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Staking Tokens!

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.

Source: Crypto.bi
Source: Tezos Baking & Delegation Guide, Medium

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.   

Meanwhile in Crypto Wonderland….

“Ivy-league Bitcoin” Since Bitcoin began to pick up steam in 2016, the network, coupled with its core developers, has been criticized by cynics en-masse for its inability to scale. And while evident strides are being made, with solutions like the Lightning Network and Segregated Witness seeing rapid adoption, innovators have still sought to one-up the world’s first cryptocurrency. Academics from two world-renowned institutions of higher education recently divulged ambitions to top Bitcoin. Since the bombastic announcement, Joey Krug, a leading Silicon Valley investor and devout disciple of blockchain scaling, has come out in support of the project.

“Consensys invests in two startups” Despite the recent cost-cutting ventures at ConsenSys, the company is increasing its investment activities by reaching out to independent start-ups. The Brooklyn-based ethereum venture studio announced two new investments on January 17, 2019. They put an undisclosed amount in the encryption-centric browser Tenta and $1 million in the Since its inception in 2017 with $50 million, ConsenSys Ventures invests in start-ups that complement those already under the ConsenSys umbrella. Since then, the company has distributed almost $14.5 million across 14 projects.

“Mainstream Exchange Going Crypto” The Stock Exchange of Thailand (SET), the country’s national stock exchange, is reportedly planning to operate a cryptocurrency exchange that is separate from the stock exchange. Dr. Pakorn Peetathawatchai, President of the SET, revealed on Thursday that the bourse is preparing to test a digital exchange prototype in the second half of this year, Post Today reported. The Bangkok Post elaborated that the bourse aims to “open a new exchange and become an authorised digital asset exchange this year,” adding that details such as the back-office system and which wallet to use for token storage are being worked out.

“Unfortunate Constantinople Chain Split”On January 15, Ethereum’s developers put out a security alert that they were postponing the scheduled Constantinople upgrade. Not everyone made the appropriate changes, however, and there is a currently a parallel universe of Ethereum mining. A “chain split” has occurred, and some miners are mining the unofficial Constantinople chain without consensus from the majority of the network. The delay came after potential vulnerabilities were discovered in one of the new upgrades.

Crypto Twitter Pick

https://twitter.com/evan_van_ness/status/1085749361840132096

What We’re Reading / Listening To

China’s Monetary Easing May Provide an Unexpected Boost for Bitcoin by Patrick Tan

Rabbit Hole Recap: Week of 2019.01.07

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