Explain the PoS economic landscape in detail: Will staking drive the next bull market?

We need a better token economics design to support the staking protocol, and a specific data analysis tool is also necessary.

Content Highlights

  1. We divide PoS pledge into three parts: node provider, liquid pledge pool, financial derivatives
  2. Big players already dominate the entire staking market
  3. New players can enter the market with support for long-tail assets, and a better user experience
  4. The staking market still has the following opportunities:
  • data analysis tool
  • Toolkit for starting a node provider business
  • Fixed investment derivatives with long-term fixed interest rates
  • Better token economics design

introduction

Ethereum is transitioning from Proof of Work (PoW) to Proof of Stake (PoS) in order to achieve higher transactions per second (TPS) and efficiency. Proof-of-stake is used by most major blockchains that support smart contracts, such as Solana, Cardano, and Avalanche.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: 2021 Staking Ecosystem Report

Most blockchains have turned to Proof of Stake as it allows them to accept high performance, faster settlements, environmental sustainability, scalability, lower security costs, and Flexible Architecture.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: 2021 Staking Ecosystem Report

Proof-of-Stake offers users a new way to earn stable income. It delegates native assets to staking nodes, so that staking users can get an average annualized rate of return of 10%~20%. This way is like national treasury bonds, it is stable, low risk, and it is more profitable than stablecoin mining on popular DEX (decentralized exchanges) and lending platforms.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Hopefully, these crypto treasuries can help investors overcome fiat inflation. The chart below illustrates inflation rates around the world. The inflation rate of fiat currencies is around 3% to 6%.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: 2021 Staking Ecosystem Report

Staking mechanism

Different blockchains have different staking mechanisms, which differ in terms of withdrawal periods and slashing rules.

Ethereum

To achieve sustainability and scalability, Ethereum is moving from proof-of-work to proof-of-stake.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Delphi Digital

Ethereum defines staking as follows: “Staking is the act of depositing 32 ETH to activate validator software. As a validator, you will be responsible for storing data, processing transactions, and adding new blocks to the blockchain. This Will keep Ethereum safe for everyone and earn you new ETH in the process. This process is called Proof of Stake and was introduced by the Beacon Chain.”

In short, in order to become a staker, a user needs to stake 32 ETH and run a validator node. Users can withdraw their pledged ETH at least after the Ethereum blockchain is merged.

Currently, users who stake on Ethereum will earn about 4.2% APR without deducting server costs. Kraken’s report “The State of Staking in Q1 2022” expects that the annual interest rate for staking users will increase to 8.5%-11.5% after the Ethereum mainnet merger.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Staking Status Q1 2022

No high-end hardware is required to run an Ethereum node, and the cost of a node server is relatively low. The recommended specifications are:

  • CPU with more than 4 cores
  • 16 GB or more of memory
  • SSD with at least 500 GB free space
  • Over 25 MBit/s bandwidth

Based on node type, disk space requirements vary from 400 GB to 6 TB.

In the ETH2 network, a proposer mines a new block, and the attester votes whether the block becomes part of the blockchain.

Slashing means that validators break the rules and are forced to quit. There are three confiscation conditions:

  • As a proposer, the node signed more than one beacon block for a block
  • As a prover, the node has signed more than one attestation on the same target
  • As the prover, the node signs the proof that conflicts with the history

If any of these behaviors are discovered, the node will be forced out of the beacon chain for the next 36 days or so. Penalties will continue to occur for around 36 days until the node can exit. The number of penalties will change based on network conditions.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Slashing forces validators out of the network, but penalties do not. The conditions under which users are penalized can be grouped into the following categories:

  • Validator Penalty
  • Inactive leak penalty

Currently, the Ethereum network has a total of 13,310,531 ETH staked, with a total of 396,982 validators. The chart below illustrates the ETH2.0 stake rate and staked ETH.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: CryptoQuant

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: CryptoQuant

The staking inflow graph shows some of the peak times of inflows. Some big inflows occurred in December 2020 and March 2022.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: CryptoQuant

Kraken is the first participant in ETH2.0. Centralized exchanges still have an advantage in the staking market. They can turn their existing users into buyers of ETH 2.0.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Ethereum 2.0 Beacon Chain (Phase 0) Blockchain Explorer – Overview of Staking Pool Services

For liquid staking, Lido dominates the market. Liquid Collateral Derivatives help users monetize their pledged assets, thereby improving capital efficiency.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Delphi Digital

competitive chain

Many smart contract enabled blockchains use Proof of Stake due to TPS and sustainability considerations.

They have different rules. Some blockchains allow users to delegate their staking to active validators. These validators run nodes and receive commission fees from delegated staking. Users who want to withdraw their staking will need to wait for a while to cancel the delegation.

Currently, Ethereum 2.0 has the lowest staking rate.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Staking Rewards

Node provider

Running your own staking node is going to be risky and requires a lot of capital to get started. It is very difficult for an individual to maintain a 24/7 online server and not be punished for doing the wrong thing. To help individuals more easily staking and earn rewards, staking-as-a-service has emerged in the market. The node provider will be responsible for managing the infrastructure, and users only need to stake their funds on the platform provided by the node provider.

Node providers provide node operation services. They serve personal and liquid collateralized derivatives. For individuals, node providers charge a monthly node operation fee or commission fee. For liquid staking derivatives, node providers usually receive a percentage of the staking reward. Lido explains how they choose node operators‌.

There are many node providers on the market, and they differ in the following ways:

  • cost
  • Supported Assets
  • reliability and safety

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Staking Rewards

Some of the big players have built large user bases, good reputations, and a track record of secure operations. In this case, it is difficult for new players to capture a large market share. Large market players see opportunities for small players as follows:

  • better user experience
  • Support long tail assets
  • Provide services other than staking, such as ecosystem updates, simple financial engineer tools, informational websites and data analysis tools

Although it is difficult for small players to compete with big players, at the same time, big players do face some challenges:

  • Centralization risk
  • Compliance
  • Security and Operational Risk

Decentralization is the key to a network. @djrtwo disputes this in his article “The Risks of Liquid Collateral Derivatives”. If several node suppliers have a major interest in the network, then these node suppliers are a class of a joint monopoly.

To build a decentralized and permissionless product, compliance is a big issue. In the Stake.fish 2021 Staking Ecosystem Report, Stake.fish argues that “since staking looks like fixed income in a sense, this may lead regulators to believe that validators are closer to financial entities than miners. If this happens, In this case, there would be no way for the validator to remain compliant without becoming a fully permissioned custodian and guarding the access rights of the delegators (which may again be technically impossible).”

Node operators put safety first as security incidents can cause asset loss. In January 2021, ETH2 validators were slashed for a bug. Below is the recent history of slashing of ETH2 validators.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: beaconcha.in

Node vendors are trying to improve the stability of their infrastructure with new technologies such as Secret Shared Validators (SSVs). A secret-sharing validator network is a technique that can achieve active redundancy. All validators in the network actively produce new blocks. The mechanism is like a multi-signature wallet.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: OBOL

Other techniques used to prevent slashing are the local slashing protection database, which records the information that led to the slashing, and the remote slasher, which records all received proofs and blocks.

From the Staking Rewards survey, users do care more about the reputation of node providers than cost, and node providers are working hard to improve their reliability to better build their reputation.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Staking Rewards

Liquid Staking Pool

After users choose the best staking node provider, the next question they face is how to improve capital efficiency. Users need to lock assets in staking nodes, but can only get 10% of the income every year. In the cryptocurrency world, opportunities are everywhere. The opportunity cost of locking assets in a staking pool is enormous. Therefore, users are striving to improve capital efficiency. Liquid staking pools can help users obtain liquidity almost instantly.

The liquid staking pool has two functions:

  1. Reduced staking requirements for users
  2. Greatly increase the liquidity of pledged assets

In order to increase the liquidity of pledged assets, the liquid pledge pool mints new tokens for users. For example, after Lido stakes ETH, Lido mints stETH for users. Users can exchange ETH for stETH on a decentralized exchange. Below is the pricing chart for stETH.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Dex Screener

stETH is like a bond. 1 stETH can be redeemed for 1 ETH in the unpredictable future. We are not sure when Ethereum will release pledged assets at the staking node, because releasing pledged assets requires a hard fork to update after the ETH2.0 merger.

The next few charts show that Lido dominates the ETH staking market and secures a significant portion of the market share.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Delphi Digital

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Delphi Digital

However, instead of Lido, Marinade dominates Solana’s liquid staking market.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Delphi Digital

Below is a breakdown of the fees for Solana’s Liquid Staking.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Delphi Digital

Besides cost and reputation, utility is another point. More partnerships mean deeper liquidity for liquid assets on decentralized exchanges and lending platforms. Marinade has the most partnerships with DeFi projects.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Delphi Digital

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Delphi Digital

finance

Most DeFi users are very concerned about the annualized rate of return of the protocol. So is there any way to push our staking yield and still enjoy lower risk? The answer is yes. Leverage farming can do this.

Most leveraged yield farms use 2-3x leverage and offer an annualized rate of return of about 7%. Of course, they do face the risk of liquidation.

The basic operation of this process is that they deposit stETH on Aave and borrow WETH through Aave. Then they trade WETH for more StETH and repeat the above steps.

Another interesting project is Staking Rewards’ SR20‌. SR20 is an index containing the top 20 PoS assets, weighted by total staked value. The index is also continuously accumulating staking rewards. The chart below shows the distribution of cryptocurrencies in the index.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Staking Rewards

The current index price is $304.41 and the reward rate is 6.54%. The pledge return YOY is 9.44%. Below is the price chart for the SR20.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Staking Rewards

To avoid the risk of slashing, there are also insurance products for validators. Lido partnered with Unslashed Finance to insure about $200 million worth of Ethereum staking in February 2021 to avoid confiscation.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

Source: Lido Medium

How the staking market will evolve next

At present, the staking ecosystem has been gradually established. The big players have already gained a strong position in the market. The total staking market will continue to grow, as ETH remains low staking compared to other PoS assets. We are optimistic about the future of the staking market.

Pledged assets are similar to buying Treasury bonds. Institutions and big whales are willing to buy these assets. But a big difference between treasury bonds and staking is that the rewards for staking are not fixed. Staking rewards vary based on network conditions. In order to make the annualized rate of return more stable, we expect a fixed annualized rate of return and the emergence of long-term pledged assets.

Explain the PoS economic landscape in detail: Will staking drive the next bull market?

The current token economics of liquid staking protocols fail to capture true value. The token price of these liquid staking protocols gradually decreased as revenue and total lock-up increased. We need a better token economics design to support staking protocols. Currently, revenue from the staking agreement is not shared with token holders, making the token a pure governance token.

Two opportunities for new players are better user experience and long tail asset support. Setting up a node is easy with the help of the official documentation, the real hard part is operations and customer management. In order to better support these new players, it is necessary to provide some toolkit, which is similar to the VPN market. Small players who enter the market later can offer lower fees and a better user experience.

A specific data analysis tool is also necessary. For stakers, what they care about is the history of activity, the history of pledge ratio, and the history of fines and confiscations. These data are different from the normal datasets we use. The common datasets we use usually focus on transactions. To better support speculators, the market needs a new data analysis tool.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/explain-the-pos-economic-landscape-in-detail-will-staking-drive-the-next-bull-market/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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