DeFi is widely lauded as the rising star of the cryptocurrency space, and rightly so. Flagship apps such as Aave, Uniswap, and Compound have paved the way for a new era of decentralized, open finance. However, long before DeFi, Proof-of-Stake (PoS) networks were pioneering the concept of earning passive yield on cryptocurrencies.
Furthermore, staking on PoS platforms is currently enjoying a flush of success that often goes unrecognized. Following the launch of staking on high-profile platforms including Cardano, Polkadot, and Solana last year, PoS is now the dominant consensus model among top-ranking platform tokens. And since Ethereum 2.0 launched its Beacon chain in December last year, staking has started gaining interest and traction with institutional investors.
For example, staking infrastructure provider Blockdaemon successfully raised $28 million in a recent funding round that included Goldman Sachs. Swiss-regulated digital asset bank Sygnum has also announced it will support staking on Ethereum 2.0, having already previously integrated staking support for Tezos.
Even before institutions begin entering the segment, there’s a significant amount of activity coming from exchanges and other crypto-native firms. Earlier this year, Coinbase announced it had acquired blockchain infrastructure firm Bison Trails, while the digital arm of Swiss investment firm Tavis Capital, which has over $1 billion AUM, has previously white-labelled the staking-as-a-service infrastructure from Audit.One (subsidiary of Persistence). The latter also manages $300 million worth of staked assets under its own name, making it the largest PoS validator in the South and Southeast Asia region.
At the time of writing, the total market cap of all staking platform tokens is $633 billion, while the total locked in staking is still only around 24% of that total, meaning there’s also still a significant addressable market.
Staking offers returns that would make a DeFi degenerate scoff but are still light years ahead of any bank. Currently, most of the top five provide anywhere between 5-7% return, although other platforms offer a higher rate. For instance, staking Cosmos’ ATOM currently provides a return of over 9%.
But why would any crypto holders bother with staking when they can deposit their funds in DeFi for significantly higher returns? There are several reasons. Staking offers relatively stable returns, whereas DeFi yield-seekers usually end up having to be pretty hands-on, seeking out the pools offering the best gains.
Staking is also comparatively low risk. Assuming that a user is willing to tolerate the risks of crypto’s inevitable volatility, staking funds in one of the established platforms doesn’t come with the danger of exit scams, rug pulls, or smart contract bugs.
That said, there are several avenues into staking. Users can opt to stake directly with the platform itself, which may involve a few technical steps such as setting up a compatible wallet and navigating the platform user interface. It also means agreeing to all of the platform’s rules regarding staking.
A second method is to join a staking pool. Pools generally operate an easier user interface, but the trade-off is that you’re trusting the pool operator. Staking pools often have their own rules that may differ from the rules of the staking platform itself.
Innovations in Staking
As ever with crypto, there are now new and innovative staking mechanisms emerging. On the cutting edge of staking, users can now explore new ways to maximize their staked funds and stimulate the token-based economy around staking.
For instance, one core feature of staking is that funds are locked for the duration of the staking period. To unlock funds, you must agree to unstake and stop receiving rewards. Therefore, there’s a vast amount of liquidity tied up in the staking ecosystem, by design, as part of the staking security model.
Persistence recently launched pSTAKE, a DeFi platform designed to unlock some of this liquidity without compromising on the security of the staked tokens. A user can stake on any supported platform using pSTAKE, and when they deposit their funds, the pSTAKE smart contract disburses tokens that represent their deposit 1:1. These pTOKENs can be used in the Ethereum DeFi ecosystem by lending them out in return for interest or putting them into a DEX liquidity pool to earn a share of transaction fees.
Another example is Polkadot and its crowd loan feature, available to projects wanting to bid for one of the platform’s coveted parachain slots. Leasing a parachain allows a project to connect to the Polkadot main chain; however, they’re only released in a limited number of slots, and projects must compete for them at auction.
To up the ante, projects can operate a crowd loan, asking supporters to lend their DOT for the duration of the parachain lease.
The only catch? The project needs to make it more alluring for the user than the generous 13% rewards they could make by staking their DOT tokens on the Polkadot platform. So far, the competition is only just starting, but depending on what projects are prepared to offer, it will make for some interesting economic dynamics in the valuation of DOT.
A Future Yield Treasure
Staking is only in its infancy, but it offers vast potential to transform the financial system and how everyday users generate returns on their savings and investments. As the “lower risk” end of the crypto yield spectrum, staking already provides the opportunity to lock in some passive rewards on tokens while generating even bigger rewards. However, we can expect to see considerable further innovation over the coming years as staking continues to establish itself.
About the author:
Tushar Aggarwal, an early member of the LuneX Ventures, is the Founder and CEO of Persistence, an ecosystem of bleeding-edge financial applications focusing on both institutional and crypto-native users. They recently launched pSTAKE, a liquid staking protocol that allows users to unlock the liquidity of their staked assets. You can follow them on Twitter @PersistenceOne and join the community on telegram
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.