The SEC are right about one thing - staking as a service sucks. Embarassing myself by expanding on the shitty pie analogy

Staking as a service is BAD. People conflate the yield they get from dividends with the APY from staking. They see it as earning money by staking with a CEX. After all, if the APY is 10% and Coinbase pay you 9% then they are only taking 1%, you're still profiting 9%! But it is not the same thing, they are robbing you.

The idea of staking APY is that those who stake are being issued an increasing percentage of ownership in the network for helping to secure it. Participants are rewarded and those who do not participate are essentially paying the participants who do for their service.

The SEC used the example of a pie, so I am going to butcher that shitty analogy and embarass myself.

Imagine a dinner party where the main course is an infinitely divisible pie. Entry to the party is $10 and 10 people choose to come. They each get a seat at the table and a plate entitling them to 10% of the pie. Our pie is now worth $100 and everybodies percentage is worth $10.

The idea of staking APY is that those who stay at the table and keep the dinner party going get new pieces of the pie. APY doesn't increase the value of the pie itself, that's based on demand for tickets to the party and what the pie itself is worth in total. APY cuts more pieces of the pie onto your plate based on the amount you own.

People who remain seated at the table (stake) keep the newly sliced pieces on their plate, and people who leave the table but stay at the party (don't stake but don't sell) have their new pieces divided up amongst the rest of the table.

Let's go moonboi and imagine 100% APY. Each new piece of pie that gets cut will be the same amount as whatever is currently sitting on your plate. If everybody has staked and there's no new entrants to the party then the value of each person's pie remains $10, only the amount sitting on their plate has doubled.

We can ignore validators in this scenario, they are participants who also work security for the party, and we pay them a little bit of our pie each time it is cut for the extra service they offer, it's additional work they do to keep the party running, and is different to staking as a service. In many cases the CEXs also work security and double dip by assigning your funds to their own validators. This actually centralises the network further and creates a threat to the whole party.

The crux of this issue and the source of the SECs problem is that if you want to protect the percentage of the pie they already sold you then you MUST stake. In our example above - if after the first cut four times more people want to come to the party, then the people who didn't stake have a percentage worth $20, but everybody who staked has a percentage worth $40. If there's no increased demand for tickets to the party then after the first new cut of the pie the people who staked have a percentage worth $15, and the people who didn't only have $5. The pie is still worth $100, but their investment has halved in value.

So here comes Coinbase, they sold you your ticket but tell you you have to stand around and watch your percentage of the pie shrink. If you want then they will be nice and sit at the table for you in return for half your newly cut pie. You may feel like you're getting 50% more pie each year, way better than stock dividends, but you are actually just diminishing the percentage of the total pie you own by 25%. The higher the percentage the CEX takes, the more percentage of the pie you already own that you lose each year.

The only way to make money from APY itself in a staking system is to get APY when others at the table aren't. This is the crux of it, and means to at least maintain the percentage of pie you already own you MUST stake. If you do not stake then your plate will be worth less each year. You still profit if increased demand offsets this, but then you are being robbed of your upside. The higher the APY, the more important it is to stake.

So tl;dr - if you like your pie then fuck staking as a service, they are taking the pie off your plate and offering you nothing in return but a reduced loss of ownership, and they're exploiting people's familiarity with dividends (externally generated profits) to make it seem like you're making money, when if you don't stake you're losing the percentage of the pie you already paid them for.

Bon Appétit fellow nerds, and forgive me for butchering this horrible, awful analogy, please blame Gary.