Based on an overall average annualized yield of 11.08%, Staking's annual revenue generated by the holders can reach $750 million. If more crypto assets support Staking in the future, and the currency price rises, the incremental income of the entire market will further expand.
The iceberg movement is majestic because it is only one-eighth of the water.
If the crypto-asset market has rebounded continuously in the past three months and the breakthrough high is one-eighth of the entire industry, then other technological advances, industry adoption and crypto-financial innovations constitute the rest of the water. Regardless of technology and industry adoption, in the field of crypto-finance innovation in the year-to-date, many new attempts are reshaping the vitality of cryptographic financial innovation after the collapse of ICO, and Staking is undoubtedly one of the most compelling.
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Its rise is the inevitable result of the industry's overall turn to POS and POS-like consensus mechanisms. At present, there are more than 70 encrypted assets supporting Etaking, such as EOS, Tezos, Cosmos, etc. In addition, nearly 20 encrypted assets such as Ethereum, Cardano and Polkadot are ready to support Staking. According to the available data, Staking can bring investors an annualized income of up to 158.10% (Livepeer), with an average of 10% to 20%.
The market value of the top 50 encrypted assets Staking annualized rate of return reference. Source: StakingRewards.com
What exactly is Staking? Why is it that it is "the inevitable result of the industry's overall turn to POS, POS-like consensus mechanism?" Why is it considered to be one of the most important blockchain financial topics in the first half of 2019? Is it worth participating and how to participate? How are risks and benefits measured?
Before you figure out this series of questions, you may want to remember a few conclusions:
1. The essence of Staking is “mortgage mining”. In the POS and POS-like consensus mechanism projects, anyone can participate in Staking's “energy earning” through the encrypted asset mortgage lock position. The yield is calculated in the currency standard. There are a large number of encrypted assets that are not involved in Staking;
2. Staking revenue depends on the inflation model design of the crypto assets, mainly the encryption asset issuance bonus. Therefore, Staking may further stimulate inflation, and the actual Staking rate of return after inflation may be negative, and the selection project cannot only look at the rate of return;
3. staking is not economical for small holders, but it is a good choice for Hodler;
4. There is currently no accurate measure of the impact of Staking on the secondary market price of cryptographic assets. If the Staking approximation is regarded as a short-term bank deposit, the Staking yield and the crypto asset transaction yield will form a competitive relationship;
5. Important note: Deleting encrypted assets and earning Staking revenue does not mean that you can make a profit without losing. The reliable Staking as a Service service provider is especially important.
In simple terms, Staking is the “mortgage mining” under the POS (or POS-like mechanism, such as DPOS, LPOS, BPOS, HPOS, etc.), which is unique to the blockchain network using the POS consensus mechanism.
In the POS blockchain network, nodes (similar to "miners" in the POW mechanism) are responsible for packaging transaction information, maintaining network operations, and participating in community governance (this process can also be called "mining"), but this process There are no block rewards, and the mining revenue depends on the amount of crypto assets they mortgage in the network: the more assets that are mortgaged, the more revenue they earn.
The process of mining and earning revenue through mortgage-backed assets is called "Staking." This process differs from the POW consensus mechanism in that miners spend a lot of power and computing power on computational mining. Under the POW consensus mechanism, mining has block rewards, and the amount of calculation determines the mining output capacity.
In the POS consensus mechanism, the working mode of the node: running the node, becoming the verification node (the node with voting rights is called "verification node"), participating in Staking, selecting the verification node by the algorithm, packaging transaction, broadcast transaction, and verification success. Image source: www.longhash.com
Staking has become the mainstream trend of 2019 encryption financial innovation.
This trend was ignited by Stake.us's $4.5 million investment from Pantera Capital, Coinbase, DCG, etc., and was received by Cosmos, the star project of the main online line in early March, while Coinbase announced that it will launch Tezos' Staking service for institutional customers, EOS, LivePeer and Ethereum 2.0, Dfinity, Polkadot, and Harmony further push Staking to the public eye.
According to StakingRewards.com, as of June 5, there are 75 encryption assets in the world supporting Staking, and 16 projects such as Ethereum, Cardano and Polkadot will continue to support Staking in the second half of the year.
Staking is bringing incremental gains to the holders. Stake's 75 projects are underway, with a total market capitalization of $21.7 billion – based on the current average 31.2% Stake ratio (the proportion of crypto assets that cannot be sold in a mortgage), Staking has a market capitalization of nearly $6.8 billion. Further, based on an overall average annualized yield of 11.08%, Staking's annual revenue generated by the holders can reach $750 million. If more crypto assets support Staking in the future, and the currency price rises, the incremental income of the entire market will further expand.
However, the Staking benefits from different projects may vary considerably. At present, EOS has the largest market value through Staking, which is about 2.8 billion US dollars. It is equivalent to an annualized rate of return of 1.84%, which is equivalent to a dividend of more than 50 million US dollars per year.
As of June 5, mainstream cryptographic assets participate in the value of Staking Lock. Currently occupying the first place in Staking Economy. Image source: StakingReward.com
Staking operation mechanism: How do ordinary people "lie"?
Staking's income is mainly composed of two parts: block reward (encrypted assets that the system is issued through inflation), node accounting income, and block reward is the most important.
For ordinary people, there are two key points to understanding Staking: first, Staking is a type of guaranteed income (currency); second, Staking essentially acquires billing rights through mortgage-encrypted assets, with a lock-up period (for example, Cosmos). The commission-debinding time is 21 days) and is a passive income. For this reason, the proceeds from Staking are considered to be “living,” and the benefits of Staking are also referred to as “sleeping income”.
1. How do ordinary people participate in Staking?
The holder can participate in Staking in two ways: by self-verification and entrusted to the node operator. However, in practice, the feasibility of self-verification is problematic:
· Mortgage balance limit: Most of the encrypted assets are set to the minimum mortgage balance involved in Staking. For example, Dash requires a minimum of 1000. Based on the closing price of $165.18 on May 31, this means that at least $165,180 is required to qualify for Staking, and the small holders are therefore blocked from the staking gate.
· Cost limitation: The operating node also has a fixed cost, and the technical threshold for building the node and the equipment required for the configuration are relatively high. Therefore, paying “passover fees” is better than self-built highways. In addition, since there are currently about 75 encrypted assets that already support Staking, the Staking mechanisms of different encryption assets are different, and it is difficult to achieve economies of scale by self-verification.
· Specialization restrictions: As the backbone of the POS blockchain network, nodes must maintain stable and normal running time (7*24), and have the ability to continuously handle network transaction volume, ensuring security and managing network updates as needed. It is difficult for individuals to guarantee continuity and safety of the process.
In addition, under the POS mechanism, the node no longer competes for billing rights through computational power, and the probability of obtaining the billing rights depends on how much it owns. Equity can be the number of encrypted assets held by the node, or it can be a function of the number of encrypted assets – which means that if the number of encrypted assets held by the node is relatively small, then the possibility of creating the next block will be greatly increased. Attenuation, and system failures that may occur at any time and erroneous operations that violate network protocols further increase the uncertainty of revenue.
These restrictive factors allow self-verification to show the uneconomical nature of the scale, providing an opportunity for the emergence of Staking as a Service.
By collateralizing the crypto assets in their hands to the node operators that provide Staking as a Service services, they can manage assets, nodes or exercise corresponding rights (such as the right to vote for consensus), and the holders do not need to meet the minimum mortgage balance limit. You can participate in Staking to share the benefits and isolate the risks to some extent. However, the holder of the currency also needs to pay a certain service fee to the node operator (generally deducted from the Staking income), and the rate ranges from 5% to 25%. Taking Coinbase as an example, its independent subsidiary Coinbase Custody announced on March 29 this year that it provided Tezos' Staking service to institutional customers and charged about 20% to 25% of the fees from Staking.
Self-verification (on) VS entrusted node operator verification (below). Image source: HashKeyHub
Many node operators have emerged on the market, and wallets, exchanges, and crypto asset custodians are becoming the entry point for ordinary people to participate in Staking.
2. Factors affecting earnings
The most direct measure of revenue is the rate of return. The Staking yield is approximately equal to the ratio of inflation to mortgage rate; higher inflation rates and lower mortgage rates lead to better yields and higher returns. Most Staking-enabled projects offer the Staking Revenue Calculator on the official website, and can be easily accessed through Stakingrewards.com.
Staking yield = inflation rate / mortgage rate
(Staking Ratio refers to the proportion of crypto assets that are used for mortgages but cannot be sold)
In addition, there are many other factors that influence Staking's earnings. These factors, including inflation, fall into three categories: constant factors, variables, and risk factors.
· Unchanging factors (established): mainly inflation rate. The inflation rate is determined by the incremental model set by the project, and this part can be approximated as a constant factor. Fixed inflation rate models (such as EOS, Stellar, etc.) and adjusted inflation rate models (such as Cosmos, Tzeos, Livepeer, etc.) are currently the two main types of issuance models.
In the Cosmos inflation model, the 66% Staking Ratio is a tipping point. Below this ratio, the inflation rate will gradually adjust to 20%, and accordingly, the annualized rate of return will also be higher; above this ratio, the inflation rate will gradually adjust to 7%, and the annualized rate of return will fall. This mechanism allows Cosmos's inflation model to encourage early participation in Staking for early dividends. Currently, Staking Rewards shows that Atom's mortgage rate has risen to 72.29%. Image source: blog.chorus.one
Variable factors (changes over time or other conditions): including mortgage rate, commission paid to the node operator, amount of mortgaged assets entrusted to the node operator, billable income, price of the encrypted asset in the secondary market Performance and so on. In the case of other factors, the higher the mortgage rate and handling fee, the lower the income; the higher the bookkeeping income, the higher the income; the more entrusted assets, the higher the secondary market price, the more the dollar-denominated income high.
The Staking annualized rate of return for the Ethereum 2.0 program is between 1.56% and 20%. The rate of return is negatively correlated with the mortgage rate. When the mortgage rate is 100% (at this time, the number of verified ETHs reaches 134,217,728), the annualized rate of return on ETH is only 1.56%. Image source: chorus.one
Risk factors (random): including Slash, security, node downtime, etc., where Slash is considered the biggest risk factor. When the node does not comply with the protocol rules (such as double-signing the block), it is possible to trigger Slash – if the block reward is cancelled, the balance of the mortgage in the account will be a penalty. The penalty ratio prescribed by Cosmos is 5%.
3. Real rate of return
The annualized rate of return of the encrypted asset Staking is conveniently queried on stakingrewards.com, but considering the “inflation” nature of cryptographic assets such as POS or POS-like mechanisms, the true rate of return after inflation is more worthy of attention.
The true rate of return for some POS projects, as of June 3; source: messari.io
Messari.io gives a reference value for real rate of return. In data-verifiable projects, the true yields of EOS, XTZ, NEO, LSK, and BTS are all negative—where NEO's real rate of return is even as high. -13.70%. This means that for POS or POS-like projects, the benefits of Staking are far from offsetting the dilution of the value of encrypted assets brought about by inflation. This is not to deny the value of Staking. If you don't participate in Staking, the inflation loss that the holders have to endure will only be higher.
4. Opportunity cost
Another factor that bearers need to weigh is the opportunity cost of Staking. In general, Staking will require a lock-up period for a period of time, during which the price of crypto assets rises and falls constitutes the most important opportunity cost of Staking.
Take EOS as an example. Its annualized rate of return is only 1.84%, and as of June 3, the 7-day and 30-day EOS price increases in dollar terms have reached 18.09% and 51.30%, respectively. If EOS continues to rise during Staking, then for the holders, the benefits are twofold: both the value-added benefits of Staking (increased crypto assets) and the wealth effect of rising currency prices ( The dollar-denominated assets have appreciated.) However, if the currency price falls sharply during Staking, the holders are likely to be allowed to lose their dollar-denominated wealth due to the loss of opportunities to operate in the secondary market. From this perspective, Staking is especially suitable for Hodlers who encrypt assets.
5. Select the "reliable" node operator
Placing an encrypted asset to a node operator does not mean a steady profit. In particular, when a node operator lacks experience or a record of integrity, the exposure of the currency holder is particularly high. There are already some third-party data research organizations that provide independent monitoring tools to monitor the operational status of the nodes, but the format has not yet been fully established.
Baking-bad.org provides third-party operational monitoring services to Tezos' node operators. The verification node of Tezos is called "Baker". Image source: baking-bad.org
In this case, there are several simple criteria for reference to the selection of node operators: historical Staking returns, community contributions, reputation, security architecture disclosed on the official website, and anti-attack solutions. Some project parties will also hang out the operation of the node operator on their official website.
Reference to the operation of the node operator given by the official website of Cosmos. Image source: www.mintscan.io/validators
Staking ecology is forming
A big trend in 2019 is that POS and POS-like consensus mechanisms are replacing POW. If POW stimulates the mining 1.0 era, it has developed from the upstream mining machine chip development, manufacturing, sales, to the midstream infrastructure (such as water cooling, wiring, power, site, second-hand mining machine trading, mine erection operations, backbone POS is expected to push the mining industry into the 2.0 era, which is likely to be Staking in the era of network infrastructure, cloud computing website deployment, and downstream industrial infrastructure and service facilities such as mining finance, exchanges, wallets, media and data services. For the core.
1. Staking ecological landscape
From a large context, Staking participants have three main levels:
· Holders with Staking needs
It includes individual investors, institutional investors (such as encryption venture capital, encrypted hedge funds, etc.), as well as foundations (such as the Ethereum Foundation, ADA Foundation, etc.), companies or project parties.
· Staking entrance
A third-party service organization that connects the money holder and the Staking service provider, which is mainly composed of a wallet, an exchange, an encryption custodian, and a POS mining pool, and provides a channel for the holder to store encrypted assets and participate in Staking.
· Staking service party
Verify the node and node operator. Generally speaking, the holder of the Staking income must first select the node to commission, and the node operator accepts the commission and charges a certain percentage of the service fee. In reality, wallets, exchanges, and encryption custodians can often become verification nodes or node operators with their own entry advantages.
In addition, data and research institutions, tools and application developers, and security teams have been created in response to the needs of the Staking market, which together form an integral part of the Staking ecosystem.
A typical representative company in the Staking ecosystem. Image source: Image source: www.theblockcrypto.com
2. Staking as a Service is becoming a trend
In the process of Staking's ecological formation, Staking as a Service has become a new demand-driven business model, which has evaded access, cost and risk for individual self-certification, marking the beginning of Staking's specialization.
Currently, the Staking as a Service service on the market is mainly wallets, exchanges, encrypted asset custodians and POS mining pools. At the same time, encryption investment institutions, emerging data research institutions, third-party professional organizations, etc. are also profiting from this market. . A number of Staking as a Service providers have emerged in China, such as HashQuark, Wetez Wallet, Firecoin Pool, Cobo Wallet, Coin Wallet, Matpool, Stake.fish, etc.
With the increasingly fierce competition, the key to Staking as a Service service provider is to master a large number of money-holding user resources or large-capital resources, and the rates, competition, system punishment, and security constitute the main challenges they face.
At present, the Staking annualized rate of return for the entire market is 11.08%, and the service provider will charge a fee of 5%~25% from the income. Based on the current $750 million Staking overall revenue scale and 15% rate, service providers can earn approximately $112.5 million in annual revenue. If the market continues to expand and the income scale continues to rise, there will be more participants coming to the Staking as a Service circuit. Competition will lower the average rate of service providers, and even cause some service providers with high operating costs to withdraw from competition. The market structure may turn to an oligopoly.
Competition is not just a competition between Staking service providers. Staking needs to mortgage the encrypted asset and has a certain lock-in period. If the fixed-term bank deposit product with interest payment ratio is compared to Staking, then it faces the secondary market investment income and other encrypted financial product income (such as decentralized lending and other Defi). Product) competition.
The value-added benefits of Staking may be more popular with long-term holders of encrypted assets (Hodler), and small-sized crypto-investors may choose Staking services less – Staking as a Service, so there is a strong to B service. Tendency.
As a Staking service provider, as with individuals who use self-verification, the most risk that can't be ignored is the risk of Slash. In the design of some POS mechanism projects, Slash will not only confiscate block rewards, but may also punish some mortgage assets.
In the list of Staking penalties issued by Tezos, some service providers were even fined 18,748 XTZ in 1 minute, and the average price of XTZ was $2,249 on June 5, and the loss was as high as $2,2497.6. More service providers are punished for continuous mistakes. Image source: tzscan.io
Participating in Staking on behalf of customers holding a large number of encrypted assets also increases the security risks of service providers. In the past, exchanges were the primary target of hacking. In the future, Staking service providers may also become targets of hackers. The most common means of attack currently may be "long-range attacks."
Staking “Paradox”: Is the prosperity ecology or accelerating centralization?
Insufficient participation rate is one of the major issues currently facing encryption projects using the POS consensus mechanism. In the case of EOS-initiated voting to reduce inflation, EOS officially received 25.63 million votes in 778 accounts during the three-month voting period, with a voting participation rate of only 2.5%.
Staking is motivated by inflation incentives to encourage more holders to take the initiative to participate in the community and network validation of blockchain projects, especially the emergence of Staking as a Service providers, which also gives fairness to small crypto asset holders. Opportunity to participate. From this perspective, Staking is expected to contribute to the ecological prosperity of blockchain projects.
However, the POS consensus mechanism encryption project also faces another major problem, that is, resources are excessively concentrated in the hands of large users, and the Matthew effect of the network is getting stronger and stronger. Staking does not seem to have the ability to solve this problem, but it may aggravate the problem. The operation mode of Staking as a Service is equivalent to adding a third-party organization to the blockchain network, which holds the encrypted assets on its behalf. The holders only obtain the “revenue right” of the encrypted assets, which is attached to the encrypted assets. Other rights, such as the right to participate in the consensus, were transferred.
The right to participate in consensus may be more important than the right to benefit – borrowing from Nervos chief architect Jan: “(The right to vote for consensus) means you can sort the transactions, and the ranking determines your trading ability. Can't get on the chain in time, can the orders traded on the decentralized exchanges be filled in time…just the difference in the order of transactions can make a huge profit."
Like Defi, another high-profile topic in the first half of 2019, Staking showed the original innovation ability of encryption finance. It transfers some of the inflationary gains to the crypto-asset holders through inflation incentives, reducing the risk of the donor's assets being diluted, but it is also contradictory – excessive incentives can lead to unconstrained high inflation, Not only does it create a selling pressure on the price of the secondary market of crypto assets, but it may also create a vicious circle within the encryption project.
But it is also a new opportunity for the full emergence of the POS era. The significance of opportunities is far greater than concerns about inflation and the possibility of increasing centralization. Among the more than 90 projects that have or will support Staking, there are 21 projects with the top 50 market capitalization, nearly half, and the market is actively choosing Staking.
Roughly estimated, each year Staking brings hundreds of millions or even billions of dollars in incremental revenue to crypto-equity holders. A large ecological landscape of Staking is taking shape, Staking as a Service, data research, security services, application development… more participants are involved, more active encryption financial market – the constant participation power is the entire encryption The industry continues to thrive.
In the future, there is no doubt that Staking as a Service will become the core of the business model in the Staking ecosystem. As a professional service organization, they have the ability to screen opportunities and isolate risks. Wallets, exchanges, crypto asset custodians, and POS pools have become the natural entrance to Staking with their innate advantages. For the emerging third-party service agencies that are ready to eat Staking cakes, it is the most important window. period.
This article is intended to provide more market information and does not constitute any investment advice.
Text | Lin Zhong Lu
Produced | Mars Financial APP (ID: hxcj24h)