Tezos is a smart contract platform. The Tezos' blockchain uses a PoS consensus mechanism called LPoS. Holders of XTZ can bake or delegate their coins and earn PoS rewards. People running a node, are called bakers. People who don't want to run a node, can delegate their XTZ to Bakers. Bakers get a percentage of the rewards that the delegates earn. For an overview on Tezos, you can read this article. (Recommended, LPoS is a great feature, but not the most interesting feature of Tezos.)
Since a few weeks more and more exchanges are offering XTZ holders to delegate their XTZ while keeping them stored on the exchange. Some voices have been heard warning about the dangers of growing towards a more centralized ecosystem. Exchanges are centralized right? And the 0% fee that Binance asks over staking rewards could mean masses would start moving towards Binance. Here's why this is not much of a big deal:
- Exchanges are centralized. Really? And other bakers, are they decentralized? The answer is no. Exchanges which are baking XTZ, are as centralized as any other baker. All bakers are run by entities and therefore centralized. So are PoW miners. It's the network of nodes that makes an ecosystem decentralized. Exchanges are bakers just like any other bakers. They have a lot at stake, just like it's supposed to be in PoS. They have a decent amount of XTZ fixated and therefore they have a natural interest in a healthy network and value of XTZ.
- Allocation of capacity. There are a few big bakers but none of them have such a big percentage of the total capacity of the network as some mining pools in PoW networks. There are quite a few big bakers, and exchanges are not exceptionally large compared to other large bakers. You can see the bond, capacity and balance of a large selection of bakers here.
Some big bakers hold about 2-4% of staking balance.
Compare that to Binance and Coinbase: Binance has about 2% and Coinbase about 4% of the baking balance.
Now compare that to BTC hashrate distribution and we see that 4 entities control 57% of all hashingpower:
- Poolin: 17.3%
- F2pool: 16.8%
- AntPool: 10.3%
- BTC.com: 12.6%
We see that Bitmain operates both Antpool and BTC.com, which are combined good for 22.9% of BTC hashing power. Centralized much? XTZ being delegated on exchanges is not the issue as portrayed by some. We are not even close to anything remotely centralized. It’s peanuts compared to how hashing power in BTC is divided.
- 0% fees is not as much a game changer as people think. Let's talk numbers: 432 nodes right now. About 607 mill XTZ is being staked today. Binance, with 0% fee has 13 mill staked. While their capacity is 15 mill. So there is not exactly extreme enthusiasm for staking on Binance.
Compare this to Coinbase which asks 25% fee, we see that they have 28 mill "staked" while their capacity is 24 mill. So they're over-delegated and about 4 mill will not get rewards.
The whole 0% fee gimmick isn’t as attractive to people as it sometimes is portrayed. Most people simply don’t want to hold on exchanges. Not your keys. Pretty basic. That 0% doesn’t make people change those habits. Lot of bakers get 7 to 15%. Which is totally worth it. No hassle starting up and maintaining a node, but keeping full ownership of your XTZ on personal controlled (hardware)wallets. On top of that, you contribute to decentralization.
So, even though the issue for Tezos is pretty much non-existent: Not your keys, not your coins! Well known wisdom in the crypto-space. So don't hold your funds on exchanges unless you are day-trading. There are enough examples of people who lost their funds, or had their account blocked for some reason.
Hold your XTZ in your personally controlled (hardware)wallet and delegate from there. There are enough high quality baking services available for reasonable fees.
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