As a customer of service providers like Lock and Cake, I am impressed by the level of transparency compared to centralized platforms. I can verify blockchain addresses with deposits, masternode addresses, and/or Merkle trees. This allows me to be sure that my coins are actually there - a significant improvement.
But isn't transparency more than just the assurance that my coins won't end up in the providers' private wallets? The established financial industry resisted unified cost calculations for years and only reluctantly disclosed the actual annual costs.
But what about our blockchain service providers? How do they handle the costs they charge us? Let's take a look at the information provided by Lock:
"There is just a 5.55% fee on Staking Rewards and 19.9% on Yield Machine Rewards at the moment. However, these fees are theoretical, since users receive a fixed amount in paid out interests (fixed APY). So, there are no fluctuating interests, but rather the LOCK income is fluctuating depending on the amount of Rewards received. Please have a look at our Terms Conditions for a detailed overview of LOCK's fee structure for Staking and the Yield Machine."
That sounds good: only 5.55% fees for staking, and Lock also bears the risk of fluctuating returns.
But when I compare the average returns of my own masternodes, I see significant differences. Strange, isn't it?
So, what do the terms and conditions say:
"Variable fees depending on the amount of Rewards generated by LOCK. A fixed and effective Staking APR/APY as shown in the LOCK application is paid out to the user."
Which one is it then? Variable or 5.55 percent? So, I decided to ask Lock:
"Hi Jonas, do you have a page where I can track your staking returns? I still don't understand how your masternodes only generate 10.7% returns. Taking the 5.55% fees into account, your gross return should be only 11.33%. As far as I know, since you also host via MyDefiChain, I can't explain the difference from around 15% from my own MN. The discrepancy is too large to be attributed to fluctuations caused by deposits and withdrawals."
The CEO of Lock responded:
"Hi Ralf, that doesn't matter with the current DFI price. It is clear to everyone that we do not generate high revenues; anyone can calculate that quickly. It is important to understand that we operate the entire service as a company and not as private investors, which means that the cost structure is much larger. In the following GSheet, you can view all our masternodes and track the rewards for each MN:"
The list then included all masternodes - transparency? Well, if I were to sit down and check all 800+ masternodes, list the returns, and calculate an average, I would have the correct gross income. But since I lack the computer/programming and blockchain skills to automate that, I still don't know the actual costs. So, I asked again:
"Let me ask again: So, you don't take 5.55% of the masternode returns, but first deduct all internal costs since MyDefiChain is free through CFP, and then take the 5.55% as net profit. Am I understanding this correctly?"
The response I received was:
"MyDeFiChain is not free; they send us invoices every month/quarter. The whole thing is calculated with a 5.55% fee. This naturally fluctuates because the MNs do not always yield the same amount of rewards, but we pay fixed rewards to our customers. So, the revenue risk lies entirely with LOCK."
So, there is no concrete answer to how high the costs actually are. Is that transparency?
Calculating the true cost ratio manually is too laborious for me with over 800 masternodes. So, I took my average earnings from rolling 30-day periods (between 14.6% and 15.4%):
At 14.6% APR - Lock's current return is 10.7% APR >>> resulting in real costs of 3.9 percentage points or, equivalently, at least
26.7%.
At 15.4% APR - Lock's current return is 10.7% APR >>> resulting in real costs of 4.7 percentage points or, equivalently
30.5%.
Instead of indicating "fees of only 5.55%," in my opinion, it is more misleading than transparent. Since I trust Lock to calculate these profits as a reputable merchant, they will likely take the blockchain returns from the lower end of the range, meaning the "fluctuations borne by Lock" would increase the net profit to around 9.3%.
A net profit margin of 5.55% - and those are the "fees," it seems - is quite reasonable in my opinion, but is it really only 5.55%? I don't know, and despite all the "transparency," I still cannot comprehend it.
Cake doesn't even disclose an APR. They only show the APY of 10.78%, which further complicates the comparison. Without performing precise calculations (which is not possible due to lack of information), we can say that the cost ratio here is even higher. I can verify the individual masternodes with Cake as well, but Cake's statement "Cake does not determine the level of APY" is also not entirely true.
I cannot substantiate all this information (except for my own returns and the statements on the websites and the responses to my inquiries), and they may in reality be higher or lower. But that supports my point that while we receive a lot of data, transparency is still something else, or am I being too stubborn?
Perhaps a provider will start with Transparency 2.0?
I don't want to be misunderstood: the services offered are good and important because they allow small investors who cannot afford a full masternode to earn returns from staking.
For tax reasons as well, it may be advisable to use the services of the providers despite the high cost ratios, as it does not lead to commercial activity, for example, in Germany.
The providers also need to make a living and achieve reasonable profit margins.
I just wish for more openness regarding the actual costs.
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