Staking as a Service: An Emerging Crypto Track Ready to Go

Compilation and finishing: Betui Mary Liu

Ethereum has completed a technical upgrade called The Merge, which changes the network’s consensus mechanism from proof-of-work to proof-of-stake. This change is expected to reduce Ethereum’s carbon consumption by 99%, reduce its inflation rate by 75%-90%, and provide long-term investors with the potential to earn 4-8% yield on staking positions.

This change is reshaping the crypto economy, putting staking front and center for investors. Among other effects, it has spawned a new generation of service providers that help investors pledge assets and earn yields.

This article focuses on the rise of these Staking as a Service (STaaS) providers, analyzing how they operate, available benefits, advantages and disadvantages, fees, and relative market share.

Why Do People Stake Crypto Assets?

Staking involves making a financial commitment to the blockchain in its native asset to secure the network. It is a fundamental part of blockchain infrastructure due to the security and decentralization properties it provides.

The main motivation for users to pledge crypto assets is to earn additional income.

Earnings come from transaction fees paid by network users and new issuances of network-native cryptoassets. Different blockchains offer different benefits (Ethereum is not the only blockchain that allows staking), and these benefits can change over time depending on a variety of factors, including the number of holders participating in the staking process, Variables related to network usage, such as the proportion of total supply staked.

For Ethereum, the total APY of those who participate in staking can be up to 8%. While these yields may decline in the long run as more participants enter the market and saturate the staking reward distribution, they are still expected to remain in the 4-8% range.

However, staking is not without risks and challenges.

One challenge is that it has been difficult for most investors to get collateral these days due to high capital commitments and complex hardware requirements. For example, staking on Ethereum requires running and maintaining a dedicated computer (called a “validator”) connected to the internet 24/7/365 and depositing at least 32 ETH to activate the validator software (at current prices approximately $50,000).

Another risk associated with staking is that one’s staking assets may be seized or “slashing”. This design mechanism helps ensure that validators consistently enforce network security. Suppose the person running the Ethereum staking infrastructure misses a software update or a device loses power; in this case, the security of the network is negatively impacted even if no malicious behavior is committed, so a portion of the ETH staked by that user is automatically slashed . In layman’s terms, the cut is similar to what banks charge from customer accounts when minimum balances and other requirements are not met.

Staking on Ethereum highlights another disadvantage of the process: Staking assets are often subject to lock-up periods, which in some cases can be relatively long.

For example, ETH staked on the Ethereum Beacon Chain — a pre-launch testnet for The Merge, which started in December 2020 — will be locked until March 2023 (at the earliest). Given Ethereum’s price volatility, this poses a significant risk; if the market falls sharply, a 4-8% yield simply won’t make up for the loss. Nonetheless, locking up staked ETH is necessary to enforce slashing, and staking rewards reflect this risk: Ethereum’s earliest stakers earn over 20% APY.

These barriers have spawned a new class of service providers that lower the financial and technical barriers associated with staking by aggregating and staking crypto assets on behalf of users. Staking-as-a-Service (STaaS) providers handle the technical challenges, costs, and risks associated with different aspects of staking, offering investors who want the benefits of staking but don’t have the technical know-how, capital requirements, or risk appetite an alternative to self-staking assets .

Aside from the technical nuances of handling staking, an important value proposition of StaaS is that if a supplier’s validator fails, it is the service provider, not the customer, that is penalized by the asset slashing mechanism.

How are staking-as-a-service (STaaS) providers growing?

So far, STaaS providers are capturing a significant portion of the staking market. Before The Merge, they accounted for more than 50% of the $21.1 billion in ETH pledged on Ethereum.

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Source: Bitwise Asset Management, data from Dune Analytics, as of August 29, 2022. Note: “Staking service” includes liquid staking, centralized exchanges and staking pools, excluding other types of stakers.

STaaS providers receive a portion of the staking proceeds from their clients’ staking assets in exchange for their services.

This is no small sum: leading DeFi staking app Lido has generated over $300 million in revenue in the past year (before the merger!).

Most staking services are blockchain-agnostic, meaning they support multiple proof-of-stake (PoS) blockchains. For example, Lido supports Ethereum, Solana , Kusama , Polygon , and Polka dot , each with different staking nuances and offering different APYs. The table below shows the APY for staking on the various PoS chains currently supported by Lido.

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Source: Bitwise, data from lido.fi as of August 31, 2022

STaaS provider comparison

TaaS providers come in many forms, from DeFi applications like Lido and Rocket Pool to public companies like Coinbase . The table below provides an overview of the leading Ethereum staking providers, including their current APY for staking ETH, fees charged, and relative market share.

Leading Staking Providers Representing $13.2 Billion in Staking ETH, Ethereum’s Leading Staking Providers Overview as of August 31, 2022:

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Source: Bitwise

Centralized and Decentralized Services

The biggest competition in the Staking as a Service space is between centralized and decentralized services that offer different core value propositions to customers.

Centralized exchanges such as Kraken and Coinbase have used their positioning in the crypto market to succeed in the staking business. Users increasingly prefer the one- or two-button functionality available in their mobile apps, and institutions prefer centralized exchanges because they are based in the US and operate within the US regulatory framework.

However, staking through a centralized service provider can have its downsides. For example, for a network with a lock-up period requirement for staking assets, staking with a centralized exchange may be a one-way transaction before the asset is unlocked. Additionally, a layer of trust is required between users and centralized services, as most centralized STaaS solutions are hosted.

Alternatives to DeFi that provide more liquidity and require less trust have emerged. These services, also known as “liquid staking,” have two significant differences from illiquid services.

First, once an investor pledges their assets, the service provider issues a separate token to the investor, representing the investor’s claim to their pledged asset and the accrued return. The token, known as Liquid Staking Derivative (LSD), can be used as collateral to borrow or earn yields on DeFi applications like AAVE and Curve. Second, if users need to sell their positions before their pledged assets are unlocked, they can sell this LSD on the secondary market. In this way, LSD can free users from the liquidity constraints of locked assets. However, this is not a risk-free trade: in times of volatility, LSD can trade below fair value, reflecting the “cost” of this liquidity.

Bringing interoperability and liquidity to staking assets is valuable to users and investors, as evidenced by the sheer demand for liquid staking solutions: Lido has over $7.4 billion in assets across the five blockchains it supports. Pledge assets and enjoy a market share of 30.1% of the total pledged ETH. Perhaps that’s why Coinbase has launched a new liquid collateral product for collateralized ETH called cbETH.

Lido 30.1% market share:

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Source: Bitwise Asset Management, data from Dune Analytics, as of August 29, 2022.

Lido’s stETH token is the most popular liquid collateralized derivative. Currently, $2.3 billion in stETH is used as collateral for DeFi lending apps like Aave and Maker. Meanwhile, Curve, one of the leading decentralized exchanges, provided $1.1 billion in liquidity for stETH trading pairs. So not only are investors investing in staking first, but they are leveraging liquid staking services and the composability of DeFi to amplify the APY and utility of staked assets.

Market Opportunities and Potential of STaaS

Staking as a Service has gained huge traction. The fact that the dominance of proof-of-stake networks relative to the overall crypto market is snowballing suggests that demand for STaaS will continue to grow.

The overall shift from PoW to PoS is one reason staking has become a source of income for institutional and retail investors, according to JPMorgan estimates, and staking could grow into an industry that generates more than $40 billion in annual revenue.

We expect the STaaS market to become more competitive as new vendors flood in to take advantage of the opportunities represented by staking. This is generally good for cryptocurrencies, increasing the resiliency of the network and spreading the risk among more participants — that’s what staking is all about, after all.

While it’s unclear who will be the long-term market leader in this space — whether it’s a centralized or decentralized staking provider, or a new type of STaaS provider we haven’t seen yet — it seems likely: with PoS As blockchain grows, Staking as a Service providers are well-positioned to benefit from this growth.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/staking-as-a-service-an-emerging-crypto-track-ready-to-go/
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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