HODLing, Stacking, Staking and Interest Accounts
I’ve previously written an article on cryptocurrency investing that compares simple / traditional investing strategies that non-crypto investors are familiar with to similar crypto-currency investing strategies. This article expands on those concepts by pulling in the concept known in the crypto world as HODLing.
There are multiple reasons for HODLing:
- Monetarily focused (interest, asset appreciation)
- Utility (holding onto a cryptocurrency because it is useful)
- Idealogical (own you own data, open global state-free money)
- Community (support a solution or system that you believe in or participate in)
For those who are monetarily focused, the best comparison for a non-cryptocurrency investor to the crypto strategy of HODLing is simply buying a stock and holding on to it for the long term.
For those who are ideologically focused or waiting on utility there are several theses on why an ecosystem and solutions built on cryptocurrency will continue to expand and ultimately be prevalent. For instance, Multicoin Capital details three theses on why this will happen and what needs to be in place for it to occur. One of their (and others) main points is that the general consumer is not going to switch to utilizing cryptocurrency based systems for purely idealogical reasons (e.g., it is decentralized, user-controlled, not state owned, etc.). People will start using these systems when they are useful. One of the ways consumers will find use in these systems is through earning higher returns with similar risk levels as with non-crypto systems; this was the theme of my previous article on cryptocurrency investing. That is a very passive form of “use”.
One of the main differences is that some of the cryptocurrencies encourage HODLing as a show of support and/or community around that particular cryptocurrency. Some also encourage HODLing by offering rewards for holding the cryptocurrency for a longer term.
Freehold (recently announced and started by Patrick Stanley), arweave and others approach HODLing with at combination of utility (i.e., making crypto useful) and a community approach. This strategy is encouraging users to invest time and money into projects they find useful. The video below from Patrick at Freehold goes into the topic of community and Freehold in greater detail.
HODLing could be split into the following basic types.
HODLing is crypto-speak for a buy and hold strategy, and mostly implies that the user is holding the crypto themselves – versus having the crypto held at a centralized or decentralized exchange. An example of this strategy would be to purchase a crypto such as bitcoin and keep the crypto in a hard wallet like a Ledger wallet. In this example, and in this type of HODLing:
- there are no monetary rewards (no interest payments, no participation rewards) other than asset appreciation (or depreciation, depending on the market);
- there is little to no utility (depending on which cryptocurrency is being held);
- there is as much ideology and community as the holder wants (i.e., I’m passively supporting the ideas behind this cryptocurrency by HODLing).
All of the strategies described below could also be described as a form of HODLing.
Cryptocurrency Interest Accounts
As mentioned above I’ve written an article that goes into detail comparing simple investing strategies the non-crypto investors utilize to their crypto counter parts. One comparison focuses on “crypto interest accounts”. These accounts:
- provide monetary rewards in the form of interest payments in return for the investor holding their crypto the account;
- provide no utility other than the afore mentioned interest payments;
- provide as much idealogical support and community as the user wants (or none).
Staking is a consensus mechanism whereby crypto holders lock up a crypto currency for a certain period of time and get a staking reward for that lockup period. Staking can be done by the owner or through delegation. It also can include voting on certain issues affecting the network. The crypto-currencies Tezos and Kyber are examples.
In this type of HODLing:
- there are monetary rewards from staking. There can also be appreciation or depreciation of the underlying cryptocurrency asset being staked;
- there is no utility. If the asset is staked it cannot be utilized for other uses.
- as with the other forms of HODLing, the user can be providing idealogical and community support by providing liquidity to the cryptocurrency through staking.
Blockstack has combined mining and staking into “Stacking”. A user running a Blockstack miner node forwards bitcoin to the network for a chance to lead a block and mine Stacks tokens. Stacks token holder stake (which Blockstack calls “Stacking” for obvious reasons) their Stacks tokens for a certain period of time, and get a portion of the bitcoin that the miners forwarded on to the network.
Quoting Diwaker Gupta from Blockstack:
Proof-of-Transfer is a novel approach to consensus that leverages Bitcoin’s security to secure the Stacks blockchain. Instead of consuming electricity all over again, miners forward $BTC to the network for the chance to lead a block and mine Stacks tokens (STX). This also means mining is accessible and feasible to anyone with $BTC. Stacking then makes up the other half of the mechanism where the protocol redistributes the BTC committed by miners to qualified STX holders. To qualify, token holders must lock up their tokens for the time period they want to participate in Stacking. This interplay between Stackers, STX miners, $BTC, and Stacks is the magic behind Stacks 2.0 and what allows us to anchor the user-owned internet to Bitcoin.from https://blog.blockstack.org/krypton-launch-proof-of-transfer-now-implemented-on-the-stacks-2-0-testnet/
Stacking is quite comparable to Staking, although there is a much higher level of community participation and commitment.
From Passive HODLing to Participatory HODLing
The concepts and ideologies of a user-owned data, a user-owned internet, start free money, and others are wonderful concepts and goals. But in and of themselves they are not going to push the average user to make the jump into trying out cryptocurrency, crypto based apps and systems.
Freehold, arweave and others are taking a different approach: working to turn passive HODLers into active community HODLers, which is a path toward utility, toward making cryptocurrencies useful.