Staking: an investment not to be missed

With a market capitalization that has increased sixfold in 2021 to $728 billion, an average return of 14% on $15 billion of distributed earnings, it’s hard to ignore this new investment opportunity that is being bet on. But what is staking, how does it work, and most importantly, how can you get involved?

Martin Bujol, Head of Marketing and Communications, and Maxime Rutagarama, Technical Director

Mining is good, staking is better

For a decentralized blockchain to work, its participants must agree on various transactions and how they are verified.

Martin Bujol

There are two main ways to validate transactions and reach consensus. The first and oldest, used by the Bitcoin network in particular, is called “Proof of Work” (or “PoW”). It consists of putting computers in competition for solving a complex mathematical problem. The players in this competition are called miners, and whoever wins the race gets the right to write the next block to the blockchain. He will be rewarded with transaction fees and newly minted tokens. While this method is very safe, showing that until today it was impossible to destroy it, it is also very costly in terms of energy, which is its biggest weakness.

Maxim Rutagarama

The second method is called Proof of Stake (PoS). In the Proof of Stake network, there is no need to run powerful computers, since the participant who will have the privilege of writing the next block is chosen at random, and not through a contest. Participants who staked their tokens in the stakeout contract are eligible, and this random selection is weighted according to several parameters, such as the number of staked tokens or the duration of the stake. As with mining, the chosen one receives newly issued tokens as a reward, as well as a transaction fee.

A good analogy would be a lottery in which the money invested in a ticket does not disappear. Placing its tokens in the placement contract gives us the opportunity to receive rewards for participating in the protection of the blockchain. This action is called “stacking”.

To give you an idea of ​​the difference in consumption between a transaction on the Bitcoin (PoW) network and a transaction on the Ethereum network in PoS, imagine the Burj Khalifa in Dubai being 830m high. If this represents a Bitcoin transaction, an Ethereum transaction would be the size of…a small 1.5cm screw , or 99.99% less. When it comes to energy, there is no comparison.

2022.07.18.Ethereum Blockchain

NB: There are 3 items above, simply because the Ethereum blockchain, while already more energy efficient than Bitcoin, is in the process of transitioning to Proof of Stake. This will allow it to be much faster, cheaper, more scalable, and much less energy intensive.

What should an institution do?

Any private investor can buy cryptocurrency on the exchange platform and stake on the same platform. Coinbase, Binance, Kraken, there are many options.

Nevertheless, making such a choice is unworthy of a professional investor. In essence, this deprives the investor of control over his portfolio. Added to this is a level of opacity as the investor has no control or even understanding of where their cryptocurrencies (in other words, borrowed funds) are located.

2022.07.18.Staker steps

Above are the 3 main steps to staking as an institution. The first step is to purchase the cryptocurrency of your choice, usually through an exchange platform. You will then need to choose where these cryptocurrencies will be stored, which is probably the most important step. You can decide to use and manage your own digital wallet or entrust this task to a professional service provider. Finally, all you have to do is choose the betting service that suits you. There is nothing complicated in this, it is just a matter of finding the right partners.

4 things to pay attention to

There are a few things to watch out for when staking. Various settings and limits will affect things like income generated or liquidity. Let’s first take a look at the Solana cryptocurrency page on the site together. Staking Rewardswhich we encourage you to explore.

2022.07.18.Staker settings

We can see some information like the market cap, the price, its curve and the popularity of the token. Let’s focus on the 4 most important ones, namely: “adjusted reward”, “stake ratio”, “lock” and the difference between delegation and validation.

1. Adjusted income (adjusted remuneration)

You will notice that there are two values ​​in the “rewards” category. The first is the nominal yield, and the second is inflation-adjusted. Because cryptocurrencies also have inflation due to the creation of new tokens. In short, if you don’t stake your cryptocurrencies, they lose value.

2. Rate ratio

The stake ratio is calculated by dividing the capitalization of the assets locked in the blockchain by the total capitalization of the assets. Overall, this tells us what percentage of the coin is in the staking system.

2022.07.18.  Blockchain Polkadot

Take Polkadot, for example, which aims for a betting ratio of 75%. Polkadot believes that cost is the best compromise between network security and liquidity. Indeed, if the bet ratio gets too low, the security of the network can be compromised. Thus, the yield will increase to encourage users to bet and increase the odds. By the same logic, a ratio that is too high will indicate that there are too many assets placed and that there are not enough tokens in circulation. The offered yield drops sharply above 75% to encourage participants to use the currency.

3. Blocking period

The main thing to know about staking is that once you have staked your tokens in a staking contract, it is often not possible to withdraw your funds immediately. There is a waiting period that can last from a day to a week or even longer, depending on the blockchain.

To overcome this illiquidity, some so-called “liquid staking” solutions offer to receive at the time of staking a token representing the staking asset in order to be able to use it in other transactions during that time. However, this method is associated with additional costs and risks.

4. Delegation vs. Validation

There are also two main options for an institutional player looking to take advantage of staking. The first option is to go through an external validator who will take care of the technical issues in exchange for a percentage of the profits.

The second option is to set up your own verification infrastructure. However, this option is not available to everyone, as it requires knowledge in the field of development and server management, and will only be profitable with a significant number of staked tokens.

What is the future of betting?

We see three major developments in staking in the coming years.

First, the emergence of a new version of Ethereum that will become PoS instead of PoW should solidify the dominance of Proof of Stake in the blockchain industry. While this is less proven than mining (PoW), we believe it is a much more sustainable alternative in the long run.

Secondly, we expect to see more and more venture capital deals in PoS projects. It will look like this: venture capitalists with blockchain experienced teams will take care of finding the next promising projects, for example, investing one hundred thousand dollars in several projects. The day a project like Solana grows and the cryptocurrency rises from $0.10 to $100, the $100,000 invested will become $100 million, which will give the venture capitalist a large amount to use this blockchain, creating an additional resale value of recurring income thanks bid. Another option would also be to position yourself as a validator and have private or institutional investors delegate their staking activities to them.

Finally, it is easy to imagine the democratization of new financial products based on cryptocurrency staking that will work like a portfolio of bonds. The formula is the same as for a debt-based portfolio: choosing different cryptocurrencies with different risk and return profiles to create a portfolio based on profitability and target risk. We offer two examples below:

2022.07.18.Conservative portfolio strategy

This first portfolio is more conservative with relatively low volatility and a return target of around 8%.

2022.07.18.Aggressive portfolio strategy

This second portfolio is much more aggressive. First we note a stronger concentration with a target doubling the return to over 23% and volatility following the same trajectory.

Conclusion

Despite 10 years of existence, staking remains a relatively unknown mechanism, especially among institutional investors. While many are distracted by the volatility of cryptocurrencies and especially bitcoin, “Proof of Stake” cryptocurrencies have gradually established themselves as must-have assets offering a fixed income in tokens. Staking is one of the best ways to make digital assets work, if only to counter inflation.

If you have any questions about betting, feel free to contact our team. With our Retake service, we take care of setting up individual betting solutions for institutions. Our infrastructure is specifically designed to perform with quality control. We also offer a consultation to explore the different currencies you are interested in and find the asset management solution that best suits your situation.