The promise and perils of staking cryptocurrency
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.