Over the past year, the term “staking” has become more and more prevalent in the blockchain ecosystem. From a high-level, staking refers to locking some form of collateral in exchange for some form of benefit. We’re seen staking use-case for everything from base-layer protocols for consensus like Tezos, Cosmos and Algorand to application-specific staking in notable DeFi applications like Synthetix and Uniswap.
What’s important to note is that the various use-cases take on different staking schemas, and the ultimate goal is to build scarcity by encouraging as many token holders to *lock* collateral as possible. In this sense, demand for any given token will *hopefully* outpace supply, thus driving token price upwards.
In practice, we saw tons of projects raise funds on the basis of a Proof-of-Stake based consensus mechanism in which validators post collateral to perform validation on the network. Now that many of these protocols are starting to go live, we felt this was a perfect time to paint a larger picture on notable staking narratives and their implications.
DeFi Token Models
For those keeping up to date with the proliferation of DeFi, it’s no surprise that the amount of value being locked within various products in gradually increasing each month. With this, there are a few notable projects leveraging a native token, most of which have (or plan to) implement staking as a value driver. Let’s take a look at a few examples:
Users looking to create derivatives (Synths) must post 750% collateral in the form of SNX. Similarly, staked SNX entitles users to a portion of all fees generated on the platform. At the time of writing, 80% of all SNX is currently locked within the protocol.
Kyber just announced Katalyst, their new token model which places a heavy emphasis on KNC staking for their DEX model. Users who stake KNC earn a portion of exchange fees along with having governance rights.
Nexus Mutual provides a decentralized insurance protocol. In the latest governance call, the core team discussed how NXM staking will soon be integrated into all smart contract covers along with a rework on the rewards distributions. In practice, users who stake NXM stand to earn a portion of all fees relative to their share of the staking pool.
Similarly, we’ve also seen a number of staking schemas that don’t leverage a native token but require collateral to be locked in exchange for a benefit or reward. A few notable examples of this type of staking include:
Users must lock collateral (currently ETH and BAT) in a Vault to mint Dai – a decentralized stablecoin. Dai can then be locked via the Dai Savings Rate to earn an annualized return (currently 4% at the time of writing). As it relates to governance, MKR is locked via a voting contract to vote on executive polls. Stated plainly, Maker staking unlocks permissionless borrowing, savings and governance on a stable-form of Ether.
Uniswap is a decentralized exchange leveraging smart contracts to trade Ethereum-based assets. Anyone can lock collateral into a specific Uniswap Pool and earn a portion of the 0.3% liquidity fee incurred on all exchange transactions. Here’s a look at the returns on some of the more popular pools. For those unfamiliar with this process, suppliers *lock* collateral in return for a liquidity token which can be redeemed at any time.
Compound is a permissionless lending protocol offering different interest rates for various crypto-assets. Users supply Compound with assets in exchange for cTokens, or Compound’s representation of an asset that is currently accruing interest in the protocol. User are therefore earning interest for as long as assets are staked within Compound.
What’s important to remember here is that regardless of whether or not a native token is being used, locking capital serves as a tested mechanism to ensure that key actors are being held accountable. By using smart contracts to hold assets in escrow, it becomes nearly impossible for a malicious actor to game the system and take advantage of the predefined reward schema(s).
Taking a look at staking protocols, we’ve seen a large number of exchanges start to enter the Staking-as-a-Service game. As many of us are aware, centralized exchanges are inherently custodial, meaning that a third-party institution is holding all of the funds in your account.
By introducing added staking features, users can now *stake* their assets directly through an exchange, drastically lowering the technical barriers to entry in favor of an intuitive UI. So far to date, we’ve seen industry leaders like Coinbase and Binance provide non-technical users with a compelling mechanism to take advantage of Proof-of-Stake protocols like Tezos, Cosmos, and Algorand to name a few.
These crypto giants have also drastically increased the competitive nature of Staking-as-a-Service, forcing staking providers like Stake Capital and Staked to offer things like StakeDAO to differentiate and emphasize the ethos of decentralized, permissionless networks.
ETH 2.0 / Serenity
As many of us are aware, Ethereum is quickly approaching it’s much anticipated release of Serenity, effectively transitioning the protocol from Proof-of-Work to Proof-of-Stake. For more information on how this transition is expected to pan out, we recommend brushing up with our Serenity roadmap resource.
What’s important to note here is that Ethereum’s transition to Proof-of-Stake will not only mark an increase in throughput, but also an easier mechanism for non-technical users to take advantage of block rewards and transaction fees through validation.
As it stands today, the initial capital requirement for each validator node is currently set at 32 ETH or roughly $4200 at the time of writing (ETH $130). It’s largely expected for early validators to claim the largest rewards during the early days of Serenity, meaning that many users are actively soaking up ETH in anticipation of the 2020 transition.
Similar to Staking-as-a-Service providers described above, we fully anticipate exchanges to allow for users to *stake* ETH in increments smaller than 32 ETH, further building on the narrative of scarcity in the event that staking becomes popularized by smaller investors.
If one thing is for certain, staking pools such as RocketPool and Stake Fish offer a novel way for any user to capture the upside of ETH staking without buying or maintaining any of the technical specs required to run an independent validator node.
Why Does This Matter?
Tying all these notions together, let’s reflect on why staking matters. Seeing as we’re largely operating in a distributed ecosystem where influence is spread across a global scale, staking provides:
- Security – The more capital staked in any given product or service, the more secure it becomes due to a larger amount of capital needed to game the system.
- Scalability – While Proof-of-Work has served as a solid foundation, it’s largely recognized that Proof-of-Stake will drastically increase throughput, further increasing the opportunity for any public blockchain-based application to reach a mainstream audience.
- Decentralization – Staking is inherently permissionless, meaning that you don’t have to *ask* anyone to stake your assets. While we are likely to see large providers aggregate a significant majority of staked capital, the notion that anyone can contribute to the validation of a network is pretty powerful.
- Accessibility – With staking, rewards become accessible to non-technical users. As tools continue to advance, it’s likely the staking will become easier to navigate for beginners.
- Novelty – Different products can leverage unique schemas to incentivize their community to participate. At the end of the day, staking is the clearest illustration of putting skin in the game.
While this article didn’t highlight anything too novel in recent weeks, it’s important to recognize that staking seems to be a growing trend that many projects are incorporating to stay relevant.
Whether it’s staking for a claim on a rewards pool or staking to influence governance over the system, we’re now beginning to see many projects *update* their tokenomics to try and drive demand through a desire to stake a particular asset.
When we tie in aspects like bonding curves, the argument for token appreciation can become clearer than some of the far-fetched use cases we’ve seen in the past few years.
If one thing is for certain, staking certainly doesn’t matter if there isn’t a valuable reason for users to stake in the first place. While we think staking for rewards is a good start, we largely expect to see the benefits of locking capital to increase in its potential implications.
Using memberships as an example, it’s entirely possible to imagine an ecosystem in which benefits are earned relative to the amount of capital being staked, effectively allowing users to come and go from a service as they please. Paired with the fact that sunk costs can be avoided by allowing that user to sell their capital whenever they are done with the service, we can start to envision some pretty fascinating models coming into play.
If you or your business are interested in learning more about staking or looking to implement it into your business, give us a shout!
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Fitzner Blockchain Consulting is a leading management consulting firm that specializes in blockchain-based systems and their design