Binance clarified that coins deposited in its recently launched staking program for proof-of-work (PoW) token dogecoin (DOGE) and litecoin (LTC) would remain with the exchange and won't be lent out for generating additional yield.
"There is no on-chain staking of LTC and DOGE for network validation since these are non-proof-of-stake tokens," a Binance spokesperson said. "The user funds remain with Binance, and we have very strict risk management controls to ensure their security."
The explanation comes after several prominent social media influencers and investors disapproved of the program after it went live on Tuesday, questioning how it is possible to stake coins like DOGE and LTC, as their parent blockchains use a proof-of-work consensus mechanism.
"Oh boy. @Binance announced another "holding" program. This one is referred to as "Locked Staking," and it allows you to "stake" LTC and Dogecoin. How is that even possible when #LTC and #Dogecoin are PoW cryptos," a popular dogecoin-focused Twitter handle Mishaboar tweeted on Tuesday.
Dogecoin, litecoin and bitcoin blockchains use the energy-intensive proof-of-work mechanism, with miners solving a computational problem to verify transactions as opposed to the proof-of-stake (PoS), which requires market participants, or validators, to stake or hold a minimum number of coins to validate transactions in return for rewards.
Therefore, DOGE, LTC and BTC holders don't have the option of staking their coins on a network individually or through an exchange in return for rewards. Only native tokens of PoS blockchains like Polkadot, Cardano and Avalanche can be staked to earn rewards, representing a passive income. (Ethereum, which was originally designed as a PoW blockchain, is in the process of becoming a PoS blockchain).
Binance has updated the frequently asked questions page on its website, explaining the process of locked staking for the so-called non proof-of-stake coins.
The locked staking program is scheduled to last for 120 days, meaning the users who subscribed will have this position for 120 days. While the early redemption option is available, users seeking the same will have to forfeit the rewards. The subscription window for this campaign is set to end on July 26.
The program is said to offer up to 10% annualized percentage yield on deposits with rewards paid daily. Some investors are worried that the double-digit yield may be too good to be true and the exchange might use the locked coins elsewhere to generate additional income, exposing user funds to potential risks.
Dogecoin's creator, Shibetoshi Nakamoto, expressed displeasure, calling the product offering 10% yield unsustainable in a sarcastic tweet. The aversion to high-yielding products is understandable, considering the collapse of Terra in May and recent liquidity issues at several lending and borrowing firms and exchanges. Terra's Anchor Protocol offered a 20% yield on deposits of stablecoin UST earlier this year.
In response to these concerns, Binance's spokesperson said, "We do not stake or lend out users' LTC and DOGE and the APR (annual percentage rate) rewards for this campaign come directly from us."
Dogecoin traded at 7.12 cents at press time, representing a 1% gain on the day. The meme-focused cryptocurrency has dropped 58% this year.
On Thursday, developers behind dogecoin released its Core 1.14.6 upgrade, introducing security updates and changes to network efficiency.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.