Coinbase Custody’s 60 institutional clients, who currently store around $600 million on the platform, will be able to stake or “bake” Tezos (XTZ) from today forward. Staking or baking dividends are akin to interest in the regular world. By holding tokens and putting them up for stake, new blocks get minted. The larger your coin stash, the better your odds of finding a block.
Proof-of-stake is one of two primary models for cryptocurrencies, the first and most successful having been proof-of-work. A version of proof-of-stake called delegated proof-of-stake is present in platforms like Tron. Ethereum will be moving to proof-of-stake sometime in the near future. Tezos has a different governance model and calls its version “baking.”
But the concept is the same: holding coins and enabling baking puts you in a position to earn revenue from your holdings, thus giving the network some form of security as well as incentive to hold coins.
Proof-of-Stake (“POS”) assets incentivize participants to help secure the blockchain by “staking”, or “delegating”, their assets to someone running the blockchain software. If you delegate to a trusted node (also known as a validator), you can share in the rewards that the validator receives for mining blocks. Anyone holding the blockchain’s token can participate in this process, making POS networks one of the first crypto-native ways to earn passive income on crypto assets.
MyTezosBaker.com says that using 01no.de as your baker, with a stack the size shown in the screenshot on the Coinbase blog (about 10 million XTZ), you would earn over $645,000 in a year, or about 7% interest. In and of itself, this is a decent return, especially on a crypto-asset.
The figure inherently assumes a constant price of Tezos. The price may rise or fall, which would definitively have an impact on the returns. In one sense, a falling price might help stakers – if other large holders sell, you stand to make even more by holding your stake.
The Wall Street Journal notes that Coinbase is the largest company so far to offer staking rewards to custodial clients:
Coinbase will be the largest company in the sector to start offering this service. A startup called Staked offers a similar service, and another one was just launched by a company called Battlestar Capital. These services are essentially cooperatives using pooled capital for the staking service. Another startup, BlockFi, accepts cryptocurrencies as deposits for interest-bearing accounts and as collateral for loans.
Readers should not forget about another service, open to everyone, which allows you to stake certain Ethereum tokens, including the Dai, for interest. Compound Protocol pays anywhere from 3 to 5% interest on, and updates your balance by the minute. You don’t have to be an institutional investor to take advantage of Compound both short and long-term.
Derivative financial products built on blockchain technology are likely to explode during the elusive next bull run. Coinbase’s position as a custodian with blockchain roots puts it in a good position to pick up more institutional business moving forward. However, traditional firms like Fidelity and JP Morgan have entire divisions devoted to exposing large clients to blockchain assets, and their reach is nothing to understate.
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