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Older Americans, and anyone familiar with traditional finance, understands (at least on an elementary level) how compound interest works. Essentially, it works like this. You put money into a financial instrument, let's say it's a savings account, and you earn a fixed interest rate (let's say 1%). Not only does the principal in your account earn interest, but the interest you earn also earns interest. Example:
You put $100 into savings
At the end of the interest-earning period, you've got $101 ($100 X $.01)
At the end of the next interest-earning period, you've got $102.01 ($101 X $.01)
At the end of the third interest-earning period, you've got $103.02 ($102.01 X $.01)
And so on.
There are two things to note about this financial phenomenon. First, it works no matter what the interest rate is. If the interest rate is 10%, at the end of the first interest-earning period, you'll have $110. At the end of the next interest-earning period, that $10 plus the initial $100 you put into your account will earn interest. In other words, the interest is compounding.
The second thing to note about this is that your interest payments keep increasing over time. That is, if you never take money out of your account. Even if you don't add new money to the account, your interest payments continue going up.
That's the power of compound interest. Today, I'm going to talk about compound staking.
Like compound interest, compound staking works to your benefit.
On proof-of-stake blockchains, participants stake a certain amount of earnings in order to participate in the governance of the blockchain. For example, if you want to participate on Ethereum, you've got to buy ETH, the native cryptocurrency of the blockchain, and you've got to stake your ETH.
Let's say you buy $100 in ETH and stake 100 percent of that. You now have $100 in voting power on the blockchain. Up that amount to $1,000 or $10,000 and you've got a greater stake in the blockchain governance. All POS blockchains have this unique characteristic.
In some cases, staked earnings could earn additional cryptocurrency. Such is the case on the Hive blockchain. which is a modified POS blockchain referred to as Delegated POS (DPOS) because stakers vote on witnesses who, based on an accumulated vote of all eligible governance participants, become delegates responsible for securing and discovering onchain transactions.
If you buy $100 in HIVE and power that up (stake it), then you begin posting content to the blockchain, upvoting other participants' content, and interacting with others on the blockchain in meaningful ways, that $100 HIVE could earn you additional HIVE. Let's say that, at the end of the first month, your $100 HIVE has earned you an additional $0.25 in HIVE. You then have $100.25 in HIVE POWER (HP), which is different than having the same amount in liquid HIVE. Why? Because you can use your HIVE POWER to interact with others and earn additional HIVE.
Over time, you can turn a $100 investment into thousands of dollars in HIVE POWER. But let's say you add $100 to your account every month for a year. At the end of the year, you've got at least $1,200 in your HP account. If you've been active on the blockchain throughout that time, then you can turn each $100 monthly investment into compounded staking assets just by that participation.
There are three things going on here:
You're adding to your HIVE POWER each time you buy more HIVE and stake it in your Hive account.
The HIVE POWER accumulating in your account earns more HIVE as you interact on the blockchain. The more HP you have, the more you stand you to earn in rewards.
You can further add to the compounding by participating in the blockchain even more. The more you participate, the more potential you have to earn additional rewards that you can then stake, or power up, to increase your ability to earn more.
Of course, the only guarantees in life are death and taxes (and one of those is variable). Because the Hive blockchain involves the subjectivity of voting to determine which pieces of content are valued, it's possible that you could rub a large number of people the wrong way and receive more downvotes than upvotes. But, like all social media, your outcomes depend to a large degree on your inputs. In other words, don't walk into the room, look for the biggest people you can find, and kick them in the balls. To some extent, diplomacy is social capital.
To mitigate nefarious downvotes, the DPOS blockchain also rewards those who upvote content, giving an incentive to those who recognize the value of your content. There are no incentives for downvotes.
Just as you wouldn't buy a single stock on the stock market and rest all of your hopes on becoming a millionaire on that one stock, it's best not to rely on a single POS or DPOS asset to lift your financial mojo. Diversify!
There are two ways to diversify when it comes to compound staking:
Onchain diversification
Cross-chain diversification
With onchain diversification, your goal is to give yourself multiple ways to benefit from compound staking. Using the Hive blockchain again as an example, there are multiple ways to use staking to your benefit. Here are three useful ways to make it work to your advantage:
Community-based delegations - Several communities on the Hive blockchain allow you to delegate some of your HP in exchange for easy rewards. Either they upvote your content depending on how much you delegate to their account or they'll send you a percentage of earned rewards daily, weekly, or monthly. @Ecency operates this way. There are plenty more.
Curation trails - Curation trails are accounts that you can follow that will allow you to automatically upvote or downvote content based on how those accounts vote. For instance, if you follow @Curie and that account votes for a piece of content at 20%, you will automatically cast a vote for the same piece of content. You can program your vote to align with Curie's so that a 20% vote from Curie is also a 20% vote from you or you can program it to cast as a percentage of Curie's vote. If you elect to vote at 20%, for instance, and Curie's vote is 20%, then your vote will be 20% of 20% of your voting power. This is a good way to control your Resource Credits so that you don't diminish your voting power too quickly. And keep in mind that your votes for other content turn into rewards for you after seven days, your rewards dependent upon your HP.
InLeo - InLeo has a different setup altogether. As a community on Hive, InLeo pays rewards to its members based on HP delegation. A Premium InLeo account costs 10 HBD per month. You can delegate your HP to InLeo and receive staked LEO in return. The more HP you stake, the more LEO you receive.
It's important to understand that delegated HP is still yours. You own it, and you can take back your delegation at any time. However, by delegating your HP, you can help a community leverage their voting power and leverage your own earning power at the same time. The flipside is that delegating HP reduces your resource credits, which are used to conduct activities on the blockchain. You don't want to delegate more than you can afford to give up or you won't be able to interact on the blockchain.
With cross-chain diversification, you essentially participate in more than one blockchain. What if your favorite blockchain goes belly up or something happens to it that prevents it from growing? To mitigate that risk, it's important to participate in more than one blockchain, which increases your compound staking opportunities.
Be sure to read the whitepaper for any blockchain you wish to participate in so that you understand how their staking mechanism works.
There's a myth that the Hive blockchain only benefits early comers and whales. The reason this is a myth is because very few people, if any, get on the blockchain and immediately become whales. The only way to do that is to buy A LOT of HIVE as soon as you join and power up that HIVE. While that could happen, most people do not have sufficient liquid assets to do it.
It's imperative to understand how the blockchain works. It is true that staking benefits whales more than it benefits smaller users (plankton, minnows, orcas, and dolphins). However, the underlying code base is designed to reward all users in the same manner.
Just as with any business, HIVE benefits whales partly based on past activity. When you first launch a business, fewer people know about your offerings. You have fewer customers and less financial power. Over time, that financial power grows as more people discover your business through marketing and word-of-mouth referrals. If you manage the finances well, you'll become wealthier and more successful assuming there is a market for your business. Likewise, with a HIVE account, your HP starts small and grows as you pay attention to account and community dynamics.
HP increases one's earning power on the blockchain. The more HP you have in your account, the more earning power you have. The key to increasing your earning power on the Hive blockchain is to stake your HIVE as soon as you can, and to stake as much as you can. On top of that, be active on the blockchain. The more active you are, the more likely you'll see positive results. Finally, be a positive contributor. If you have a tendency to fight with everyone you meet on the blockchain, it will increase friction between you and other community members, which is likely to reduce your earning power and opportunities.
That's not to say you must kowtow to the Greek god of content distribution. But, like in the real world, you reap what you sow on the blockchain.
If you make a plan, create awesome content, network with other Hive members, make more friends than enemies, then you can turn Hive into a real earning opportunity. Of course, it doesn't happen overnight. But the idea that only whales benefit is a myth propagated by the lazy, the dissatisfied, and the disgruntled. If you're afraid of making enemies, you might lose opportunities to make friends. Be wise and keep your eyes and ears open for earning opportunities.
As I've shown, compound staking is a real thing. The more you stake, the more you stand to earn. But this earning power is even more powerful when you add the ability to earn interest on your HBD savings account.
Currently, the Hive blockchain is paying 20% APR on HBD savings, on a monthly payout schedule. You can buy HBD or earn it on the Hive blockchain. Then you put your HBD into your HBD savings account to earn monthly interest.
Compound staking and HBD interest work in tandem to increase your earning power of the Hive blockchain.
As I've shown, compound staking is a powerful way to earn cryptocurrencies just for posting content. Whether you are a blogger, videographer, photographer, musician, or another type of creator, you can turn your time into money through compound staking.
I'm not saying your should leave Patreon, Substack, Medium, or whatever other platform you happen to be using to earn from your creativity. What I am saying is give the blockchain a chance, to paraphrase that rock icon John Lennon. In just over two years, I've turned my Hive account into a nearly $2,000 asset. And I've only been moderately aggressive in my approach.
Just imagine the earning power you could have after 20 years of compound staking. By starting at $0 and adding $50 to $100 per month to your Hive account, then using the staking tactics I've identified in this post, you could have a $2,000 asset in no time. Continue posting, and continue powering up, and you can turn that $2,000 asset into a $20,000 asset. One day, you could eventually be a whale.
Allen Taylor lists more than 100 different Web3 social media platforms and protocols in his book Web3 Social: How Creators Are Changing the World Wide Web (And You Can Too!).
I am not a financial advisor and this is not financial advice. Information is provided for information and entertainment purposes only. Please consult a financial advisor before you invest, buy, or stake any cryptocurrencies.
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Allen Taylor
