How is AdEx Network Paying More Than 50% Staking APY?

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Posted by AdEx Network on March 24th, 2021

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This thought piece by AdEx Network’s CEO Ivo Georgiev first appeared on our Reddit page. An AdEx follower started a post in which he asked:

“Hi fellow AdEx believers,

I’ve been holding a good sum of AdEx for a few weeks now, happily enjoying the benefits of staking and believing in the product that the AdEx network offers. Of course I’ve been been researching AdEx before I threw my buck in, but these things I haven’t been able to find an answer to:

How is the AdEx network paying so much annual yield to stakers? For example: ~58% APY in Tom’s validator, ~10-50% APY in the loyalty pool, ~46% APY on Binance staking. Where are all these coins coming from? Minting more? Gas fees? ”

Here’s what Ivo answered:

Staking APY comes from new issuance and validator fees. It has little to do with ETH fees, in fact ETH fees have negative effect on it, because validators have to charge less fees to compensate.

Issuance

Issuance APY works by creating new ADX, which you might think causes inflation, but since it’s concentrated on staked ADX, what it does is transfer value from non-stakers to stakers. Furthermore, since it’s quite high, it incentivizes more ADX to get locked up, and so far every month since staking exists, the new ADX locked far exceeds the ADX minted. This is sustainable until the ADX max supply is reached.

Validator Fees

Validator fee APY works by distributing validator fees to stakers, and this is sustainable forever. Currently, this is a small percentage of the total APY (~3-5%), but it will increase as the network grows, as this means higher volume of payments and therefore a higher absolute amount diverted to staking.

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Another question in the post was:

Will Eth 2.0 and the solving of high gas fees on the eth network force AdEx staking APY to plummit? Or the reaching of the maximum supply (150m)?

To which Ivo answered:

ETH 2.0 currently has no solutions for gas fees, since sharding was removed from it’s road map. For our plans on how to solve gas fees, please check our roadmap and stay tuned for further updates - we’ll have an article dedicated to gas fees soon and this article on our blog will give you a better understanding on how Ethereum gas fees work.

A note about long-term sustainability:

Many DeFi yields are in the hundreds and thousands of APY %, but only hold for a few days. AdEx Staking has provided > 50% APY for almost a year now. While the ADX supply will eventually reach the cap, it gives us a lot of time (>3 years) to grow the network enough to sustain high APYs through fees. Even if the APY drops to something like 10%-20% in a few years, it’s still incredibly attractive to ADX holders given that it’s a great mix of sustainable and high yield compared to alternatives.

Final note

The APY is inversely correlated to how many ADX are staked. Eg if double the ADX are staked, the APY will be half of what it is now. But double the ADX staked means another 30 million out of circulation, which will be amazing for the price.


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