An increasing number of crypto projects now use the PoS (Proof of Stake) consensus mechanism to validate transactions on the blockchain. A new crypto ‘infra’ business, ‘staking-as-a-service’ is growing rapidly alongside. Such service providers essentially provide an easy way for users to stake tokens and become block validators for the PoS protocol.
Bitcoin’s meteoric price rise over the last decade attracted significant mining interest and subsequently led to the centralization of hash power. Driven primarily by ASICs, the top 3-4 pools still account for a majority of network hash power. This non-egalitarian nature of Bitcoin mining leaves average users with small capital investments incapable of mining Bitcoin for a profit. As a result, mining pools that aggregate hash power of thousands of users to mine Bitcoin have come into existence. For the average user with mining aspirations who might otherwise stand no chance, this increases the likelihood of finding a block (and therefore a share of the block rewards) through collective pooling of resources.
In PoW, miners contribute computing power, literally their ‘proof-of-work’. In PoS, validators need to stake tokens to add transactions to the block and the staked tokens will be lost if a validator decides to add incorrect transactions to a block. The validators are chosen at random, with the probability of becoming the next block validator in most cases, directly proportional to the number of tokens staked. PoS systems are designed with the assumption that staking tokens is the best way for long-term tokenholders to maintain their equity in the ecosystem, or even stand a chance of increasing their ownership sometimes, by earning a token reward on their staked tokens.
However, this proposition is still not as attractive as it may sound for the small-scale or ‘retail’ tokenholder. Most projects require users to stake a minimum of tokens to be eligible to become a block validator. For example, Tezos requires its users to stake at least 10000 XTZ tokens ($4000 in current prices) and Ethereum, when it moves to PoS, requires at least 32 ETH ($3500) to be staked. The heavy upfront investment stops most users from becoming block validators, resulting in an effective dilution of their stake in the ecosystem as new block rewards entirely go to the eligible block validators, who benefit disproportionately in this oligopoly.Staking-as-a-service addresses this problem; Similar to mining pools, service providers aggregate tokens from average users to become block validators and distribute token rewards to their users proportionally after charging a fee for their service.
However, the nascent nature of this emerging business is reminiscent of the early days of bitcoin exchanges; there was little transparency into exchange operations and a profusion of hacks, usually as a result of users trusting their exchanges with their bitcoins. There might be significant value that can be captured by the early entrants in the staking-as-a-service business. However, the inchoate nature of business processes and infrastructure for this budding space might leave user funds vulnerable to hacks, as was the case with centralized exchanges in their early days.
Additionally the economics of staking are also volatile. Yields for PoS vary upon the percentage of the tokens being staked and the annual inflation of the token. Yield range for popular PoS coins such as NEO, Qtum, Tezos, PIVX, LISK and DASH is roughly 3-10%. The table below shows the current yields for some top currencies.
The service fees being charged by staking pools are currently in the order of 3-5% of the revenues. A detailed comparison of service fees between various operators is available here.
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