The Risks of Staking Through Exchanges

As the voting period for P-Rep candidates grows closer and closer, a number of individuals have inquired on various social media channels regarding the possibility of certain exchanges providing staking rewards for a user who holds their ICX on that exchange. 

While this may seem like a more convenient option, we at Rhizome believe that staking your ICX through an exchange presents a poor risk:reward ratio. We believe this for the following reasons.

Lack of Security

This is the most simple to understand. Since its inception, the cryptocurrency exchange industry has suffered multiple security breaches, most notably hacks, that left their users without their funds. 

The history of cryptocurrency is littered with exchanges who thought they had built an impenetrable security system, only to see themselves lose millions through breaches and hacks. No matter how safe and secure an exchange may seem to you, and no matter how credible and trustworthy their team may seem, you can never be 100% sure your coins will be safe unless you hold them yourself. 

Additionally, many people view staking through an exchange as advantageous due to the lack of a lockup period (when staking ICX through your wallet, your ICX is locked for 5-20 days, depending on network usage). However, exchanges also have a history of creating issues in being able to transact with your own coins. For instance, what happens if the exchange is shut down for an extended period due to maintenance or other reasons? What if the exchange suspends ICX withdrawals for several days or far longer than that? As some may remember, earlier this year, ICX withdrawals were suspended for several days on Binance.

As the saying goes, “No your keys, not your coins!”

Self-Disenfranchisement (Surrendering Voting Privileges)

It is almost certain that exchanges will not provide a feature to allow their users to allocate their staked ICX to vote for P-Reps. Remember, the entire justification for providing staking rewards is to incentivize ICONists (anyone who holds ICX) to elect P-Reps who they believe are the most qualified and willing to operate and grow the ICON network. 

You might be asking: “Well, why do I care? I’m just in it for the free ICX!”

Remember - the way to ensure strong P-Reps is to reward them with your vote, while punishing weak P-Reps by allocating your vote elsewhere. However, if you choose not to vote, the inability to reward strong P-Reps and punish weak P-Reps is diluted. What are the consequences of that? They are:

  • An increased likelihood that a P-Rep is elected that is technically incapable of running a consistent node, opening up the network to vulnerabilities and reducing the willingness of enterprises to utilize it.
  • An increased likelihood that a P-Rep is elected that does nothing to improve the growth and progress of the ICON ecosystem, which also reduces the value of the network. 
  • An increased likelihood of a P-Rep that acts maliciously toward the network in a manner that may directly sabotage it. 

These are all very bad things, and they would all have a significant negative impact on the ICON network - and consequently the ICX price.

Your voice is your only source of power to prevent the harmful activities described above - why would you choose to surrender it?


If you choose to surrender your voting privileges to an exchange, it means you are handing them over to another entity - in this case, an exchange.

If an exchange is running for P-Rep, they now have the ability to utilize all of the ICX that has been handed to them to vote themselves in.

While this may not seem like a big deal - “Who cares if an exchange is a P-Rep?” - it has the potential to be problematic, as voting power on the ICON network is correlated with the amount of ICX that has been delegated to a P-Rep. 

Significant decisions on the ICON network require a 23 vote. But that isn’t weighted equally across all 22 P-Reps. It’s weighted based on the total amount of delegated ICX a P-Rep has.

That means, if a single P-Rep receives 67% of delegated ICX, they effectively run the network. 

Is it likely that 67% of all staked ICX is staked through a single exchange? Not really. However, if an exchange serving as a P-Rep has a significant amount of voting power, it only requires them to team up with a small group of other P-Reps to create a cartel and effectively make all decisions regarding the operation of the network - including voting to kick off other P-Reps they may not like. 

Here’s a practical example: Exchange A is a P-Rep candidate. Exchange B is not, but will use the ICX staked with them to vote. Exchange A uses all the ICX held in their wallets to vote themselves in. They also encourage - or maybe even cut a deal with - Exchange B to use all the ICX in Exchange B’s wallet to vote for Exchange A. 

At this point, a large amount of ICX has been delegated to what could effectively be viewed as an “Exchange cartel.” Keep in mind, exchanges don’t necessarily profit if the ICX value increases; they make money on ICX being traded. Accordingly, their incentives would point toward supporting changes to the network - such as reducing the ICX transaction fees - that support their interests, while possibly hurting the interests of the ICON network. 

This specific example is of course a nightmare scenario - and one that I don’t believe to be likely - but the possibility exists - but only if ICX holders enable it to happen. 

That’s a big problem for a network that exists solely to provide decentralized decision making. 

Closing Thoughts

It’s understandable why an ICX holder would want to stake through an exchange. “Set it and forget it” and watch your balance grow over time seems like a convenient approach. 

However, by increasing the risks that bad actors will have influence over the network - or that bad actors could simply run the network - you reduce the odds drastically that the value of ICX will grow over time. 

ICON could line up the most impressive partnerships in the world. Tomorrow, they could announce MOU’s with Apple, Wal-Mart, and Tesla - but if those companies see a network that runs inconsistently with poor management, they will ultimately head for the hills.

Ultimately, the trade off might be that in order to receive some convenience and a steady growth in your ICX balance, you’ll be sacrificing that ICX actually being worth something in the future. 

So what would you prefer? Spending some effort to help make sure ICX is worth $10 in the future, or choosing the easy way and ensuring its worth $0?