New Money and Services Flowing into Proof-of-Stake ProjectsBy Jeff Chang
In early February, Staked.us, a company offering institutional-grade staking services for proof-of stake (PoS) networks, closed a seed round worth $4.5 million. This round was led by well-known blockchain investment firm Pantera Capital, and a number of other investors, including Coinbase, came along for the ride. It’s just one in a growing list of signs signaling professional investment interest in technologies related to proof-of-stake.
The latest sign is Coinbase's announcement that it will offer staking services for institutional clients, beginning with the Tezos network. The company is promising investors a return of 6.6% after fees. That's a pretty appealing annual rate in today's market. To understand why Coinbase is confidently jumping in on this trend, we have to understand what proof-of-stake is.
Proof-of-stake is a type of algorithm that helps blockchains achieve consensus via staking, which is based on token ownership, rather than based on mining. Bitcoin, and most of the cryptocurrencies that have followed in its wake, are secured with proof-of-work mining algorithms that require a lot of energy. Proof-of-stake algorithms allow for a blockchain network to be secured and achieve consensus without mining, and thus without the need for the energy-draining calculations mining computers must perform on proof-of-work blockchains.
This works by using randomization, in combination with token ownership data, to decide who generates each block on the blockchain. In a proof-of-work chain, miners run complex calculations and the first miner to “solve” one of these very difficult math problems wins the rights to create the next block in the chain and reap the corresponding rewards. In a proof of stake system, however, the next block creator is chosen randomly from among the population of token holders who have “staked” their tokens and are running a node with them. Typically, an account that has staked more tokens will be granted a correspondingly higher chance to create the block (and thus earn the block rewards), so the more tokens you are willing to stake, the more rewards you can earn.
Interest in proof-of-stake technology is growing. Staked.us’s investors expect that by the end of 2019, a quarter of all blockchain networks will be running on proof-of-stake. “Staking as a service” - which is what staked.us offers - is expected to become a $2.5 billion market over that same period.
Part of this rising interest is probably because Ethereum, the second-largest cryptocurrency by market cap (as of this writing) has long had plans to switch from a proof-of-work algorithm to proof-of-stake. EOS, another popular altcoin, uses Delegated Proof of Stake (DPoS) consensus, a variation of proof-of-stake. Cosmos, Polkadot, Cardano, Dfinity, and other attractive crypto projects have also emerged in recent years, all running proof-of-stake systems.
The rise in proof-of-stake systems has caused a corresponding rise in interest in staking-related services. Currently, there are mainly two approaches for SaaS staking services: operational services for institutional nodes and custody services for individual investors.
Institutional providers include Staked.us, Stakecapital, P2P Validators, etc. Staking services aimed at individuals include Wetez, Cryptium Labs, Figment, Stakewith.us, etc. But although the clients differ, these services all do essentially the same thing: run a staking node for you, using your coins and charging you a commission of 5-25% based on the rewards your node generates.
The kinds of returns staking can generate vary dramatically from token to token, and of course, as each token’s exchange rate fluctuates, the value of the block rewards it offers goes up and down as well. Staking is attractive, however, because it does offer predictable additional revenue for crypto investors, and unlike mining it doesn’t require expensive equipment and large amounts of electricity.
You can think of it a bit like a bond with a fixed interest rate: while the value of the currency itself might go up or down, the rate of return from the bond’s interest (or the proof-of-stake token’s reward for staking) is fixed.
Beyond predictable revenue, staking offers another attractive facet: staked tokens typically also confer additional rights, like voting rights on the blockchain. So, just as miners can influence the development direction of proof-of-work projects, coin stakers on proof-of-stake systems generally get a similar say in decisions that are put to a community vote. Some staking tokens may also offer additional rewards to token-stakers, like access to shared resources or services.
Staking as a technology has already been adopted by a wide variety of tokens, wallets, and of course all of the aforementioned staking-as-a-service companies. It has grown particularly fast in China, where there are active projects like:
Huobi Pool: A mining pool that includes PoW but but also PoS features. It has included, for example, EOS validators’ voting tools right in the Huobi exchange when interest in EOS is high. It also supports other POS currencies like TRON, ONT, and CMT.
Cobo Wallet: A wallet that provides users rewards via PoS mining, it raised $13 million in A-round fundraising from Danhua Capital. It supports a variety of PoS mining projects, including DASH, VET, DCR, etc.
Wetez: A firm that offers China’s biggest Tezos validators service, and also makes a wallet designed particularly for PoS tokens. In Wetez wallet, coin holders can delegate to different validators conveniently and check rewards. There are plans for the wallet to include PoS projects like Cosmos, Cardano, Polkadot, etc.
Hashquark: A member of the WanXiang blockchain ecosystem that has also been an early entrant to the PoS field. It’s focused on PoS and DPoS consensus via mining pools, and distributing the rewards to staking users.
And that’s just the tip of the iceberg. There are many other teams in China and across the globe that are ramping up to integrate proof-of-stake technology services into their offerings.
This is likely just the beginning. Ethereum’s eventual transition from proof-of-work to proof-of-stake is going to bring more attention to staking than the technology has ever had. And based on investment activity like Staked.us’s recent seed round, some investors clearly think that’s going to kick off an additional flurry of interest. As staking rises to prominence, we can expect to see the business ecosystem that’s emerging around staking to grow and diversify. And while it seems likely that Ethereum will be a big driver of this rise, if it fails, there are many other staking coins waiting in the wings that will likely keep driving new interest to this promising tweak on traditional blockchain technology.