Elaborate the Impact to Players in the Staking Economy. (Including Chinese Cases)
Actually we wrote this article one month ago, but we just translated this article until now. This article elaborate the impact to each player including exchanges, wallest, mining pools, capitals and coinholders in the Staking Economy. We add some of cases of Chinese players so western community can learn more about eastern community. Sorry for the first half of translation( it may not be so fluent. From the second half of this article, it will be much better. Enjoy and welcome to dicuss the difference of Eastern and Western
In early February, Staked, a blockchain startup offering institutional-grade staking services for proof-of stake (PoS) networks, closed a seed round worth $4.5 million. This round was led by well-known blockchain investment firm Pantera Capital, and a number of other investors, including Coinbase, came along for the ride.
This news reflects the potential business opportunity of proof-of-stake. According to the investors, PoS project will reach 25% of all projects in 2019, and Staking will bring in $2.5 billion income, with huge room for growth.
The word “Staking” is likely to be mentioned more frequent in 2019. You must have a clear concept over it. Staking, a special action of PoS system, in which the token holders exercise their rights by the action called “Staking”.
We know that Ethereum is about to change its consensus to PoS. PoW mining for ETH will gradually be replaced by Staking. Not only Ethereum, long-term participants may notice that in the first half of 2018, but the DPoS consensus (which is a variant of PoS) led by EOS has also brought out the discussion over delegate and dividend. Cosmos, Polkadot, Cardano, Dfinity, and other popular crypto projects is going to run PoS when launched.
More and more staking projects have emerged. Loom Network recently released PlasmaChain with delegated and locked feature. Any Loom holders are able to be a delegate and get rewards from staking. Cosmos Network, another PoS project, is about to launch its mainnet very soon.
Numerous teams are ready for exploring the business opportunities in the PoS space. Institutional providers include Staked.us, Stake Capital, P2P Validators, etc. Staking services aimed at individuals include Wetez, Cryptium Labs(Awa Sun Yin), Figment Networks, StakeWith.Us, etc. Although the clients differ, these services all do essentially the same thing: run a staking node for you, using your coins and charging you a commission of 5–25% based on the rewards your node generates.
The way most PoS projects encourage nodes to maintain the network and incentivize more people to participate in is by inflation. Among the projects that Wetez tracked, most of the additional tokens are allocated to the holders rather than the nodes, and the nodes only take the small portion of handling fees.
Token holders who participate in Staking process will be awarded by different amount of tokens (depending on the project), ranging from 7% of DASH to 150% of Livepeer. Except the long-term holding return, general investors receive an extra fixed income on account of the annual additional issuance in PoS. This generates a new economic model in the crypto space, and more changes are coming.
Basic knowledge of “Staking Economy”
Investors who want to grasp the opportunity of Staking Economy should first get to know the basic knowledge of Staking.
What is Staking Economy?
As more and more popular projects adopt PoS, holders can make profits through Staking. Generally, the annualized yield is between 7% and 150%, depending on the project itself.
To earn the Staking reward, holders should first choose a validator, which cloud be wallet, exchange or third-party operator. Future delegation service will appear in different forms, just like the present pay channels in China, you can choose Alipay, WeChat, UnionPay or credit cards. Each channel provides different discounts and activities. As coin Holders, we should have a good sense of smell over different validators.
What is Node? How to run it?
The node takes an important role in maintaining blockchain, responsible for recording and verifying transactions. Teams or companies that want to run nodes need to operate the code on the server to build the nodes.
What is node delegate service?
PoS system rewards its participants for maintaining the network by issuing more tokens. Broadly speaking, token holders who participant in the staking process also be included in network participants. The delegate service is operated by a professional team. The team will run nodes for general investors who have no time to manage, and charge a certain fee in return.
Pioneer of Chinese staking business
Many Chinese institutions have noticed the opportunities of PoS and started to deploy related businesses.
The number one player is Huobi. In addition to the basic exchange service, Huobi launched its mining pool on March 30, 2018. Besides PoW mining pool, Huobi also embraces PoS feature. For example, Huobi offered delegate voting tools for EOS nodes when EOS was at its peak in June last year. Holders could vote for EOS nodes on Huobi platform to earn integral, which helped Huobi attract a batch, and Tron, ONT and CMT were also supported. Huobi has integrated its entire business system into a new token — HPT. We speculate this will push Huobi into the rising Staking market and add the value of HPT and its ecosystem.
Cobo is a wallet that provides users rewards via PoS mining, it raised $13 million in A-round fundraising from Danhua Capital. It supports a variety of PoS mining projects, including DASH, VET, DCR, etc.
A firm that offers China’s biggest Tezos validators service, and also makes a wallet designed particularly for PoS Consensus. In Wetez wallet, coin holders can delegate to different validators conveniently and check rewards in time. Future plan for the wallet is to include more PoS projects like Cosmos, Cardano, Polkadot, etc.
A member of the WanXiang blockchain ecosystem that has also been an early entrant to the PoS field. It’s focused on PoS and DPoS consensus via mining pools, and distributing the rewards to staking users.
Except for the projects mentioned above, many other projects, such as Bixin wallet and Matpool, are also in the layout. We will see more PoS elements integrated with exchanges and wallets in the future.
Outlook to the future of PoS mining pool
Staking Economy will profoundly affect the future game of main mining pool.
Different PoS chains have different rules. Unlike PoW where the only limitation to be an on-chain miner is to run a node, in PoS, to increase efficiency, nodes that generate blocks are usually limited to some extent.
Projects using PoS consensus behave various, some are much more centralized while others are more decentralized: EOS has 21 nodes for generating new blocks, Cosmos has 100, and Tezos currently owns 450. Among them, Tezos sets no limit to the number of nodes, but constrains the amount — participants who intend to run nodes should hold at least 10,000 XTZ. The earning of nodes is positively correlated with the number of Staking. The more they stake, the higher the possibility of packing blocks they will get.
Currently, the PoS mining pool is still during the war period, there is no indicated mining pool yet. Also, there are no sufficient community tools which can compare the staking rewards and staking rules of different PoS blockchains. In addition to the nodes on exchanges, individual nodes scatter separately. Users usually tend to choose the trustworthy node if the fees are similar. Normally, the node who stands closest to the user and share the latest information has higher chance be chosen as the delegate node.
When the service, yield and fees in the market are close to homogeneity, and the information becomes more transparent, projects that want to stand out from the crowd should be qualified with the following conditions:
Reputation and Membership System: If a node wants to develop user stickiness, he should first build a good reputation, and then bind users together by setting up membership system.
Issuing: In PoW system like Viabtc, Poolin pool, both issued their own tokens. The tokens, function as the second reward of mining revenue, also being used to deduct the handling fee, purchase related products and receive future dividends. But essentially they are marketing tricks, the ultimate way to huff the price is the real adoption. We believe similar token modules will occur in the upcoming PoS projects.
Fee Rate Competition: This is the most direct factor affecting the revenue of the delegators, but it harms the interests of the nodes. The current gameplay is to lower the service fee in the beginning and lift it in the subsequent cycles, or to reduce fees in the middle of cycles.
We believe that the future pattern is dynamic, however, nodes that participate early and build a good reputation are advantageous, and the result of existed node operation record will be the basic reference of holders on another blockchain.
No doubt, in the end, some super-large PoS pools will emerge, most likely backed by exchanges. According to Twenty-eight Law, most of the resources are in the hands of a few people, which likewise can be applied to PoS system: most of the resources are held by giants such as exchanges and token funds. Out of benefits, capital giants are inclined to support delegate service of exchanges strategically, thus the mining pool that obtains the delegated service from an exchange is most likely to become a super-large PoS pool.
Although the gap between PoW and PoS consensus is huge, profit-orientated capitals will ultimately create a node model similar to the mining pool. Super PoS nodes like f2pool and Antpool (which are to PoW pool) will definitely appear.
How Exchange and Wallet Players Keep on Track of PoS
The status quo of most exchange and wallet players shows no emphasis on PoS business in their operational blueprints. Two facts underlie 1. There are not many mainstream cryptos that adopt PoS; 2. many projects would rather conserve their strength in the bear market than wasting time and resources running on the wrong track.
Some others, however, have noticed the exciting business opportunity of PoS. Just as I wrote in the previous article, home players, such as Huobi, Cobo, and Wetez, have insights in the future of PoS. Meanwhile, their overseas counterparts didn’t fall out. Coinbase has pledged to include staking into their business category, and not a few client wallets, like Maguam and Atomic Wallet, have supported the staking of some tokens.
In the past, the exchanges that attract enough traffic and popularity are those once integrating fiat money trade, smart contracts, and mining by trading. As we all know, traffic is pivotal to portal products, so will PoS be the fast track for exchanges or wallets that adopt it to overtake those who do not?
In my opinion, there are two direct benefits PoS brings to exchanges or wallets:
The extra earnings come from two aspects: 1. the exchange conducts Staking using user’s deposit in the exchange; 2. the exchange runs nodes and enjoy annual dividends. Those will be the extra earnings apart from transaction fees and token listing charges for crypto exchanges. We are not quite clear whether there are players doing that now, but there are only a few exchanges willing to share their benefits with users.
When users start to value the staking benefits of the tokens they hold, exchanges that provide Staking services and rebates staking earnings will succeed. Take Tezos as an example, Hitbtc exchange never pledged to reward their users, their XTZ trading volume, which used to be the biggest, has slumped. As for how to optimize PoS business scenario, it is a topic to be discussed. Currently, Huobi is making some trials.
Wetez believes that PoS-related business will be a standard for any exchange and wallet in the future. Those who haven’t will be driven out of the market gradually.
The advent of PoS economy will reshape the crypto industry, and players right on the PoS tract will forge ahead. More will follow suit. Looking ahead, [Staking Economy] will bring about more possibilities for wallets and exchanges.
The one is various financial products on the basis of PoS. Under PoS consensus, the annual dividends are fixed. Therefore, one can compare PoS products to bonds, a basic financial product. Once packaged, it can be ETF index, in the form of PoS, in one basket, or derivatives combing PoS tokens with crypto lending.
For another, community exchanges or wallets on the basis of PoS will arise. Staking is one of the paramount attributes in PoS and the top concern of token holders. Therefore exchanges who maintain the stake of token holders well and mobilize different blockchain communities will have great expectations.
Here’s an example. There’s an exchange that offers Tezos community with Staking and voting tools. It also contacted validators in Tezos community to educate them on how to use these tools. By leveraging each validator, the exchange itself can amplify the influence of validators in different regions with different features. Meanwhile, the exchange adopts point system to nurture the adhesiveness of users. To repeat this action on various chains, there will come a successful exchange with community features.
How Crypto Investing Institutions Get Involved?
In the PoS era, crypto investing institutions will have found itself an indispensable player in PoS field, for a string of projects they invested are based on PoS, such as Cosmos, Polkadot, Difinity, and so forth. The tokens in investor’s pockets are mining instruments for them. When they remain very prudent in the bear market and potential projects to be invested are hard to find, investors can engage in PoS field, running nodes to generate cash flow for their tokens. In the long run, they possess the token as a long-term investment.
There are two solutions in the market. The one is to establish maintenance nodes by a team, like Stakewithus and Mythos. The other is to delegate to a third party of maintenance nodes, the most famous example would be Saked.us invested by Pantera Capital and Coinbase Capital.
So the investing institutions need to think, which one of the two solutions is better? Cost and revenue should be taken into consideration.
From the cost perspective, the cost is generated mainly in 3 ways:
The investors need to hire engineers, establish nodes from scratch and be responsible for the upgrade and maintenance in days to come.
Exemplified by Wetez:
Infrastructure: If the mainnet is stable, it takes only less than 1 week to set up a node to run delegation services. The time will be even shorter if the engineer team is a veteran to the chain. If it starts with the testnet, then the timeline will be rather long. There will be a series of structural parameters adjustment, time varies as to each chain. Take Cosmos for an example, they have run the nodes from Nov 2019 but the mainnet has not been launched until Feb 2019.
Maintenance: Once the chain is launched, the maintenance work will depend on the upgrade of the chain itself and the framework of the nodes. When the chain is stable, the upgrade will take place every few months. On the other hand, if the framework of the nodes is robust at the very beginning, the following maintenance cost will be low, and vice versa.
This cost is not easy to be quantified and hugely depends on the personal capability of the engineer and the cognitive cost which will be introduced below.
Server costs can be divided into two categories: cloud server and hardware Data Center.
Cloud server: It is relatively simple and convenient to maintain. The cost is divided into fixed charges, server configuration, and data fee: on-chain data synchronization. Running a PoS node generally does not require premium setups. A 2-core CPU 2G RAM will be sufficient. In special cases, the chain itself requires a lot of memory, and 4G, 8G or higher RAM will be required. As for the data part, the situation varies as to the chain.
Note: The chain of DPoS is the exception, such as EOS, because the nodes on EOS chain is block producer (supernode), configuration requirements rather high.
A cloud server will cost, according to the configuration level, about 3,000 to 10,000 RMB per year. If you choose a more complex and secure solution to prevent malicious attacks such as DDoS, you need to deploy more than one node. You need multiple servers if you implement sentry node mode.
Hardware server: The hardware server is a more secure and private service than the cloud server. For giant capital holders with high alert, they will try to run the node independently rather than rely on a third party. The hardware cost, however, will be higher, Meanwhile, the server needs to be on-the-grid 24/7 and put in a safe and stable surrounding environment.
In general, the solution of cloud server with the hardware wallet is the most convenient and can guarantee that the private key remains confidential.
Cognitive cost is the highest cost. In terms of technology, if you recruit an engineer with no experience in the blockchain, s/he needs to know where to find the document, the relevant resources, and discuss upgrade with the community in case of code problems. In terms of operations, the capital holders are necessary to be clear about the token economics of each chain, how high is the threshold for participation, how much revenue can be generated by chain issuance, and under what circumstances there will be Slash penalties.
The calculation of the proceeds can be done in this way: the annual return of most PoS blockchains is between 5% and 25% denominated in that token. The calculation of the capital holder’s revenue can be “Token quantity held by the capital holder × the annualized rate of return of the chain”. In the end, the risk of the token relative to the fiat money need also be taken into consideration.
The capital holder may sum up the three costs of running the node and compare the fees charged by the third-party. Objectively, from the perspective of large-scale economics, the third-party outsourcing team boasts economies of scale. The marginal cost is low when we try to understand the blockchain from scratch, build nodes on the chain, and finally maintain more nodes on the same chain.
As we observe, there are 2 main capital holders in the crypto world. One is the private investor, similar to a family workshop. It is rather closed and their fund has a long redemption period. The other is a limited partnership investor. The investment redemption period is shorter. Because of the long-term stability, private investors only need internal agreements to conduct Staking operations while limited partners need to disclose important operations to their investors. In this way, contract issues may be involved with token-holder’s rights. In contrast, private investors are more likely to build their own teams.
Few Pieces of Advice for Normal Investors
What should normal investors bear in mind? How to keep revenues safe and stable?
Here are two pieces of advice.
Do not let shining regular income(inflation) compromise crypto prices
Cryptos that adopt PoS is profitable from further issuance of tokens. If the further issuance rate is high, token holders will earn more, and vice versa. But further token issuing may be at the cost of inflation. If the project keeps issuing more tokens, the investor’s possession may compromise in proportion to the total token supply, which leads to token depreciation. No one wants to see their regular income(inflation) at 50% while the token price falls by 80%.
As we saw, in most project’s issuance models, the initial issuing rate is high but it calms down as time passes. This conforms to the economic models in the real world. Developing countries are apt to set inflation rate and interest rate high, but as the economy stablizes and flourishes, the index will be lowered. The reasonable inflation rate is at 0–10% while premium projects may boast a 20% inflation rate in the first stage. Once the rates exceeds 20%, you may as yourself, as a normal investor, why on earth does this project has the inflation this high?
Be very prudent when choosing delegate service teams
The team that provides the Staking dividends delegation services is bound together with normal investors by shared interests. Here are some criteria that most people can refer to:
Generally speaking, the team will charge a fee ranging from 5% to 25% from the client. In most cases, the investor should compare different delegate services and choose one with a moderate fee.
The Rate of Return
The rate of return depends mainly on the active time of the team’s node running, and whether the team is Slash punished by the system due to operational errors or malicious behavior. Most teams are at a similar level of yield as long as they carefully operate.
The PoS economy is still at the early stage, with no sophisticated monitoring tools. We believe, in the future, there will be reports on revenues of each node on different chains, just like fund returns reports, which can act as a judgment standard for normal investors.
When the team’s reputation is higher, the cost of misbehavior is higher.
Team Contribution to the Community
Choosing a commission service is far more than generating revenues. Just like electing a representative, these nodes are the representatives of the blockchain. They contribute to the chain in accordance with their own capabilities which may vary. The more quality nodes, the faster the project develops, and the brighter the future of tokens in normal investor’s pockets.
The team of Long-term Cooperation
Choosing a long-term cooperation and a trustworthy team can save the time cost for normal investors. Inferior teams may not send Staking rewards to the investors or change commissions at will. We have seen, in Tezos community, that some teams charge fees rather low to attract users but turn up the fee at the final cycle. Generally, if the client does not notice, s/he will cost more eventually.
Thank you for reading such a long long article. Appreciated!!!
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