker 1 (29:44):
That makes a lot of sense. What about staying informed?
Things change fast.
Speaker 2 (29:48):
Vigilance is crucial. You need to keep an eye on
the market health of the assets you're staking. Maybe set
some mental stop losses or alerts if a token's value
starts to seriously degrade. Even if you're locked up, you
need a plan for what you'll do when you can
access those funds, reassess its long term viability.
Speaker 1 (30:05):
And monitor the protocols themselves too, like updates or governance votes.
Speaker 2 (30:08):
Absolutely networks evolve. Sometimes there are proposals to change the
inflation rate, the reward structure, or the technical parameters is staking,
These can directly impact your future returns or even the
security model. Being unaware of major upcoming changes is a
failure of due diligence for any serious staker. Hashtags, hash
tax paddic five point three Strategic reinvestment for manual compounding.
Speaker 1 (30:29):
You mentioned earlier that manual compounding, while maybe less convenient,
offers some flexibility, especially on high fee networks. Is there
a strategic advantage to manual beyond just saving on.
Speaker 2 (30:41):
Gas potentially Yes, if you're forced into manual compounding less frequently,
say weekly or monthly, because of high fees, you can
turn that necessity into a tactical opportunity. It allows for
strategic timing.
Speaker 1 (30:55):
You mean timing your reinvestment with market movements exactly.
Speaker 2 (30:59):
Think of it as a form of dollar cost averaging
DCA for your rewards. Let's say you accumulate your staking
rewards over a month. During that month, the price of
the token dips significantly for a few days. If you
reinvest your entire month's worth of rewards during that dip,
you're effectively buying more tokens with those rewards than you
would have if you'd compound it automatically each day at
(31:20):
potentially higher prices.
Speaker 1 (31:21):
Ah I see, you get more bang for your buck
reward wise. By buying the.
Speaker 2 (31:25):
Dip precisely, you maximize the purchasing power of your earned rewards.
Waiting for those moments when the price is temporarily lower,
and often network transaction volume might also be lower, leading
to cheaper gas fees gives you a potential double win,
lower reinvestment costs and acquiring more tokens per dollar of
reward earned.
Speaker 1 (31:45):
So it turns volatility, which we listed as a major risk,
into something you can potentially de liverge slightly to your advantage.
If you're compounding manually anyway.
Speaker 2 (31:54):
It's a small edge perhaps, but over the long term,
strategically timing those manual reinvestments during dip tips could enhance
your overall token accumulation compared to just automating blindly when
costs are high.
Speaker 1 (32:06):
Okay, let's make this even more concrete. The sources included
a case study using cardono EIGHTYA. Can you walk us
through that. It seems to illustrate how even a more
moderate apy adds up.
Speaker 2 (32:15):
Sure, it's a good example because EIGHTA staking yields are
generally seen as relatively stable and sustainable, not astronomical. So
the scenario assumes you start with ten thousand, eighty A tokens, and.
Speaker 1 (32:25):
Let's say for simplicity, the price when you start is
two dollars per EIGHTYA, So that's a twenty thousand dollars
initial investment.
Speaker 2 (32:31):
Right. Then we assume a realistic steady staking apy of
five percent it's not super high, but typical for EIGHTA,
and we assume it's compounded monthly.
Speaker 1 (32:40):
Okay, ten k eightya two dollars price five percent apy
compounded monthly. What happens over is, say five years.
Speaker 2 (32:46):
Just focusing on the token growth first, purely through that
five percent monthly compounding. Over five years, the initial ten thousand,
Eightya grows to approximately twelve thousand, eight hundred and thirty
three point five nine eighty.
Speaker 1 (32:58):
So about a twenty eight point three percent increase in
the number of tokens you hold, just from the staking
rewards compounding exactly.
Speaker 2 (33:04):
Now, let's look at the value. This is where it
gets interesting, tying back to volatility. If the price of
eightya miraculously stayed exactly at two dollars for all five years, which.
Speaker 1 (33:13):
Is unlikely but for the sake of calculation, then.
Speaker 2 (33:15):
Your total holding would be worth twenty five thousand, six
hundred and sixty seven dollars and eighteen cents. That six
hundred and sixty seven dollars gain is purely the result
of the compounding effect at a stable price.
Speaker 1 (33:24):
Okay, But what if the market actually did well over
those five years. Let's say EIGHTDA went up to three
dollars per token.
Speaker 2 (33:29):
Now the picture changes dramatically. You have twelve thousand, eight
hundred and thirty three dollars and fifty nine tokens each
worth three dollars. Your total investment value jumps to thirty
eight thousand, five hundred dollars and seventy seven cents.
Speaker 1 (33:40):
Wow. So the gain isn't just a price increase on
the original ten k tokens plus the value of the rewards.
Speaker 2 (33:45):
No, that's the critical insight. The compounding amplifies the effect
of the price appreciation. You benefited from the price rise,
not just on your initial stake, but on the additional
two thousand, eight hundred and thirty three tokens you accumulated
through compounded rewards.
Speaker 1 (34:00):
Compounding acts like a lever on market gains.
Speaker 2 (34:02):
It does, and conversely, though less fun to think about,
if the price had dropped to one dollar, having those
extra twenty eight hundred and thirty three tokens would mean
your total value is twelve thousand, eight hundred and thirty
three tokens, which is still a big loss from the
initial twenty k, but slightly better than if you only
had the original ten k tokens, which would be worth
ten dollars. It magnifies gains and slightly cushions losses. In
(34:24):
token terms. Hashtag tash tag six point two comparison to
traditional investments.
Speaker 1 (34:28):
This really highlights the potential. How does this stack up
against just putting money in, say a regular savings account
or maybe bonds.
Speaker 2 (34:35):
The contrast is pretty stark, honestly, traditional low risk investments,
you know, your standard banks, savings account, maybe government bonds.
You're typically looking at annual returns in the range of
what maybe one percent to three percent these days sometimes less,
and compounding might only happen quarterly or annually.
Speaker 1 (34:50):
Yeah, not exactly setting the world on fire.
Speaker 2 (34:52):
Whereas in crypto staking, even for established proof of state networks,
APIs of five percent to ten percent are quite common,
and for some new or a niche protocols you might
see fifteen percent, twenty percent or even higher. Though we've
discussed the risks associated with those. The sheer difference in
the base rate in our formula is enormous.
Speaker 1 (35:10):
Let's put numbers on that too, same ten thousand dollars investment,
same five year timeframe, what's a traditional savings do?
Speaker 2 (35:16):
Okay, ten thousand dollars in a savings account earning let's
be generous, two percent apy compounded monthly for five years
that rose to about eleven thousand and forty one dollars
and sixty cents, so.
Speaker 1 (35:27):
A gain of just over one thousand dollars. Safe, predictable,
but slow.
Speaker 2 (35:31):
Very slow. Now take that same ten thousand dollars and
stake it in crypto at say a modest ten percent APY,
and crucially, let's assume for this comparison, that the token
price remains perfectly stable, which is a huge assumption.
Speaker 1 (35:42):
Remember, just comparing the compounding effect at different.
Speaker 2 (35:45):
Rates, that ten thousand dollars at ten percent APY compounded
monthly for five years grows to approximately sixteen thousand, four
hundred and fifty three dollars and nine cents.
Speaker 1 (35:52):
Okay, that's a gain of over sixty four hundred dollars
compared to about one thousand dollars in savings. That's a
massive difference.
Speaker 2 (35:58):
It is, and that delta, that gap and potential returns
is precisely why investors are drawn to staking despite the
volatility and other risks we've detailed. The potential for wealth
generation is just in a different league compared to most
traditional low risk options.
Speaker 1 (36:12):
But the conclusion has to be balanced.
Speaker 2 (36:14):
Right, Absolutely, the potential upside is significantly higher, yes, but
it comes hand in hand with significantly higher risks, the
price volatility, the platform risks, the technical complexity is the
uncertain regulation. You are essentially trading the safety and predictability
of traditional finance for the potential of exponential growth in
(36:34):
a much riskier environment.
Speaker 1 (36:36):
This crypto space never stands still. So if someone is
building a long term compound staking strategy today, what should
they be keeping an eye on? What are the future
trends that might impact this good question?
Speaker 2 (36:47):
Things are definitely evolving. The first, perhaps most obvious trend
is just the continued expansion of staking itself. More blockchains
are moving to proof of steak or launching with it from.
Speaker 1 (36:57):
Day one, The more assets becoming available.
Speaker 2 (36:59):
To stay exactly, more choice, which is good, but it
also likely means more competition for staking rewards. As the
total value locked in staking across the industry grows, It's plausible,
even probable, that average apise will gradually trend downwards over
the long term basic supplying demand.
Speaker 1 (37:19):
Okay, so maybe don't expect today's highest yields to last forever.
What else?
Speaker 2 (37:23):
The second big trend is deeper integration with the rest
of DeFi decentralized finance. We're already seeing more complex, multi
layered strategies emerging.
Speaker 1 (37:32):
What do you mean by multi layers?
Speaker 2 (37:34):
Think about combining staking with other DeFi activities. For instance,
you might stake your eth using a liquid staking provider
like Lido get back steeth which represents your steak deeth
plus accruing rewards. Then you could take that steeth token
and use it as collateral in a DeFi lending protocol
to borrow stable coins, or maybe provide liquidity with it
in a decentralized exchange pool.
Speaker 1 (37:55):
WHOA Okay, So you're earning staking yield and then potentially
earning lending interest or trading fees on top of that
using the steak asset representation.
Speaker 2 (38:03):
Potentially Yes. These strategies, sometimes called yield farming or liquid
staking derivatives LSD farming, can stack yields but also stack
risks and complexity significantly. It's becoming much more interwoven.
Speaker 1 (38:17):
That sounds like a whole other deep dies needed. What
about regulation? That always looms large huge factor.
Speaker 2 (38:23):
Governments and regulators worldwide are playing catch up, but they
are catching up. Increased regulatory scrutiny is inevitable.
Speaker 1 (38:30):
How might that affect compound staking?
Speaker 2 (38:32):
Several ways we'll likely see a much clearer, more formalized
tax reporting requirements, which might simplify things in one way,
but also increase the compliance burden. Regulators might impose stricter
rules on centralized staking providers regarding custody disclosures or risk warnings.
They might even try to regulate certain DeFi protocols, and
all of this could potentially dampen some of the highest
(38:54):
ap wise, if compliance costs rise or certain activities are restricted.
Regulatory risk is absolutely a major factor to watch.
Speaker 1 (39:01):
And finally, what about just using these platforms? Will it
get easier?
Speaker 2 (39:05):
That's the fourth trend, a relentless focus on improving the
user experience. The UX platforms know that complexity is a
barrier to mass adoption.
Speaker 1 (39:13):
So making staking and compounding less intimidating for average users.
Speaker 2 (39:18):
Exactly, we're seeing more intuitive interfaces, one click staking solutions,
wallets that automatically calculate and optimize compounding based on gas fees.
The goal is to make participating as easy as say,
putting money into an online savings.
Speaker 1 (39:33):
Account, which could bring more people in.
Speaker 2 (39:35):
It absolutely will. As the technical hurdles lower, we can
expect compound staking strategies to become much more mainstream, moving
beyond just the crypto native crowd hashtash tag outro well.
Speaker 1 (39:46):
That brings us to the end of this deep dive.
We set out to understand compound interest staking and I
think we've established it well potentially one of the most
powerful tools for building wealth from the crypto space right now.
It cleverly combines that steady passive income from taking with
the frankly amazing power of exponential growth through compounding.
Speaker 2 (40:05):
It really does. But the crucial takeaway pulling together everything
from the sources is that success isn't just about finding
the absolute highest APY number you can. It's about deeply
understanding the mechanics how to actually maximize your net compounding
frequency by smartly managing those pesky gas.
Speaker 1 (40:23):
Fees, and it's about rigorously managing the significant risks. That
means constantly assessing market volatility, understanding lockup and liquidity constraints,
doing your homework on platform security and audits, diversifying your
assets and platforms, and staying on top of those tax implications.
Speaker 2 (40:39):
Couldn't have said it better. A potential is there undeniably seductive,
as you said, but this landscape is incredibly dynamic, vigilance
and adaptability are non negotiable.
Speaker 1 (40:48):
So as you the listener, think about how this applies
to your own situation, here's a final thought. We want
to leave you with something to mull over. We've talked
about the trend towards clearer regulation and much simpler user
experience is making this more accessible. If that continues, how
long can these double digit apwise we've discussed realistically persist.
At what point does the crypto staking market start to mature, stabilize,
(41:12):
and maybe begin to look a bit more like the lower,
more regulated yield environment we see in traditional finance.
Speaker 2 (41:18):
That's the multi billion dollar question for the long term investor.
Isn't it food for thought until our next deep dive
Welcome to the deep dive. So you've gathered a whole
stack of research for us today, all focus on, well,
a pretty compelling goal, how to really boost your crypto
returns without being glued to the trading screen twenty four
to seven.
Speaker 2 (00:14):
That's right. And our job here is to take all
that complex material, the math, the mechanics, the risks which
are crucial, and boil it down into something clear, something
you can actually use.
Speaker 1 (00:25):
And the topic today blends something really old school financially speaking,
with the cutting edge of digital assets exactly.
Speaker 2 (00:34):
Today's mission is all about compound interest taking. We're aiming
to go beyond just looking at those flashy apy numbers
you see everywhere.
Speaker 1 (00:41):
Right, get underneath them, yeah, to.
Speaker 2 (00:42):
Really understand how combining that eighth wonder of the world,
compound interest with crypto staking, how that combination can genuinely
accelerate wealth building in this digital space.
Speaker 1 (00:54):
It jumps out straight away from well pretty much all
the sources, is this idea of acceleration. It's not just
I'm earning some passive income.
Speaker 2 (01:01):
No, it's more than that. It's passive income that then
starts generating its own income. It creates this non linear
growth curve.
Speaker 1 (01:09):
That's the core idea. We want to give you the
blueprint essentially for making your tokens work harder, faster, smarter
for you.
Speaker 2 (01:18):
And this is a big butt we have to keep
coming back to. We also need to really pick apart
the risks.
Speaker 1 (01:23):
They're significant, absolutely essential, and to do that properly, we've
got to start with the basics, Like any good financial strategy,
first things first, defining the key parts before we stick
them together.
Speaker 2 (01:33):
Okay, let's kick off with the engine behind it all,
compound interest. Now, for a lot of you listening, especially
if you're deep in finance, this isn't new, but we
need to be really precise about it in the crypto context.
So put simply, compound interest just means your investment earns interest, right,
but critically, it earns it on the initial amount plus
any interest that's already piled up, right.
Speaker 1 (01:55):
And that's the fundamental difference between you know, linear growth
and exponential growth. Simple interest that's static, It just pays
out based on what you first put.
Speaker 2 (02:04):
In, always the same amount each time, exactly. But compound
interest that's dynamic. The interest you earn gets added back in,
becomes part of the new principle, So the base keeps
growing and the interest payments get bigger over time. The
system literally feeds itself.
Speaker 1 (02:18):
In the math, the formula itself really shows how that
acceleration works. The sources all point to the standard one
A equals P times one plus R over n all
raised to the power of N times T.
Speaker 2 (02:31):
Yeah, one aoap left plus one plus frack. And look,
we don't need to dwell too much on P the
principle or A the future value. What's really critical here
are the levers inside that formula that drive the acceleration.
Speaker 1 (02:44):
You mean R, N and T exactly.
Speaker 2 (02:47):
R is your rate of return, obviously, and in crypto
staking that R can often be well significantly higher than
what you'd see in traditional finance. That's a big part
of the appeal.
Speaker 1 (02:56):
But you're saying, the real magic isn't.
Speaker 2 (02:57):
Just the rate, not solely. No fuel power multipliers are
N and T. T is time the duration. The longer
you leave it, the more cycles of compounding you get,
the more dramatic the effect. That upward curve gets steeper
and steeper.
Speaker 1 (03:10):
Makes sense, more time, more growth.
Speaker 2 (03:11):
But then there's N that's the compounding frequency. How many
times per year is that interest calculated and added back
into the pot.
Speaker 1 (03:19):
Ah. Okay, So compounding daily versus say, annually makes a
big difference, a huge difference.
Speaker 2 (03:24):
Think about it. If you compound daily that's N equals
three to sixty five annually is just N equals one,
You're giving your money three hundred and sixty four more
chances to grow each year.
Speaker 1 (03:35):
Even if the annual percentage rate the R is identical.
Speaker 2 (03:39):
Precisely, just the sheer frequency of adding that interest back
to the principle base makes the effective growth rates speed
up significantly. And that's the first big takeaway in cryptostaking.
Maximizing that frequency is often way more possible and impactful
than in old school banking, which is exactly why we're
digging into this.
Speaker 1 (03:58):
Okay, So we've got this exponential engine compound interest. Now
we need to connect it to crypto, and that happens
through staking. So what exactly is staking and why does
it pay out something like interest in the first place?
Speaker 2 (04:08):
Right? Snaking is essentially actively participating in keeping a blockchain
network secure and operational. It involves you locking up your
digital assets, your tokens within that network's protocol.
Speaker 1 (04:21):
So you're committing your coins.
Speaker 2 (04:22):
Yes, and this is fundamental for blockchains that use what's
called a proof of steak or POS consensus mechanism or
something similar.
Speaker 1 (04:29):
Right, Unlike the old proof of work like bitcoin mining,
which relies on massive computing power, POS is different.
Speaker 2 (04:36):
It is it relies more on an economic incentive. Those
tokens you lock up. They act kind of like collateral.
Validators use the steak to get the right to verify
transactions and add new blocks to the chain.
Speaker 1 (04:47):
So by staking, you're basically putting your money where your
mouth is, signaling you trust the network and want it
to run.
Speaker 2 (04:53):
Correctly exactly that you have skin in the game. If
a validator you've staked with tries to cheat the system,
like approving bad trans actions, they are staked tokens and
potentially yours, depending on the setup, can get penalized. They
call it slashing ouch.
Speaker 1 (05:07):
Okay, So there's risk, but there's also reward, and that's
the key part for our deep dive today. What does
stakers get back for providing this security service.
Speaker 2 (05:17):
They earn staking rewards. These are usually paid out in
the form of more tokens, sometimes newly created ones by
the network. Sometimes it's a cut of the transaction fees
people paid to use the network.
Speaker 1 (05:28):
So that's the passive income stream.
Speaker 2 (05:29):
That's it, And the comparison to traditional interests holds up
pretty well because you're being rewarded for committing your capital.
But here you're not committing it to a bank vault.
You're committing it to the operational health and security of
a decentralized network and.
Speaker 1 (05:44):
Those rewards, that's the interest we're looking to compound.
Speaker 2 (05:47):
Precisely, that's the fuel for the compound staking engine.
Speaker 1 (05:50):
Okay, we've got the building blocks defined compound interest staking rewards.
Now let's get to the core mechanism compound interest staking.
This is where it moves from just holding and earning
passively to well actively pushing for that exponential growth.
Speaker 2 (06:05):
Right, this is the action step. It's simply the practice,
the strategy of taking those staking rewards you earn and
immediately putting them back into the staking pool reinvesting them.
Speaker 1 (06:16):
So it's not usually automatic. You have to choose to
do this often.
Speaker 2 (06:19):
Yes, it's an active choice aimed squarely at maximizing it
that compounding frequency we talked about. The more often you reinvest,
the faster it potentially grows.
Speaker 1 (06:29):
So walk us through that cycle. Let's say a network
pays out rewards what daily or maybe weekly.
Speaker 2 (06:35):
It varies. Could be daily, could be every few days,
could be weekly tied to network eight box. But as
soon as those new tokens hit your wallet or get
credited to your staking account, the strategy is reinvest them
straight away.
Speaker 1 (06:47):
And doing that increases your total staked amount your principle.
Speaker 2 (06:51):
Instantly, which means in the next reward cycle you're earning
rewards on a slightly larger base, and then you reinvest
those slightly larger rewards.
Speaker 1 (07:00):
Which makes the base even larger for the cycle after that.
It's a feedback loop exactly.
Speaker 2 (07:05):
That's the definition of exponential growth in action. You know,
if you earn one token today on a one hundred
token steak, you reinvest tomorrow, you're earning one hundred and
one tokens day after maybe one oh two point zero one,
and so on. It's the consistency of that reinvestment that
really unlocks the acceleration. Hashtag tech tech two point two.
The mechanics of yield APY versus APR.
Speaker 1 (07:26):
Now, when we're looking at staking returns, there are these
two terms thrown around, APR and APY. The sources are
really clear. We need to focus on one. Which is
it and.
Speaker 2 (07:35):
Why we absolutely have to focus on APY annual percentage yield.
That's the standard, and for good reason. APR annual percentage
rate is just the simple interest rate. It tells you
the return based purely on your initial principle, without factoring
in any compounding.
Speaker 1 (07:49):
So ten percent APR means you get ten percent of
your original stake back over the year period.
Speaker 2 (07:53):
Correct, regardless of how often they pay it out. But APY,
that's the effective annual rate you earn after you count
for the effect of compounding those rewards back in. It
reflects the true earning power of your stake if you're
actively reinvesting.
Speaker 1 (08:06):
Okay, that distinction is crucial because if you are compounding,
the APY will always be higher than the APR, assuming
it compounds more than once.
Speaker 2 (08:14):
A year, always higher. Yes, let's use that example from
the research to make it concrete. Say you stake one
thousand tokens. The advertised rate is let's call it ten
percent per year.
Speaker 1 (08:24):
Okay. If that was simple interest ten percent APR, after
one year, you'd have your original one thousand plus one
hundred tokens in rewards total eleven hundred tokens.
Speaker 2 (08:35):
Simple enough. But now let's say that ten percent is
compounded monthly, so N equals twelve.
Speaker 1 (08:39):
Right, you're reinvesting those little bits of reward each month.
Speaker 2 (08:42):
What happens then, well, because you're earning interest on the
interest throughout the year, your total at the end is
an eleven hundred, it's actually around eleven one hundred and
four point seven to one tokens.
Speaker 1 (08:51):
Ah, So that extra four point seven one tokens that's
the compounding bonus.
Speaker 2 (08:55):
That's the difference the compounding frequency makes. That's the APY
effect versus the APR. It might seem small in your one.
Speaker 1 (09:00):
But that's the key, isn't it. That four point seventy
one isn't just extra profit. It's now part of your
principle for year two. You start year two earning interest
on eleven of four point seven one tokens, not just
eleven hundred.
Speaker 2 (09:12):
Exactly, and over five, ten, twenty years, that seemingly small
difference becomes enormous. We'll see that very clearly in the
case study later on.
Speaker 1 (09:21):
Okay, so we understand the mechanics, where do people actually
do this? Where do you go to implement compound steaking?
The sources seem to point to a couple of main avenues.
Speaker 2 (09:31):
Broadly, yes, two main categories of let's call them facilitators,
each with different ways of doing things and definitely different
risk profiles.
Speaker 1 (09:39):
First up are the big proof of steak networks themselves, isolate.
Speaker 2 (09:42):
Think ethereum, post merge. Staking eth directly requires a hefty
thirty two ETH, which is a lot for most people.
But there are staking pools and these things called liquid
staking protocols like Lido or rocket Pool. They let smaller
holders pul their ETH together and they often handle reinvestment,
though the specifics vary.
Speaker 1 (10:02):
And Cardano ADA often comes up here too, right, Yeah,
is being quite easier friendly for this.
Speaker 2 (10:07):
Yes. Cardano is frequently cited because it's basic design makes
compounding pretty straightforward. You delegate your ADA to a stake
pool from your wallet, and for many popular Cardona wallets,
the rewards you earn are kind of automatically included in
your staked balance for the next reward cycle. It's often seamless,
almost automatic compounding without you needing to constantly claim and redeposit.
Speaker 1 (10:30):
Okay, so that's staking more directly with the network or
through protocols closely tied to it. What about other platforms
like exchanges.
Speaker 2 (10:39):
That's the second major category using intermediaries, and here we
split into centralized versus decentralized. On the centralized side, you
have the big exchanges, Binance, Coinbase, crake In and so on.
They offer staking as a service.
Speaker 1 (10:52):
So they handle the technical stuff for you completely.
Speaker 2 (10:54):
They run the validators, manage the complexities. You just choose
your token, choose a staking duration maybe flexible, may be
locked for thirty sixty, ninety days. And often crucially they'll
offer a simple checkbox auto compound, reward convenience, maximum convenience,
minimal friction for the user. But and it's a big butt.
This introduces the highest level of what we call counterparty risk.
(11:18):
You're trusting the exchange entirely. We'll unpack that risk more later,
got it.
Speaker 1 (11:23):
And the other side of the intermediary coin decentralized.
Speaker 2 (11:27):
That's the world of DeFi protocols. Think platforms like a
Herve or compound, though they're more lending focused, but also
specialized yield aggregators. You're in finance being a classic example.
Speaker 1 (11:38):
How does compounding work?
Speaker 2 (11:39):
There?
Speaker 1 (11:39):
Is it automatic?
Speaker 2 (11:41):
It can be, but it's often more complex under the hood.
These platforms use smart contracts, compounding might rely on automated systems,
sometimes con keeper bots. These bots monitor the contracts and
trigger the reinvestment function, maybe harvesting rewards from one strategy
and depositing them into another, or just adding them back
to the main pool.
Speaker 1 (11:58):
So not quite as simple as a checkbox.
Speaker 2 (12:00):
Not always understanding how a specific DeFi protocol handles compounding,
is it truly automatic? How often? Who pays the transaction
fees for it? Is really key to figuring out your
actual net apy and the operational risks involved. You need
to dig into their documentation a bit more.
Speaker 1 (12:16):
Okay, this brings us right to a really practical choice,
automatic versus manual compounding. Auto sounds like the obvious winner, right,
set it and forget it.
Speaker 2 (12:25):
On the surface, yes, automatic compounding is great for consistency.
It ensures you're hitting that reinvestment cycle as frequently as possible,
maximizing the N value. In theory, the platform or the
smart contract does the work, But there's always a butt.
Speaker 1 (12:40):
What's the catch with automatic?
Speaker 2 (12:42):
The catch, and it can be a huge one, is
transaction costs gas fees, Especially on networks like Ethereum. These
fees can be well, really high sometimes, particularly when the
network is busy.
Speaker 1 (12:52):
Right, So if you're automatically compounding daily, you might be
paying a gas fee every single day exactly.
Speaker 2 (12:58):
And here's the dilemma. Imagine you have a relatively small steak,
say five hundred dollars worth of some token, and you're
earning maybe zero fifties and rewards per day.
Speaker 1 (13:08):
That sounds okay, fifty cents a day adds up.
Speaker 2 (13:11):
But what if the gas fee on a theorem that
day to make the transaction to claim and reinvest that
zero fifty census is four dollars.
Speaker 1 (13:17):
You're losing three dollars and fifties every day just by
compounding automatically.
Speaker 2 (13:21):
Precisely in that scenario, daily automatic compounding is completely counterproductive.
You're literally burning capital. The math of high frequency gets
totally wiped out by the real world cost.
Speaker 1 (13:33):
So the benefit of high frequency compounding only makes sense
if the reward you're getting each cycle is significantly bigger
than the transaction fee.
Speaker 2 (13:42):
That's the crux of it, which leads us to manual compounding.
It takes effort, you have to remember to do it,
you have.
Speaker 1 (13:49):
To log in, claim the rewards. Then stake them.
Speaker 2 (13:51):
Again, right, but it gives you control. You can let
those rewards build up for a week, maybe two weeks,
maybe a month, and then you choose a strategic moment
to reinvest them all at once.
Speaker 1 (14:01):
What makes a moment strategic lower gas.
Speaker 2 (14:04):
Fees primarily yes, you wait for a time when network
congestion is low, maybe late at night or on the weekend,
and gas prices dip. For smaller investors, especially on high
fhe networks like Ethereum, mayet compounding manually once a week
or once a month when gas is cheap, even though
it lowers your theoretical and value, can often result in
a much higher net apy you keep more of the rewards.
Speaker 1 (14:25):
So the takeaway is automate if you can, especially if
the platform covers the fees, or if you're on a
low fee network like Polygon or Salana.
Speaker 2 (14:33):
Maybe generally yes, But if.
Speaker 1 (14:35):
You're on an expensive network with a smaller steak, manual
tactal compounding, watching those gas fees might actually be the
smarter play for maximizing your real return.
Speaker 2 (14:45):
That's often the case. It requires more diligence, but potentially
yields better net results.
Speaker 1 (14:51):
Okay, we've laid out the mechanics, the platforms, the costs,
let's talk about the payoff. Why go through all this? Yeah,
the number one benefit, the big headline, has to be
that exponential growth potential, especially with the kind of yields
we sometimes see in crypto staking.
Speaker 2 (15:04):
Absolutely, the sources really hammer this home. Time is the
critical ingredient. Compounding doesn't feel that dramatic in the first
year or two. Maybe the games are kind of modest.
Speaker 1 (15:14):
Yeah, that extra four point seventy one tokens didn't sound
life changing back there.
Speaker 2 (15:18):
Right, But stretch that out over five years, ten years,
twenty years, that growth curve starts to bend upwards sharply.
It becomes incredibly powerful.
Speaker 1 (15:26):
Let's revisit that comparison you mentioned earlier. A one thousand
dollars investment, let's say at a ten percent annual rate
held for.
Speaker 2 (15:33):
Ten years, Okay, with simple interest ten percent pr it's easy.
One hundred dollars profit each year. After ten years, you've
got your original one thousand dollars plus one thousand dollars
in interest, total two thousand dollars, linear, predictable.
Speaker 1 (15:47):
Nice and steady. But now same thousand dollars, same ten
percent rate, but compounded monthly over those ten years, what.
Speaker 2 (15:54):
Happens that one thousand dollars grows to over two thousand,
seven hundred and seven dollars. Sorry, I think the earlier
figure was slightly off. The tenure mark is actually higher.
It's significantly more than the two thousand dollars from simple interest.
Speaker 1 (16:04):
Wow. Okay, so that's over seven hundred dollars extra purely
from the compounding effect exactly.
Speaker 2 (16:08):
And think about what that seven hundred and pei dollars represents.
It's more than seventy percent of your initial principle generated
just by the mechanics of reinvesting over that decade. It
really drives home that compounding doesn't just add to your money,
if fundamentally changes the trajectory of your investment's growth over time.
Hashtag tag track tag three point two Accessibility and ease.
Speaker 1 (16:27):
Beyond the potentially huge numbers, though, another big plus highlighted
is just how accessible this can be, especially compared to
other ways of making money in crypto, like say active trading.
Speaker 2 (16:36):
Definitely, compound staking, once you've set it up, is fundamentally
a passive income strategy. You do the initial work, choose
your asset, choose your platform, or method, set up auto
compounding if it makes sense, or maybe set reminders for
manual reinvestment, and then the system largely takes over.
Speaker 1 (16:55):
You're not having to constantly watch charts, analyze market sentiment,
time entries and exits.
Speaker 2 (17:01):
None of that, No technical analysis skills required, no staying
up all night worried about price swings in the same
way a day trader might. It lowers the mental overhead significantly.
Speaker 1 (17:12):
And the barrier to entry itself seeds lower too. You
mentioned not needing thirty two eh for direct ethereum staking.
If you use pools. It's not like crypto mining either, right,
not at all.
Speaker 2 (17:21):
Mining requires expensive specialized hardware, consumes a ton of electricity,
and you need some technical know how to set it
up and maintain it. Staking many programs have very low
minimum requirements. You might be able to stake just a
few dollars worth of some tokens, and you can usually
do it all through a software wall in on your
computer phone or via an exchange website.
Speaker 1 (17:40):
So it kind of democratizes access to potentially higher yields.
Speaker 2 (17:44):
That's a great way to put it. It opens the
door for you know, the average person, the long term
holder maybe someone just curious about crypto to generate returns
that used to be much harder to get without significant
resources or active effort hashtags tag three trawler three point
three supporting the ecosystem.
Speaker 1 (18:02):
And there's another benefit, maybe a bit more philosophical. The
sources mentioned that by staking, you're actually helping the network.
Speaker 2 (18:10):
Yes, and this is an important point about aligning incentives.
When you stake your tokens, you are directly contributing to
the security, the stability, and the decentralization of that blockchain.
Speaker 1 (18:21):
Your capital is literally helping to validate transactions and keep
things running smoothly.
Speaker 2 (18:25):
Exactly so, your own financial self interest wanting your stake
tokens and the rewards to be valuable, becomes directly linked
to the overall health and success of the network itself.
You want it to be secure, reliable, and well governed
because your investment depends on it.
Speaker 1 (18:39):
That feels quite different from purely speculative trading, where someone
might just be betting on short term price moves without
really caring about the underlying tech.
Speaker 2 (18:47):
It is different. Staking makes you a participant, a genuine stakeholder.
It potentially encourages a more long term perspective, maybe even
participation in network governance votes if the protocol allows it.
It fosters a more invested user base in every sense
of the word.
Speaker 1 (19:04):
Okay, we've talked up the benefits exponential growth, accessibility, ecosystem support.
It sounds pretty great, but we absolutely have to pivot
now and stare unflinchingly at the risks. High potential reward
rarely comes without high potential risk, especially in crypto.
Speaker 2 (19:20):
Couldn't agree more. This is probably the most critical section
for anyone considering this strategy, and the number one risk,
the giant shadow looming over everything, is the volatility of
the underlying asset hashtag tag tag four point one market
volatility the primary threat.
Speaker 1 (19:34):
Right those impressive APIs we discuss five percent, ten percent,
maybe even twenty percent, Those are paid out in the
token you're staking, but the value of that token in
dollars or euros or whatever your local currency is can
swing wildly massively.
Speaker 2 (19:47):
You could be compounding away diligently, growing your stack of
token X by fifteen percent over a year. That feels great,
but if during that same year the market price of
token X crashes by fifty percent, you've actually.
Speaker 1 (19:57):
Lost a significant amount of real world value. Your fifteen
percent gain in token count is completely overwhelmed by the
fifty percent price draw exactly.
Speaker 2 (20:07):
Your net position in fiat terms is deeply negative. Despite
doing everything right on the compounding front, it's absolutely vital
you internalize this compound staking growsier token count exponentially, but
your wealth is measured in fiat value, and that's constantly
at risk for market forces.
Speaker 1 (20:23):
So you have to be prepared for the possibility that,
even with great compounding, a market downturn could wipe out
all those gains in more you do.
Speaker 2 (20:32):
And it also means you need to be careful about
chasing ridiculously high apys, often yields north of say, thirty
forty percent er associated with very new, very small, or
highly experimental tokens. These tend to be extremely volatile.
Speaker 1 (20:46):
So a lower, more stable APY on a more established
may be less exciting token might actually be a safer
long term compounding play.
Speaker 2 (20:53):
It very well could be. Risk management is key hashtag
tag tag four point two Liquidity and timing issues block ups. Okay,
volatility is risk number one. What's next? The sources talk
a lot about liquidity, or the lack thereof. This relates
to locking up your tokens. Yes, when we say you
lock up tokens for staking, sometimes that's meant quite literally.
Many staking programs, particularly those offering higher yields or run
(21:15):
through centralized exchanges, require you to commit your tokens for
a fixed period like.
Speaker 1 (21:20):
Thirty days, sixty days, maybe even longer.
Speaker 2 (21:23):
Could be ninety days, one hundred and twenty days, sometimes
even years for things like initial etherium staking phases. During
this lockup period, your tokens are completely inaccessible. You cannot
withdraw them, you cannot sell them. And the danger there
is the danger is that the market takes a nose
dive or some terrible news comes out about that specific project,
(21:43):
and you are powerless to react. Your capital is stuck
while its value potentially evaporates. You lose all flexibility.
Speaker 1 (21:50):
It comes pretty scary. Is it just the lockup period?
Speaker 2 (21:53):
Not always. You also need to be aware of something
called an unbonding or unstaking period. Even after your initial
lockup might be over. Some protocols require an additional waiting
period before your tokens are actually liquid and back in
your control.
Speaker 1 (22:06):
Seriously, how long can that be?
Speaker 2 (22:08):
It varies hugely by network. Could be a few hours,
could be a few days, could be weeks, sometimes twenty
one days or even twenty eight days on certain chains.
So you need to factor in both the lock up
time and any unbonding time when you assess how quickly
you could actually get your money out if you needed to.
It dramatically impacts your real liquidity.
Speaker 1 (22:27):
All right, so we have market risk liquidity risk. What
about risks related to the platforms or the technology itself.
The sources mentioned things like slashing and trusting third parties.
Speaker 2 (22:38):
Yes, this is about who you're trusting with your assets
and the inherent risks in the tech. Let's start with
third party risk, specifically counterparty risk when using centralized services.
Speaker 1 (22:48):
Like those big exchanges offering staking exactly.
Speaker 2 (22:51):
Yeah, when you stake through binance or coinbase or similar platforms,
you're not directly interacting with the blockchain protocol in the
same way you are trusting the exchanged to stake on
your behalf and pass the rewards back to.
Speaker 1 (23:03):
You, And the risk is that the exchange itself fails Precisely.
Speaker 2 (23:06):
We've seen major exchanges get hacked with customer fund stolen.
We've seen exchanges collapse due to mismanagement or outright fraud
becoming insolvent. If the platform you're staking on goes under
or gets severely compromised.
Speaker 1 (23:20):
Your staked assets could be lost or tied up in
bankruptcy proceedings for years, regardless of how secure the actual
blockchain is.
Speaker 2 (23:29):
Correct, Your primary risk there is the solvency and security
of the exchange itself. It's classic counterparty risk.
Speaker 1 (23:35):
Okay, what about the tech risk you mentioned slashing earlier?
Speaker 2 (23:37):
Right? Slashing is a built in mechanism in proof of
stake networks designed to punish bad behavior by validators. If
a validator messes up, maybe they go offline for too
long and mis attestations, or worse, they try to validate
conflicting transactions double signing, the network protocol can automatically destroy
or slash a portion of the token stake to that validator.
Speaker 1 (23:58):
So if I've delegated my tokens to a validator pool
and that validator gets slashed.
Speaker 2 (24:03):
You could lose a percentage of your stake tokens as
a result of their mistake or malice. Your principle isn't
necessarily safe.
Speaker 1 (24:09):
Wow, how do you even protect against that?
Speaker 2 (24:11):
Or the exchange risk due diligence is paramount. For centralized exchanges,
you look for signs of stability. Are they regulated in
reputable jurisdictions? Do they provide proof of reserves? What's their
security track record?
Speaker 1 (24:23):
And for decentralized options like pools or DeFi.
Speaker 2 (24:26):
Protocols, you need to look at the specifics. If delegating
research the validator pool, what's their uptime history? Have they
ever been slashed before? Do they offer any kind of
slashing protection or insurance? Though that's rare if you're using
a DeFi staking protocol.
Speaker 1 (24:42):
Smart contracts, right those need checking.
Speaker 2 (24:44):
Too, absolutely critical. Has the smart contract code been professionally
audited by reputable security firms? Look for audit reports from
companies like Cerdict, Trail of Bits, open Zeppelin, Peckshield. An
unaudited DeFi protocol is carrying significant technical risk. You have
to verify these things before you deposit funds.
Speaker 1 (25:01):
Okay, market risk, liquidity risk, platform risk, tech risk, anything
else we need to worry about. Oh?
Speaker 2 (25:07):
Yes, the one certainty in life besides death taxes. And
they are definitely not straightforward here, right.
Speaker 1 (25:14):
Staking rewards aren't just free money? Are they? How are
they typically treated.
Speaker 2 (25:17):
In most major places like the US, UK Canada, Australia speaking,
rewards are generally treated as taxable income at the moment
you receive them, based on their fair market value at
that time, and often it's taxed as ordinary income, not
usually as capital gains initially.
Speaker 1 (25:32):
Okay, So every time you get a reward payout, whether
it's daily, weekly, whatever, that's a taxable event.
Speaker 2 (25:38):
That's the common interpretation. Yes, and this is where compounding
adds a layer of complexity or maybe just pain. How So, well,
if you receive say point one tokens today worth two dollars,
That two dollars is income you reinvested immediately tomorrow, That
reinvested point one token might earn you point zero zero
one tokens where it's say zero is reach Ye, tiny
(26:00):
dollars or two cents is also income another taxable event.
Speaker 1 (26:03):
Oh wow, So if you're compounding daily, you could potentially
have one hundreds, maybe thousands of tiny taxable events per
year to track.
Speaker 2 (26:10):
Potentially, Yes, you need to know the daytime amount and
fiat value of every single reward received. It can become
a massive record keeping headache, especially if you're using multiple
platforms or assets.
Speaker 1 (26:21):
That sounds like a nightmare. What's the advice here.
Speaker 2 (26:24):
The only sensible advice echoed across all the sources is
talk to a qualified tax professional who specializes in cryptocurrency.
Tax laws are complex, vary by country, and are still
evolving for digital assets. Don't assume standard.
Speaker 1 (26:39):
Rules apply, and you need to plan for actually paying
the tax too. Right, the tax is ode in fiat
like dollars exactly.
Speaker 2 (26:45):
But your rewards are in crypto. So you might find
yourself in a situation where you have a significant tax
liability but haven't actually converted any crypto to cash. You
might need to sell some of your staked assets, potentially
interrupting your compounding strategy, just to cover the tax bill.
It requires planning.
Speaker 1 (27:01):
Okay, we've thoroughly explored the risks alongside the rewards. Let's
bring it back to strategy. How do we navigate all this?
How do we actually maximize the net return what we
actually keep from compound staking considering all these factors.
Speaker 2 (27:14):
Right, it's about smart optimization, not just blindly chasing the
highest number. First, revisit that APUY and frequency optimization we
talked about hashtag tech check five point one optimizing yield
and frequency.
Speaker 1 (27:25):
So research the different apys available for the assets you're
interested in. But you mentioned being wary of extremely high yields.
Speaker 2 (27:31):
Definitely exercise healthy skepticism. If a platform is offering one
hundred percent or two hundred percent apy, you need to
ask why is it a brand new token with massive
inflation built in, meaning the rewards might dilute the value
of your principle quickly? Is the protocol unaudited or inherently risky?
Is it sustainable?
Speaker 1 (27:52):
So look beyond the headline rate, maybe investigate where the
yield is actually coming from.
Speaker 2 (27:57):
Yes, is it generated from real network usage like transaction
fees shared with stakers, or is it just the protocol
printing vast amounts of new tokens to distribute as rewards.
Yield derive from real economic activity is generally more sustainable
than yield derived purely from inflation. Longevity matters more than
a short term.
Speaker 1 (28:15):
Spike, Okay, it makes sense. And then optimizing the compounding frequency,
linking back to that gas fee.
Speaker 2 (28:20):
Issue exactly, It's about finding the sweet spot for your situation.
If you're on a low fee network or the platform
handles fees automate from maximum frequency daily if possible. But
if you're on an expensive network, like ethereum.
Speaker 1 (28:31):
You need to do that break even calculation figure out
how much reward needs to pile up before it's worth
paying the gas fee to reinvest.
Speaker 2 (28:38):
Correct. Maybe that calculation tells you that for your spake size,
compounding once a week or even once every two weeks
during a low gas period gives you the best net return.
You sacrifice some theoretical value for practical cost savings. It's
about net apy, not gross apy. Hashtag tag tag five
point two defensive strategies.
Speaker 1 (28:58):
Given all the risks volatility, platform failure's defense seems just
as important as offense. Here, what are the key defensive moves.
Speaker 2 (29:05):
Diversification is absolutely fundamental and it needs to be multi layered.
Meaning first, don't put all your eggs in one crypto basket.
Stake across multiple different cryptocurrencies if possible. This helps mitigate
the risk of one specific tokens price collapsing.
Speaker 1 (29:20):
Okay, diversify the assets.
Speaker 2 (29:22):
What else, diversify the method or platform you use for staking.
Maybe put some funds on a reputable centralized exchange, delegate
some directly through a native wallet for another asset, and
perhaps experiment with a well audited DeFi protocol for a
third portion. This spreads your counter party and technical risk.
Don't rely solely on one single point of failure.
Speaker 1 (29:44):
That makes a lot of sense. What about staying informed?
Things change fast.
Speaker 2 (29:48):
Vigilance is crucial. You need to keep an eye on
the market health of the assets you're staking. Maybe set
some mental stop losses or alerts if a token's value
starts to seriously degrade. Even if you're locked up, you
need a plan for what you'll do when you can
access those funds, reassess its long term viability.
Speaker 1 (30:05):
And monitor the protocols themselves too, like updates or governance votes.
Speaker 2 (30:08):
Absolutely networks evolve. Sometimes there are proposals to change the
inflation rate, the reward structure, or the technical parameters is staking,
These can directly impact your future returns or even the
security model. Being unaware of major upcoming changes is a
failure of due diligence for any serious staker. Hashtags, hash
tax paddic five point three Strategic reinvestment for manual compounding.
Speaker 1 (30:29):
You mentioned earlier that manual compounding, while maybe less convenient,
offers some flexibility, especially on high fee networks. Is there
a strategic advantage to manual beyond just saving on.
Speaker 2 (30:41):
Gas potentially Yes, if you're forced into manual compounding less frequently,
say weekly or monthly, because of high fees, you can
turn that necessity into a tactical opportunity. It allows for
strategic timing.
Speaker 1 (30:55):
You mean timing your reinvestment with market movements exactly.
Speaker 2 (30:59):
Think of it as a form of dollar cost averaging
DCA for your rewards. Let's say you accumulate your staking
rewards over a month. During that month, the price of
the token dips significantly for a few days. If you
reinvest your entire month's worth of rewards during that dip,
you're effectively buying more tokens with those rewards than you
would have if you'd compound it automatically each day at
(31:20):
potentially higher prices.
Speaker 1 (31:21):
Ah I see, you get more bang for your buck
reward wise. By buying the.
Speaker 2 (31:25):
Dip precisely, you maximize the purchasing power of your earned rewards.
Waiting for those moments when the price is temporarily lower,
and often network transaction volume might also be lower, leading
to cheaper gas fees gives you a potential double win,
lower reinvestment costs and acquiring more tokens per dollar of
reward earned.
Speaker 1 (31:45):
So it turns volatility, which we listed as a major risk,
into something you can potentially de liverge slightly to your advantage.
If you're compounding manually anyway.
Speaker 2 (31:54):
It's a small edge perhaps, but over the long term,
strategically timing those manual reinvestments during dip tips could enhance
your overall token accumulation compared to just automating blindly when
costs are high.
Speaker 1 (32:06):
Okay, let's make this even more concrete. The sources included
a case study using cardono EIGHTYA. Can you walk us
through that. It seems to illustrate how even a more
moderate apy adds up.
Speaker 2 (32:15):
Sure, it's a good example because EIGHTA staking yields are
generally seen as relatively stable and sustainable, not astronomical. So
the scenario assumes you start with ten thousand, eighty A tokens, and.
Speaker 1 (32:25):
Let's say for simplicity, the price when you start is
two dollars per EIGHTYA, So that's a twenty thousand dollars
initial investment.
Speaker 2 (32:31):
Right. Then we assume a realistic steady staking apy of
five percent it's not super high, but typical for EIGHTA,
and we assume it's compounded monthly.
Speaker 1 (32:40):
Okay, ten k eightya two dollars price five percent apy
compounded monthly. What happens over is, say five years.
Speaker 2 (32:46):
Just focusing on the token growth first, purely through that
five percent monthly compounding. Over five years, the initial ten thousand,
Eightya grows to approximately twelve thousand, eight hundred and thirty
three point five nine eighty.
Speaker 1 (32:58):
So about a twenty eight point three percent increase in
the number of tokens you hold, just from the staking
rewards compounding exactly.
Speaker 2 (33:04):
Now, let's look at the value. This is where it
gets interesting, tying back to volatility. If the price of
eightya miraculously stayed exactly at two dollars for all five years, which.
Speaker 1 (33:13):
Is unlikely but for the sake of calculation, then.
Speaker 2 (33:15):
Your total holding would be worth twenty five thousand, six
hundred and sixty seven dollars and eighteen cents. That six
hundred and sixty seven dollars gain is purely the result
of the compounding effect at a stable price.
Speaker 1 (33:24):
Okay, But what if the market actually did well over
those five years. Let's say EIGHTDA went up to three
dollars per token.
Speaker 2 (33:29):
Now the picture changes dramatically. You have twelve thousand, eight
hundred and thirty three dollars and fifty nine tokens each
worth three dollars. Your total investment value jumps to thirty
eight thousand, five hundred dollars and seventy seven cents.
Speaker 1 (33:40):
Wow. So the gain isn't just a price increase on
the original ten k tokens plus the value of the rewards.
Speaker 2 (33:45):
No, that's the critical insight. The compounding amplifies the effect
of the price appreciation. You benefited from the price rise,
not just on your initial stake, but on the additional
two thousand, eight hundred and thirty three tokens you accumulated
through compounded rewards.
Speaker 1 (34:00):
Compounding acts like a lever on market gains.
Speaker 2 (34:02):
It does, and conversely, though less fun to think about,
if the price had dropped to one dollar, having those
extra twenty eight hundred and thirty three tokens would mean
your total value is twelve thousand, eight hundred and thirty
three tokens, which is still a big loss from the
initial twenty k, but slightly better than if you only
had the original ten k tokens, which would be worth
ten dollars. It magnifies gains and slightly cushions losses. In
(34:24):
token terms. Hashtag tash tag six point two comparison to
traditional investments.
Speaker 1 (34:28):
This really highlights the potential. How does this stack up
against just putting money in, say a regular savings account
or maybe bonds.
Speaker 2 (34:35):
The contrast is pretty stark, honestly, traditional low risk investments,
you know, your standard banks, savings account, maybe government bonds.
You're typically looking at annual returns in the range of
what maybe one percent to three percent these days sometimes less,
and compounding might only happen quarterly or annually.
Speaker 1 (34:50):
Yeah, not exactly setting the world on fire.
Speaker 2 (34:52):
Whereas in crypto staking, even for established proof of state networks,
APIs of five percent to ten percent are quite common,
and for some new or a niche protocols you might
see fifteen percent, twenty percent or even higher. Though we've
discussed the risks associated with those. The sheer difference in
the base rate in our formula is enormous.
Speaker 1 (35:10):
Let's put numbers on that too, same ten thousand dollars investment,
same five year timeframe, what's a traditional savings do?
Speaker 2 (35:16):
Okay, ten thousand dollars in a savings account earning let's
be generous, two percent apy compounded monthly for five years
that rose to about eleven thousand and forty one dollars
and sixty cents, so.
Speaker 1 (35:27):
A gain of just over one thousand dollars. Safe, predictable,
but slow.
Speaker 2 (35:31):
Very slow. Now take that same ten thousand dollars and
stake it in crypto at say a modest ten percent APY,
and crucially, let's assume for this comparison, that the token
price remains perfectly stable, which is a huge assumption.
Speaker 1 (35:42):
Remember, just comparing the compounding effect at different.
Speaker 2 (35:45):
Rates, that ten thousand dollars at ten percent APY compounded
monthly for five years grows to approximately sixteen thousand, four
hundred and fifty three dollars and nine cents.
Speaker 1 (35:52):
Okay, that's a gain of over sixty four hundred dollars
compared to about one thousand dollars in savings. That's a
massive difference.
Speaker 2 (35:58):
It is, and that delta, that gap and potential returns
is precisely why investors are drawn to staking despite the
volatility and other risks we've detailed. The potential for wealth
generation is just in a different league compared to most
traditional low risk options.
Speaker 1 (36:12):
But the conclusion has to be balanced.
Speaker 2 (36:14):
Right, Absolutely, the potential upside is significantly higher, yes, but
it comes hand in hand with significantly higher risks, the
price volatility, the platform risks, the technical complexity is the
uncertain regulation. You are essentially trading the safety and predictability
of traditional finance for the potential of exponential growth in
(36:34):
a much riskier environment.
Speaker 1 (36:36):
This crypto space never stands still. So if someone is
building a long term compound staking strategy today, what should
they be keeping an eye on? What are the future
trends that might impact this good question?
Speaker 2 (36:47):
Things are definitely evolving. The first, perhaps most obvious trend
is just the continued expansion of staking itself. More blockchains
are moving to proof of steak or launching with it from.
Speaker 1 (36:57):
Day one, The more assets becoming available.
Speaker 2 (36:59):
To stay exactly, more choice, which is good, but it
also likely means more competition for staking rewards. As the
total value locked in staking across the industry grows, It's plausible,
even probable, that average apise will gradually trend downwards over
the long term basic supplying demand.
Speaker 1 (37:19):
Okay, so maybe don't expect today's highest yields to last forever.
What else?
Speaker 2 (37:23):
The second big trend is deeper integration with the rest
of DeFi decentralized finance. We're already seeing more complex, multi
layered strategies emerging.
Speaker 1 (37:32):
What do you mean by multi layers?
Speaker 2 (37:34):
Think about combining staking with other DeFi activities. For instance,
you might stake your eth using a liquid staking provider
like Lido get back steeth which represents your steak deeth
plus accruing rewards. Then you could take that steeth token
and use it as collateral in a DeFi lending protocol
to borrow stable coins, or maybe provide liquidity with it
in a decentralized exchange pool.
Speaker 1 (37:55):
WHOA Okay, So you're earning staking yield and then potentially
earning lending interest or trading fees on top of that
using the steak asset representation.
Speaker 2 (38:03):
Potentially Yes. These strategies, sometimes called yield farming or liquid
staking derivatives LSD farming, can stack yields but also stack
risks and complexity significantly. It's becoming much more interwoven.
Speaker 1 (38:17):
That sounds like a whole other deep dies needed. What
about regulation? That always looms large huge factor.
Speaker 2 (38:23):
Governments and regulators worldwide are playing catch up, but they
are catching up. Increased regulatory scrutiny is inevitable.
Speaker 1 (38:30):
How might that affect compound staking?
Speaker 2 (38:32):
Several ways we'll likely see a much clearer, more formalized
tax reporting requirements, which might simplify things in one way,
but also increase the compliance burden. Regulators might impose stricter
rules on centralized staking providers regarding custody disclosures or risk warnings.
They might even try to regulate certain DeFi protocols, and
all of this could potentially dampen some of the highest
(38:54):
ap wise, if compliance costs rise or certain activities are restricted.
Regulatory risk is absolutely a major factor to watch.
Speaker 1 (39:01):
And finally, what about just using these platforms? Will it
get easier?
Speaker 2 (39:05):
That's the fourth trend, a relentless focus on improving the
user experience. The UX platforms know that complexity is a
barrier to mass adoption.
Speaker 1 (39:13):
So making staking and compounding less intimidating for average users.
Speaker 2 (39:18):
Exactly, we're seeing more intuitive interfaces, one click staking solutions,
wallets that automatically calculate and optimize compounding based on gas fees.
The goal is to make participating as easy as say,
putting money into an online savings.
Speaker 1 (39:33):
Account, which could bring more people in.
Speaker 2 (39:35):
It absolutely will. As the technical hurdles lower, we can
expect compound staking strategies to become much more mainstream, moving
beyond just the crypto native crowd hashtash tag outro well.
Speaker 1 (39:46):
That brings us to the end of this deep dive.
We set out to understand compound interest staking and I
think we've established it well potentially one of the most
powerful tools for building wealth from the crypto space right now.
It cleverly combines that steady passive income from taking with
the frankly amazing power of exponential growth through compounding.
Speaker 2 (40:05):
It really does. But the crucial takeaway pulling together everything
from the sources is that success isn't just about finding
the absolute highest APY number you can. It's about deeply
understanding the mechanics how to actually maximize your net compounding
frequency by smartly managing those pesky gas.
Speaker 1 (40:23):
Fees, and it's about rigorously managing the significant risks. That
means constantly assessing market volatility, understanding lockup and liquidity constraints,
doing your homework on platform security and audits, diversifying your
assets and platforms, and staying on top of those tax implications.
Speaker 2 (40:39):
Couldn't have said it better. A potential is there undeniably seductive,
as you said, but this landscape is incredibly dynamic, vigilance
and adaptability are non negotiable.
Speaker 1 (40:48):
So as you the listener, think about how this applies
to your own situation, here's a final thought. We want
to leave you with something to mull over. We've talked
about the trend towards clearer regulation and much simpler user
experience is making this more accessible. If that continues, how
long can these double digit apwise we've discussed realistically persist.
At what point does the crypto staking market start to mature, stabilize,
(41:12):
and maybe begin to look a bit more like the lower,
more regulated yield environment we see in traditional finance.
Speaker 2 (41:18):
That's the multi billion dollar question for the long term investor.
Isn't it food for thought until our next deep dive
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