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Coindesk offers some context: > Kraken’s staking service offered a 20% APY, promising to send customers staking rewards twice per week, according to its websit

Coindesk offers some context: > Kraken’s staking service offered a 20% APY, promising to send customers staking rewards twice per week, according to its website. https://www.coindesk.com/policy/2023/02/09/kraken-agreed-to-shutter-crypto-staking-operations-to-settle-sec-charges-source/ https://www.coindesk.com/policy/2023/02/09/kraken-agreed-to-... Simple question: how is that guaranteed yield sustainable if not through a Ponzi scheme?

tbruckner 4y ago
It is a Ponzi scheme. The only way it wouldn't be is if it was paying dividends through revenue it generated and crypto generates zero revenue.
- coolestguy 4y ago
  Ethereum's chain is profitable. The networks fees outweights the supply given to validators to secure the chain.
  - lottin 4y ago
    Source?
    - yokem55 4y ago
      https://ultrasound.money https://ultrasound.money tracks this. You can play with the sliders projecting things out depending on how much ether is staked vs what the sustained transaction fees are.
      - lottin 4y ago
        It's unclear to me by looking at these numbers that the network is profitable. Profit is the difference between revenue and cost, so we need to know the amount of fees earned and the operating expenses.
        yokem55 4y ago
        Ethereum measures its "costs" as issuance paid to stakers while measureing "income" in the amount of eth burned by users via gas fees paid to transact on the network. Since the merge, there has been about 15K more eth burned in transaction fees then has been issued to validators.
        lottin 4y ago
        Both issuance of eth and fees are forms of revenue to validators. You're saying that revenue is predominantly in the form of transaction fees. This is just one part of the equation. The other part is costs, and this doesn't tell us anything about the costs incurred by the validators. Therefore no conclusions about the profitability of the network can be inferred from this data.
        lmm 4y ago
        The argument would be that transactions must be worth at least what people pay for them, otherwise people wouldn't pay for them.
        lottin 4y ago
        Nobody is doubting that transactions aren't worth what people pay for them. The doubt is whether the fees that users pay exceed the costs of operating the network.
        yokem55 4y ago
        90+% of the transaction fees are not paid to validators. They are burned or thrown away. That reduces the supply of eth to the benefit of all other eth holders.
        lottin 4y ago
        If fees are thrown away you can't count them as revenue. Also, still no mention of costs.
    - mszcz 4y ago
      If it weren't true the network wouldn't run longer than it takes one's idle curiosity yield to the electricity bills.
    - piqi 4y ago
      https://tokenterminal.com/leaderboards/earnings https://tokenterminal.com/leaderboards/earnings
  - tbruckner 4y ago
    But it's still a Ponzi scheme in that you're paid out in the thing you stake, so you don't necessarily have any more value with respect to an external reference. For all practical purposes, you could exchange the currency for something else. But that's outside the scope of the staking system as defined. I'm not making any negative or positive judgement on the system, Ponzi scheme is just a description of how it operates. Similarly, any stocks that does not pay out dividend is also a Ponzi scheme.
    - TAKEMYMONEY 4y ago
      > it's still a Ponzi scheme in that you're paid out in the thing you stake > any stocks that does not pay out dividend is [sic] also a Ponzi scheme Neither of these things are "Ponzi schemes." Read about Charles Ponzi's role in his investment scheme to understand why.
    - NineStarPoint 4y ago
      That’s not what a ponzi scheme is though. The most important thing about what makes a ponzi scheme a scheme is that the person running the scheme is obfuscating where the money being paid out comes from. It’s when someone pretends they’re doing something highly profitable to attract investors, but actually when they pay people with what they claim is profits they’re actually just using the money from other investors. The defining feature of a ponzi scheme is not that if no one would be willing to buy if off you, if would have no value (that’s definitionally true of all objects). It’s that if new people stopped investing in the company, the company would fall apart. There is no value in a ponzi scheme separate from more money piling into it. This is very different from a stock that doesn’t pay a dividend. While you’d never get money out of it if no one was willing to buy it, what stocks generally promise is some amount of ownership and voting rights in a company (which theoretically could result in dividends, if enough stock holders agreed). That said ownership ended up not being valued by other people does not make it fraud. You can certainly feel free to believe that stocks that don’t give dividends are worthless though, that’s a separate question really. I generally come down on the side that the major cryptocurrencies aren’t ponzi schemes, or fraud in general. (Plenty of fraud in the shitcoins, of course). Ultimately you decided to buy a data point on a ledger in a distributed system, and that’s what you get. But…well, mining sometimes confuses that. Without enough people coming into the system to buy new coins, the miners would start shutting down until none were left. Much like a ponzi scheme, crypto currencies seem reliant on new blood to keep functioning to me. Don’t know if that makes them a scheme necessarily, but they’re more adjacent to it.
  - 8note 4y ago
    I don't know how to parse this. The fees are larger than the amount staked? The fees, when realized into gains, are worth more than the cost to run the validation? Are the validators converting back to pay for their costs? Or paying for them some other way? Does it stay profitable if ethereum drops to 1% of its current trading value?
    - TimJRobinson 4y ago
      When people pay fees for transactions most of that fee is burnt. Blocks have a fixed amount of rewards given to the validator that created them and the validators that attest it is valid. When more fees are being burnt than Ethereum issued in blocks it is deflationary. It is deflationary at ~16 Gwei and fees have been higher than this for a while now. Validators cost very little to run, they're usually NUCs that use 20w, the main cost is the Ethereum you have to stake.
      - scotty79 4y ago
        That would mean that number of total ETH drops. Is that true?
        TimJRobinson 4y ago
        Yep that's what the main number at the top of https://ultrasound.money https://ultrasound.money shows.
- ejanus 4y ago
  Kraken is a huge network validator. They generate a lot of tokens which they return as earnings to their shakers.
- panarky 4y ago
  No. A Ponzi scheme is paying existing investors with the deposits from new investors. That's not what's happening here.
  - scotty79 4y ago
    That's exactly what happens here because new coins minted for stakers have any value only because new investors purchase the currency and prop up its price. Once new investors dry out and price collapses stakers will be rewarded with same amount of coins now worth nothing (just like IOU in Ponzi) and will be left with staked coins of 0 value, just like in Ponzi.
    - miracle2k 4y ago
      > That's exactly what happens here because new coins minted for stakers have any value only because new investors purchase the currency and prop up its price One could design a "staking" system that is directly reliant on other people's money coming in for your payout to happen. This is not what is happening here. Staking as done by this protocols itself never promised you anything but a yield in the crypto currency itself. Maybe you think crypto in general is a ponzi scheme because people only want to sell to new entrants for a profit, but that's a different issue (not not necessarily true - it also works with a fixed set of people you keep wanting to gamble).
      - scotty79 4y ago
        > Staking as done by this protocols itself never promised you anything but a yield in the crypto currency itself. That's a fixed percentage promise. There's relly no difference if it's expressed in crypto coins or in entries in the database of a software system of ponzi schemer. If you have a fledgeling crypto on its ride up, it's not only fueled by new investors but sustained by new investors. If the coins are minted at will the supply will eventually exceed the demand and the coin will start loosing its value. And then the inevitable crash to the bottom happens. It's crypto equivalent of hyperinflation of normal currencies that happens when money supply exceeds demand for money associated with economic development. > Maybe you think crypto in general is a ponzi scheme I don't. I just feel like promising fixed, large percentage gains makes something Ponzi scheme. Something like Bitcoin or Ethereum that have tight control on coin supply are not ponzi schemes. Those are just new type of commodity. Mildly useful, but scarce, unique and easily transferrable and divisible.
- Cthulhu_ 4y ago
  So do stocks and fiat currency though; it's not the crypto that generates revenue, it's what's done with e.g. investor money that makes it more valuable. Where does a bank account's interest come from? It's fiat currency, it generates zero revenue just sitting in an account. But the bank invests it, by e.g. giving people loans for which they pay interest. Likewise so with cryptocurrencies and so. In theory anyway, I'm an amateur but IIRC staking is a way to enforce stability in the crypto market, lock currencies into place to have some guarantees for the future and for certain projects that require currencies / things being locked in.
  - rnk 4y ago
    Banks make loans for people to buy houses and they pay interest, or they start a business and the business pays interest on the loan. There's economic activity that generates a return. All the crypto "loans" seem to be loans to each other using tokens and they pay interest in the form of more tokens. There's no fundamental economic activity. The only money they seem to make is betting that other cryptocurrencies will go up or down, using leverage. And then when crypto falls all their investments lose so much money they go out of business. It just seems pointless speculation, and this is visible in that the ones that fail are shown to have all loaned money to each other and so it's a true house of cards. There's just not much actual purchase of real goods with crypto, no one buying in the store. So the crypto itself serves no purpose other than as a financially lucrative asset.
deleted 4y ago
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rom-antics 4y ago
The exact quote from Kraken's site is "Stake for up to 20% APY." The APY is different for each coin and is measured in that coin, not in USD. For example, ETH gets you around 4% APY as of writing. The money comes from staking rewards, which are typically new money minted by the algorithm. (You could call it inflation)
- pa7x1 4y ago
  https://ultrasound.money/ https://ultrasound.money/ Since the merge Ethereum has had net negative issuance. Ethereum's yield is not coming from dilution. The network is profitable, the profit is distributed to token holders and validators, plain and simple.
  - rom-antics 4y ago
    I didn't say anything about dilution. Ethereum's yield comes from (I'll try to follow your terminology here) the gross issuance, which looks to be the green gauge called "issuance" on that site and is a positive number. Fee burn is unrelated to that and floats around randomly based on network usage (issuance was net positive a month ago) and GP didn't ask about it so I didn't think there was any reason to add confusion.
    - pa7x1 4y ago
      This is not completely correct. Ethereum's return to validators has 3 sources: - new issuance - transaction fees - MEV The average yield over the last month (annualized) is over 5%. Source: https://beaconcha.in/pools https://beaconcha.in/pools Ethereum´s current issuance is 0.55% (654K ETH per year on a circulating supply of 120M, source: https://ultrasound.money/ https://ultrasound.money/). This is split between the validators which are now around 13.7% of the network (source: https://beaconcha.in/ https://beaconcha.in/). Resulting in a yield from newly minted ETH of 4%. The other 25% of the yield comes transaction fees and MEV. On top of that the ETH consumption through the burn more than compensates the newly minted ETH. As the network is net deflationary (source: https://ultrasound.money/ https://ultrasound.money/). You can think of a company that pays employees partly with stock options but has also a buyback program. If the buyback program that comes from its ability to generate profit more than compensates the newly issued stock, the employees pay in stock is not self-dilutive. What I'm basically getting at is that, if the network is not seeing net issuance (i.e. roughly flat or even negative), then the newly minted ETH is real yield. By the simple fact that nominal yield - monetary inflation is positive.
dang 4y ago
Ok, we've changed to that from https://blog.kraken.com/post/17619/settlement/ https://blog.kraken.com/post/17619/settlement/. Thanks! (See https://hn.algolia.com/?dateRange=all&page=0&prefix=false&query=press%20release%20by%3Adang&sort=byDate&type=comment https://hn.algolia.com/?dateRange=all&page=0&prefix=false&qu... for why we prefer third-party reporting where possible)
StanislavPetrov 4y ago
>Simple question: how is that guaranteed yield sustainable if not through a Ponzi scheme? Let's say you buy 100 digital widgets from me. I promise you a 20% rate of return if you stake those widgets back. A ponzi scheme would require me to lure in new "investors" and take in new funds in order to pay you the 20% return you are promised. However, I can sustain this process forever without ever having a single new investor. I'm paying your APR in digital widgets, not any sort of actual currency. With the stroke of a key, I can create as many digital widgets as I need, and give you your 120 widgets after the year is up. However, there is no guarantee what your digital widgets will be worth - that's the rub. It might be characterized as a scam, but it isn't a ponzi scheme.
- scotty79 4y ago
  It's a Ponzi scheme with extra steps.
  - ahoya 4y ago
    This does not fit the definition of a Ponzi scheme.

tbruckner 4y ago

It is a Ponzi scheme. The only way it wouldn't be is if it was paying dividends through revenue it generated and crypto generates zero revenue.

coolestguy 4y ago
Ethereum's chain is profitable. The networks fees outweights the supply given to validators to secure the chain.
- lottin 4y ago
  Source?
  - yokem55 4y ago
    https://ultrasound.money https://ultrasound.money tracks this. You can play with the sliders projecting things out depending on how much ether is staked vs what the sustained transaction fees are.
    - lottin 4y ago
      It's unclear to me by looking at these numbers that the network is profitable. Profit is the difference between revenue and cost, so we need to know the amount of fees earned and the operating expenses.
      - yokem55 4y ago
        Ethereum measures its "costs" as issuance paid to stakers while measureing "income" in the amount of eth burned by users via gas fees paid to transact on the network. Since the merge, there has been about 15K more eth burned in transaction fees then has been issued to validators.
        lottin 4y ago
        Both issuance of eth and fees are forms of revenue to validators. You're saying that revenue is predominantly in the form of transaction fees. This is just one part of the equation. The other part is costs, and this doesn't tell us anything about the costs incurred by the validators. Therefore no conclusions about the profitability of the network can be inferred from this data.
        lmm 4y ago
        The argument would be that transactions must be worth at least what people pay for them, otherwise people wouldn't pay for them.
        lottin 4y ago
        Nobody is doubting that transactions aren't worth what people pay for them. The doubt is whether the fees that users pay exceed the costs of operating the network.
        yokem55 4y ago
        90+% of the transaction fees are not paid to validators. They are burned or thrown away. That reduces the supply of eth to the benefit of all other eth holders.
        lottin 4y ago
        If fees are thrown away you can't count them as revenue. Also, still no mention of costs.
  - mszcz 4y ago
    If it weren't true the network wouldn't run longer than it takes one's idle curiosity yield to the electricity bills.
  - piqi 4y ago
    https://tokenterminal.com/leaderboards/earnings https://tokenterminal.com/leaderboards/earnings
- tbruckner 4y ago
  But it's still a Ponzi scheme in that you're paid out in the thing you stake, so you don't necessarily have any more value with respect to an external reference. For all practical purposes, you could exchange the currency for something else. But that's outside the scope of the staking system as defined. I'm not making any negative or positive judgement on the system, Ponzi scheme is just a description of how it operates. Similarly, any stocks that does not pay out dividend is also a Ponzi scheme.
  - TAKEMYMONEY 4y ago
    > it's still a Ponzi scheme in that you're paid out in the thing you stake > any stocks that does not pay out dividend is [sic] also a Ponzi scheme Neither of these things are "Ponzi schemes." Read about Charles Ponzi's role in his investment scheme to understand why.
  - NineStarPoint 4y ago
    That’s not what a ponzi scheme is though. The most important thing about what makes a ponzi scheme a scheme is that the person running the scheme is obfuscating where the money being paid out comes from. It’s when someone pretends they’re doing something highly profitable to attract investors, but actually when they pay people with what they claim is profits they’re actually just using the money from other investors. The defining feature of a ponzi scheme is not that if no one would be willing to buy if off you, if would have no value (that’s definitionally true of all objects). It’s that if new people stopped investing in the company, the company would fall apart. There is no value in a ponzi scheme separate from more money piling into it. This is very different from a stock that doesn’t pay a dividend. While you’d never get money out of it if no one was willing to buy it, what stocks generally promise is some amount of ownership and voting rights in a company (which theoretically could result in dividends, if enough stock holders agreed). That said ownership ended up not being valued by other people does not make it fraud. You can certainly feel free to believe that stocks that don’t give dividends are worthless though, that’s a separate question really. I generally come down on the side that the major cryptocurrencies aren’t ponzi schemes, or fraud in general. (Plenty of fraud in the shitcoins, of course). Ultimately you decided to buy a data point on a ledger in a distributed system, and that’s what you get. But…well, mining sometimes confuses that. Without enough people coming into the system to buy new coins, the miners would start shutting down until none were left. Much like a ponzi scheme, crypto currencies seem reliant on new blood to keep functioning to me. Don’t know if that makes them a scheme necessarily, but they’re more adjacent to it.
- 8note 4y ago
  I don't know how to parse this. The fees are larger than the amount staked? The fees, when realized into gains, are worth more than the cost to run the validation? Are the validators converting back to pay for their costs? Or paying for them some other way? Does it stay profitable if ethereum drops to 1% of its current trading value?
  - TimJRobinson 4y ago
    When people pay fees for transactions most of that fee is burnt. Blocks have a fixed amount of rewards given to the validator that created them and the validators that attest it is valid. When more fees are being burnt than Ethereum issued in blocks it is deflationary. It is deflationary at ~16 Gwei and fees have been higher than this for a while now. Validators cost very little to run, they're usually NUCs that use 20w, the main cost is the Ethereum you have to stake.
    - scotty79 4y ago
      That would mean that number of total ETH drops. Is that true?
      - TimJRobinson 4y ago
        Yep that's what the main number at the top of https://ultrasound.money https://ultrasound.money shows.
ejanus 4y ago
Kraken is a huge network validator. They generate a lot of tokens which they return as earnings to their shakers.
panarky 4y ago
No. A Ponzi scheme is paying existing investors with the deposits from new investors. That's not what's happening here.
- scotty79 4y ago
  That's exactly what happens here because new coins minted for stakers have any value only because new investors purchase the currency and prop up its price. Once new investors dry out and price collapses stakers will be rewarded with same amount of coins now worth nothing (just like IOU in Ponzi) and will be left with staked coins of 0 value, just like in Ponzi.
  - miracle2k 4y ago
    > That's exactly what happens here because new coins minted for stakers have any value only because new investors purchase the currency and prop up its price One could design a "staking" system that is directly reliant on other people's money coming in for your payout to happen. This is not what is happening here. Staking as done by this protocols itself never promised you anything but a yield in the crypto currency itself. Maybe you think crypto in general is a ponzi scheme because people only want to sell to new entrants for a profit, but that's a different issue (not not necessarily true - it also works with a fixed set of people you keep wanting to gamble).
    - scotty79 4y ago
      > Staking as done by this protocols itself never promised you anything but a yield in the crypto currency itself. That's a fixed percentage promise. There's relly no difference if it's expressed in crypto coins or in entries in the database of a software system of ponzi schemer. If you have a fledgeling crypto on its ride up, it's not only fueled by new investors but sustained by new investors. If the coins are minted at will the supply will eventually exceed the demand and the coin will start loosing its value. And then the inevitable crash to the bottom happens. It's crypto equivalent of hyperinflation of normal currencies that happens when money supply exceeds demand for money associated with economic development. > Maybe you think crypto in general is a ponzi scheme I don't. I just feel like promising fixed, large percentage gains makes something Ponzi scheme. Something like Bitcoin or Ethereum that have tight control on coin supply are not ponzi schemes. Those are just new type of commodity. Mildly useful, but scarce, unique and easily transferrable and divisible.
Cthulhu_ 4y ago
So do stocks and fiat currency though; it's not the crypto that generates revenue, it's what's done with e.g. investor money that makes it more valuable. Where does a bank account's interest come from? It's fiat currency, it generates zero revenue just sitting in an account. But the bank invests it, by e.g. giving people loans for which they pay interest. Likewise so with cryptocurrencies and so. In theory anyway, I'm an amateur but IIRC staking is a way to enforce stability in the crypto market, lock currencies into place to have some guarantees for the future and for certain projects that require currencies / things being locked in.
- rnk 4y ago
  Banks make loans for people to buy houses and they pay interest, or they start a business and the business pays interest on the loan. There's economic activity that generates a return. All the crypto "loans" seem to be loans to each other using tokens and they pay interest in the form of more tokens. There's no fundamental economic activity. The only money they seem to make is betting that other cryptocurrencies will go up or down, using leverage. And then when crypto falls all their investments lose so much money they go out of business. It just seems pointless speculation, and this is visible in that the ones that fail are shown to have all loaned money to each other and so it's a true house of cards. There's just not much actual purchase of real goods with crypto, no one buying in the store. So the crypto itself serves no purpose other than as a financially lucrative asset.

deleted 4y ago

[deleted]

rom-antics 4y ago

The exact quote from Kraken's site is "Stake for up to 20% APY." The APY is different for each coin and is measured in that coin, not in USD. For example, ETH gets you around 4% APY as of writing. The money comes from staking rewards, which are typically new money minted by the algorithm. (You could call it inflation)

pa7x1 4y ago
https://ultrasound.money/ https://ultrasound.money/ Since the merge Ethereum has had net negative issuance. Ethereum's yield is not coming from dilution. The network is profitable, the profit is distributed to token holders and validators, plain and simple.
- rom-antics 4y ago
  I didn't say anything about dilution. Ethereum's yield comes from (I'll try to follow your terminology here) the gross issuance, which looks to be the green gauge called "issuance" on that site and is a positive number. Fee burn is unrelated to that and floats around randomly based on network usage (issuance was net positive a month ago) and GP didn't ask about it so I didn't think there was any reason to add confusion.
  - pa7x1 4y ago
    This is not completely correct. Ethereum's return to validators has 3 sources: - new issuance - transaction fees - MEV The average yield over the last month (annualized) is over 5%. Source: https://beaconcha.in/pools https://beaconcha.in/pools Ethereum´s current issuance is 0.55% (654K ETH per year on a circulating supply of 120M, source: https://ultrasound.money/ https://ultrasound.money/). This is split between the validators which are now around 13.7% of the network (source: https://beaconcha.in/ https://beaconcha.in/). Resulting in a yield from newly minted ETH of 4%. The other 25% of the yield comes transaction fees and MEV. On top of that the ETH consumption through the burn more than compensates the newly minted ETH. As the network is net deflationary (source: https://ultrasound.money/ https://ultrasound.money/). You can think of a company that pays employees partly with stock options but has also a buyback program. If the buyback program that comes from its ability to generate profit more than compensates the newly issued stock, the employees pay in stock is not self-dilutive. What I'm basically getting at is that, if the network is not seeing net issuance (i.e. roughly flat or even negative), then the newly minted ETH is real yield. By the simple fact that nominal yield - monetary inflation is positive.

dang 4y ago

Ok, we've changed to that from https://blog.kraken.com/post/17619/settlement/ https://blog.kraken.com/post/17619/settlement/. Thanks! (See https://hn.algolia.com/?dateRange=all&page=0&prefix=false&query=press%20release%20by%3Adang&sort=byDate&type=comment https://hn.algolia.com/?dateRange=all&page=0&prefix=false&qu... for why we prefer third-party reporting where possible)

StanislavPetrov 4y ago

>Simple question: how is that guaranteed yield sustainable if not through a Ponzi scheme? Let's say you buy 100 digital widgets from me. I promise you a 20% rate of return if you stake those widgets back. A ponzi scheme would require me to lure in new "investors" and take in new funds in order to pay you the 20% return you are promised. However, I can sustain this process forever without ever having a single new investor. I'm paying your APR in digital widgets, not any sort of actual currency. With the stroke of a key, I can create as many digital widgets as I need, and give you your 120 widgets after the year is up. However, there is no guarantee what your digital widgets will be worth - that's the rub. It might be characterized as a scam, but it isn't a ponzi scheme.

scotty79 4y ago
It's a Ponzi scheme with extra steps.
- ahoya 4y ago
  This does not fit the definition of a Ponzi scheme.