Illustration: Shoshana Gordon/Axios
Crypto staking is a way to maintain a consensus on accounting systems with thousands of copies being updated simultaneously – i.e. a blockchain.
Why is this important: A tremendous amount of value is tied to staking. On Ethereum alone, 17.6 million Ether (about $30 billion in value, or 14% of Ether’s total market capitalization) are staked on the network, ensuring that its transactions are demonstrably fair.
- Many other blockchains also use staking, like everything in the Cosmos, Avalanche, and Tezos ecosystem. Each of them also has a huge amount of value at stake.
Big picture: Stakeholders are like accountants on blockchains.
- They verify each transaction and ensure that the person sending it actually has the funds to send. If the sender does so, it is permanently recorded on the channel.
Enlarge: With billions of dollars in value at stake, these accountants might be tempted to cheat and put funds in their own or their friends’ pockets.
- But it puts their stake at risk. These funds displayed on the network are a kind of bond and could be recovered by other accountants if one of them is found to be misbehaving.
In short, Ethereum has $30 billion in crypto ensuring everyone plays fair.
The result : These accountants are willing to take that risk because they are paid to do so. They get new cryptocurrency issues for every block they take responsibility for validating.
- Additionally, they get all fees associated with transactions in that block.
- Blockchain users have to pay them to execute transactions. It’s not much, but it adds up.
Between the lines: It’s actually not just that they play fair. It’s also that they do the job well. A staker can lose a game if he disconnects or mistakes (although this is not as bad as stealing).
- This has made staking a highly professionalized field with large companies having entire tech teams running them, which is not super democratic.
- Note: Obol Labs is a new startup that allows division of labor, which could allow more types of entities to participate.
- Even as things stand, there are tens of thousands of validators running around the world.
The plot: A person or a company does not have to TO DO validation to participate however. It is also possible to delegate.
- Basically, you entrust your crypto to one of these accountants and share the rewards they earn on a pro-rata basis.
- The largest delegator network is called Lido, which has $9 billion worth of cryptocurrency spread across five different blockchains.
Another really big network is Coinbase, which allows its users to stake their assets seamlessly within the app. So far, $1.8 billion worth of ether has been staked on the largest US exchange.
- Kraken, a competing exchange, recently shut down a similar program at the request of the SEC.
Be smart: Both Lido and Coinbase symbolize people’s stakes. This means that they get a sort of cryptocurrency coupon for their deposits, a coupon that tracks their staking winnings and can be redeemed on-chain, without detachment.
- That’s why it’s called “liquid staking”.
What we are looking at: Ethereum’s staking program has been unique. What went into Ethereum as a stake did not come out, by design. But when the Ethereum protocol undergoes its next big update this month, stakers can start removing the ether.
- No one can guess how many of those billions of dollars in stranded assets will ever hit the market again.
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