50 Shades of Staking: Part I — Winning the Crypto Monopoly
This is first introductory part of a series of posts dedicated to exploring the topic of staking and validation. Here I will argue why I see validators of a certain blockchain protocol type as future financial hubs, able to combine and capture value from several business models simultaneously, evolving into new Bitmains, Binances, USVs and Goldmans. I will be exploring various validator, masternode and block producer concepts of various projects.
Table of Contents (to be updated as newer sections are added):
Part I. Winning the Crypto Monopoly
Part II. Away from General Purpose Blockchains. The case of Cosmos Network
Part III. Validator — a Mining Pool, a VC, a Bank or an Exchange?
Part IV. Which other opportunities are out there?
The value creation and roles within new protocol ecosystems are changing very fast and need to be seriously re-thought. After reading a lot about the various infrastructure layers of blockchain ecosystem, and concepts of masternodes (having myself run one), delegation/baking and so on, I started to notice some similarities between the crypto landscape and the board of a well-known game of Monopoly.
There are several newer blockchains with respective consensus mechanisms (e.g. EOS, Cosmos), each with their own governance and infrastructure (block producers, validators) enabling value creation above a given protocol by generating consensus and producing blocks. In Monopoly terms, think of such blockchain as a “color” or a “district” on the board and infrastructure unit (validator, masternode, etc.) as a “one of 2–3 cards of a given color” or a “street”, of which there is always a limited amount (see pic).
There are three main types of behavior in Monopoly game, each of which has its crypto counterpart. This is a spectrum of behaviors rather than 3 distinct types, meaning most of us pursue a differently weighted combination rather than only one of these:
1. Accumulating cash: going as fast as possible around the game field to maximize the number of times one passed GO! getting the easy $200 thus maximizing the liquid capital and not investing in buying “properties”. The crypto world analogue is day trading, not being invested (knowledge-wise) in the projects and rarely caring about the underlying tech and basing most of the decision on technical rather than fundamental analysis.
2. Accumulating property: buying up as various properties whenever the opportunity arises without personal interest in it. In crypto world this means passive investing or HODL-ing a diversified portfolio, betting on good projects and waiting until the prices go up with a mid- to long-term horizon.
3. Developing property: accumulating a certain amount of property of the same “color” to be able to commit capital and build “houses” on it. This means taking an active part in the project one is heavily invested in — running masternodes, being a validator, baker, etc. as well participating in governance. This is our BUIDL in this context.
Having seen these three strategies, it is not hard to guess where this is going for anyone who played a decent number of Monopoly games and what the winning strategy is. However, one can’t simply put all eggs in one basket and focus on one strategy. As was mentioned before, we are dealing with a spectrum of strategies, however the staking part is being completely overlooked and underdeveloped as of now. In further posts I will argue why the staking strategy will also enable more efficient pursuit of trading and passive investment strategies and will discuss their synergies with a fund design in mind. Jake Brukhman perfectly summed it up in his tweet:
Most are aware of the Joel Monegro’s “Fat Protocol Thesis”. His thesis can be summed up with:
“The market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer”.
However it takes into consideration the blockchain ecosystem decoupled from the off-chain world. Ethereum can be indeed considered as a “fat protocol” and to disproportionately capture value, however the entities in charge of mining (block production) of these protocol tokens profit even more. They profit not only by appreciation of said fat protocol tokens (by keeping some of those), but by generating more of those for itself via mining/staking. Bitmain with its IPO plans (though controversial), venture fund creation and with its two mining pools having grown to roughly controlling 50% of bitcoin hash rate is a great example thereof. It was able to achieve its current position by setting up, having built and continuously invested into growth of the infrastructure supporting the fat protocols.
This means that the winning strategy for a fund (or any successful individual investor for that matter) is to actively take part in governance, invest and create value in protocols which are likely to become one of the basic layers of the future blockchain ecosystem. Being involved and investing yourself in running and setting up validators and masternodes requires both time and monetary investments with a mid- to long-term horizon. Thus it would only make sense only to engage in this way with projects which are going to be around at least for the next few years. But what are those??
In Part II — Away from General Purpose Blockchains. The case of Cosmos Network I discuss which type of protocols, supporting the said infrastructure are most likely to succeed. Will provide examples as well as try to dissect the layers of value creation for a validator.
About the author
As a blockchain analyst at ASTRATUM, I am involved in a wide spectrum of activities, analyzing blockchain ventures and ICOs, applying cryptoeconomics and mechanism design to engineer tokens, conducting due diligence, developing blockchain strategies as well trading and investing into crypto-assets.
I am passionate about:
- Novel business models like masternodes, staking, validating/delegating
- Crypto-asset analytics and valuation
- Crypto-asset management
- Token engineering and mechanism design (game theory view)
- Smart contract platform research and analysis
- ICO/STO consulting
- Blockchain “deeptech” research
ASTRATUM is a Berlin-based blockchain venture studio, developing blockchain strategies, solutions and ventures. Besides corporate innovation in mobility, fintech 2.0 and real estate, we develop together with partners our own ventures. We are a founding member of German Blockchain Association.