VeradiVerdict - Staking 101 - Issue #23
Hi, I am Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing into blockchain companies and cryptocurrencies. I focus on early investments and want to share my thoughts and what’s going on in the industry in this weekly newsletter.
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Everything You Need to Know About Staking:
Staking is a way of making money on idle coins on blockchains that use the increasingly popular proof-of-stake protocol. It’s essentially like making a fixed deposit with some of your coins in exchange for the ability to validate transactions and in turn, receive some of the transaction fees.
The amount of return depends on the cryptocurrency and how much you invest, but annual yield rates range from 7% for currencies like DASH to 150% for platforms like Livepeer.
By the end of this year, 25% of all cryptocurrencies will be hosted on proof-of-stake networks, meaning investors can earn a total of $2.5 billion from staking. Given that we’re in the biggest cryptocurrency bear market in history, staking seems like a relatively safe and effective way to make some profits.
Pantera just led a $4.5M seed round in Staked in collaboration with Coinbase Ventures, Global Brian, Digital Currency Group, and several other investors. Staked is a platform that helps investors magnify their cryptocurrency investments and returns by staking or lending their holdings. I believe that Staked has the team, technical architecture, early top crypto fund clients, and partners to be very successful. The desire to invest into a staking company stemmed from looking for a partner to handle our staking needs instead of building it in-house.
What even is staking?
You’ve probably heard of an algorithm called Proof-of-Work (POW) that’s commonly used to implement consensus on a blockchain. While POW was the original consensus algorithm and is widely used today, it has had its fair share of issues, namely energy cost efficiency and the 51% attack by monopolistic miners. In response, developers have created a new algorithm called Proof-of-Stake (POS) that implements consensus based on a node’s total holdings on the blockchain.
Simply put, staking is the process of locking up some of your holdings with smart contracts to support the network; it’s like putting down a fixed deposit in exchange for the ability to validate transactions on the blockchain. By correctly validating transactions, you earn a share of the transaction fees which means you get more return on coins that would have otherwise been sitting idle on the network. The more you stake, the more transactions you’ll be allowed to validate, which means even higher returns on the holdings you lock up. The only caveat is that during the staking period, you can’t access any of the holdings you locked up––just like a fixed deposit.
Different staking interfaces do staking differently, but the general idea is that staking is locking up some of your unused coins to help verify consensus on a network in exchange for fairly high returns.
How does it work, technically?
There’s a lot of different staking user interfaces out there (namely Staked, which we just invested in!). At a high level, these interfaces basically help you:
Lock up some of your current tokens with a smart contract. This means that for the entire staking period, you cannot access these tokens.
Run a node to validate transactions, forge blocks, and most importantly, earn fees from the transactions you validate.
Step 2 might seem a bit daunting to the not super-technical type, but there’s a solution––bonding. You can bond your node to another node that will validate the transactions for that node and your node, basically taking care of all of the technical work. In exchange, you have to pay some of your returns to the node you bond to, but you still get a fair share of the transaction fees just for locking up your coins.
Why should I stake?
You probably have some holdings on your blockchain that you rarely access; think of it like money sit idly in a checking account. There’s no harm to not staking per se, but it might be worthwhile to invest some of your coins into this relatively safe protocol. Depending on the coin that you stake, you can get returns anywhere from 7% from a currency like DASH to 150% for a currency like Livepeer. As long as you don’t incorrectly validate any transactions, which you’re not likely to do anyways, there’s no harm from staking. And probably most relevant right now, we’re currently in a huge bear market for cryptocurrencies and as a result, traditional investments have slowed down a ton. Staking provides a way for you to get returns on coins that you already own, meaning that you can still profit in this bear market.
How do I stake?
First things first, remember only proof-of-stake tokens can support staking, so currencies like Bitcoin which still use the proof-of-work algorithm won’t work.
Here’s a few cryptocurrencies that do support POS: Cosmos, DASH, Decred, Qtum, Stratis, Peercoin, Lisk, Ark, Rise, Oxycoin, Shift, and Blockpool.
For annual yield rates on various currencies, visit Staking Rewards for constantly updated metrics on what you can expect to get back on any given cryptocurrency, plus data on market cap, price, risk, and a qualitative analysis of reward. Note that Staking Rewards only shows data for cryptocurrencies specifically, and not just general blockchain applications that use the proof-of-stake protocol. Some of non-cryptocurrency staking applications have the biggest returns; Livepeer, a decentralized video broadcasting application built on Ethereum, has over 100% annual return on staking. To check out the update yield rates for applications like those, visit the website of a staking application like Staked.
To start staking, visit the Staked website, navigate to the Yields tab, and click “Stake” on any cryptocurrency you’re interested in staking. Follow the instructions that pop-up; it varies depending on the cryptocurrency, but it generally involves a couple of starter transactions.
What does the market look like?
By the end of 2019, 25% of the entire cryptocurrency market will use proof-of-stake protocols for consensus. That means that given expected annual return rates, investors in these currencies can make a total of $2.5 billion annually.
For a given investment, the graph below shows how much return you can expect on your holdings based on current data. Note that the graph shows returns for either staking or lending depending on which one is more optimal––but the returns for lending are a little less than or comparable to the returns for staking, so the trends should still be representative.
Staking return rates have been going up over time, too. Below you can see the change in annual yield and price for three of the biggest staking markets: DASH, Cosmos, and Decred.
Remember that the more coins you stake, the higher your returns. Given the huge shift in the market towards staking protocols, it seems pretty clear that staking will become one of the biggest payoffs for cryptocurrency investors in the coming years.
I believe that existing crypto funds should be figuring out their staking strategy for the POS tokens that they own or are currently invested into. I can also see funds emerging or portions of funds that will be focused on investing exclusively into POS tokens to generate consistent returns.
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In the Tweets
@_jillruth @twobitidiot 1/ tl;dr - Today yes... No liquidity, not worth the risk, solutions work (working cap/treasury rebalance). 5 years, no.
⏳Here's what's most likely to go down⏳
Decentralized types - Organic/linear growth ("slow")
Fiatcoins - Rapid market cap growth.
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