Mar 15, 2023 - Economy

The promise and perils of staking cryptocurrency

Illustration of quarters transformed into nails.

Illustration: Shoshana Gordon/Axios

Crypto staking is a way of maintaining consensus over bookkeeping systems with thousands of simultaneously updated copies — that is, a blockchain.

Why it matters: A massive amount of value is tied up in staking. On Ethereum alone, 17.6 million ethers (about $30 billion in value, or 14% of ether's total market cap) is staked on the network, guaranteeing its transactions are provably fair.

  • Many other blockchains also use staking, such as everything in the Cosmos ecosystem, Avalanche and Tezos. Each of them also has a massive amount of value staked.

Big picture: Stakers are like the bookkeepers on the blockchains.

  • They check every transaction and make sure that the person sending it actually has the funds to send. If the sender does, it gets logged permanently on chain.

Zoom in: With billions of dollars in value at stake, such bookkeepers might be tempted to cheat and put funds in their own pockets or those of their friends.

  • But that puts their stake at risk. Those funds posted on the network are a sort of surety, and could be taken by other bookkeepers if one is found to be misbehaving.

In short, Ethereum has $30 billion in crypto ensuring that everyone plays fair.

The upshot: These bookkeepers are willing to take this risk because they get paid to do so. They get fresh new emissions of cryptocurrency for every block they take responsibility for validating.

  • Plus they get all the fees associated with transactions in that block.
  • Users of blockchains have to pay them to run transactions. It's not much, but it adds up.

Between the lines: It actually isn't just that they play fair. It's also that they do the job well. A staker can lose some stake if it goes offline or screws up (though it won't be as bad as if they steal).

  • This has made staking a highly professionalized field with big companies that have whole tech teams running them, which isn't super democratic.
  • Of note: Obol Labs is a new startup making it feasible to split up duties, which could enable more kinds of entities to participate.
  • Even as it stands, tens of thousands of validators are running around the world.

The intrigue: A person or company doesn't have to do the validation in order to participate though. It's also possible to delegate.

  • Basically, you entrust your crypto to one of these bookkeepers and you share in the rewards it earns pro rata.
  • The biggest network of delegators is called Lido, which has $9 billion of cryptocurrency allotted to it across five different blockchains.

Another really big network is Coinbase, which enables its users to stake their assets seamlessly in the app. So far, $1.8 billion in ether has been staked on the largest U.S. exchange.

  • Kraken, a competing exchange, recently shut down a similar program at the behest of the SEC.

Be smart: Both Lido and Coinbase tokenize people's stakes. That means they get a sort of cryptocurrency coupon for their deposits, one that tracks their staking earnings and that can be traded on chain, without unstaking.

  • That's why it's called "liquid staking."

What we're watching: Ethereum's staking program has been unique. What has gone into Ethereum as a stake has not come out again, by design. But when the Ethereum protocol undergoes its next big upgrade this month, stakers can start withdrawing ether.

  • It's anyone's guess how much of those billions of dollars in locked up assets will actually hit the market again.

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