Understanding Staking as a Service. Part 1
With the rising popularity of PoS blockchains (like EOS, Cosmos,Tezos), a new service is actively developing around them — staking as a service (StaaS). In this post we explain the basic principles of StaaS and why we think staking has an important role in institutionalising cryptocurrency and bringing it mainstream. In the second part we will talk about the risks associated with StaaS and also consider its future prospects.
StaaS basics
In Proof-of-Stake (PoS) blockchains consensus is created by stakeholders, i.e. users who own blockchain tokens (the native cryptocurrency). The rules on how stakeholders are selected for validating and creating transactions vary depending on the blockchain, but the overall idea is that holding a stake in the blockchain gives the user an opportunity to provide validations of blocks. When participating in the consensus mechanism on the blockchain, stakeholders receive a reward (more cryptocurrency).
Supporting consensus mechanism (hence, receiving reward) requires efforts from the stakeholders. The main requirement is running a secure and efficient server which is preferably always online and ready to give a hand to the blockchain exactly when it is needed. The better the stakeholder’s server is — the better it can support consensus — the higher rewards received.
Setting up and maintaining a server with required characteristics comes with a cost, and for many crypto owners such effort does not really make much sense (even if it is economically justified, inconvenience and spent time might avert users). However, if a large part of crypto assets is being idly held without contributing to the consensus in the blockchain, it is inefficient for both blockchain and crypto owners. Staking as a service can relieve this problem.
The StaaS provider is the third party which can ensure that the stakeholder’s assets are used to ensure consensus in the blockchain and that they receive a reward for this, without spending time and money on setting up a server or putting any other effort. When crypto owners delegate their assets (or associated rights) to an StaaS provider, this provider will perform all the work of supporting the consensus with the delegator´s stake and will share the reward with her based on the agreed proportions.
The relationship between a crypto owner and an StaaS provider is similar to the one between an employer and a hired person where the employer pays the worker to do a particular job instead of them. In this case, the job is to support a blockchain, the employer is a crypto owner, the worker is an StaaS provider and the fee is a share of the reward earned for supporting blockchain.
The rights that a stakeholder delegates to an StaaS provider depend on the characteristics of the underlying blockchain (for instance, Tezos owners can delegate their validating functions and on-chain voting rights) and the nature of the service. One of the major points of difference is if the service is custodian or non-custodian. Custodian services holds the user’s assets in its possession, while non-custodian services just receives some of the rights associated with your assets while the assets are still in the user’s possession.For instance, Validators.com is providing a non-custodian service for Tezos, while one of the most known examples of custodian services is Coinbase Custody.
Custodian and non-custodian services are characterised by different levels of risks for the user. When placing the assets in custody of the third party, the user also assumes the associated risks of losing it. That is the reason why custodian services in finance are usually highly regulated. At the current state of affairs, custodian services for cryptocurrency are much more regulated than non-custodian.
So what is the value created by the StaaS providers? First of all, responsible StaaS providers run reliable and secure IT infrastructure with a competent team to maintain it and provide technical support in case any problems occur. Providing reliable service to the blockchain is incentivised by the nature of the StaaS provider’s revenue: the more blocks she validates or creates, the higher the reward, hence, provider´s revenue as a share of the reward.
Reliable and efficient consensus mechanism, in turn, benefits the development and growth of the entire blockchain ecosystem and stimulates investments and new applications.
The value for crypto owners is on the surface similar to the one provided by the traditional banking system when they deposit the money to the bank and receive an interest rate on the deposit. The similarity ends here, as the StaaS provider, unlike bank, cannot invest or lend the assets trusted to her (in case of non-custodian service, users even still keep possession of their assets).
Coming back to the bank deposit analogy, staking (or delegating) crypto assets can bring stable return to the owner. The return rate on a particular asset depends on the inherent blockchain rewards, performance of the StaaS provider, and fee share. Here you can see reward stats on the most of existing crypto currencies.
StaaS role
Staking as a service provides institutional structure for crypto finance. Like banking provided the foundation for the modern financial system, StaaS has a potential to organise assets and to create structural relationships in the crypto world. In other words, StaaS can make crypto finance more accessible and attractive, and ultimately mainstream.
Staking with an StaaS provider can provide a good starting point for a person without any experience in cryptocurrency who does not want to miss an opportunity to participate in the growth of a new market while also learning more about blockchain. A user can invest as much as he wants, where even small investment will generate some return. The opportunities provided by StaaS attract people to the crypto finance and generate momentum for the industry.
The interest of the institutional investors in crypto finance is growing, good example being the success of Coinbase Custody for institutional investors, or even introduction of the crypto section to the CFA exam. One of the attraction points of crypto is a relatively low correlation with the traditional financial markets (at least at the moment), as well as high returns and expansive growth of the sector. StaaS can anchor the interest of the institutional investors by providing them an opportunity to earn money on crypto without developing own IT infrastructure and not investing too much efforts into researching a new market.
Ultimately, StaaS can reach out to the least financially advantaged population in the world including “unbanked” people, both in the economically developed and least developed countries. Higher accessibility of the financial products and better control of personal finances is at the core of the crypto ideology propagated by many crypto enthusiasts, and StaaS can be a tool to achieve this goal.
Finally, an interesting institutional role of the StaaS providers is described by Jake Scott in the post about the new social signals. He argues that Staas are becoming “influencers” of the crypto market by sending the signals of quality and potential of the various blockchain projects. The role of market influencers is justified by high competence and experience on the team behind most prominent StaaS providers.
Overall, StaaS providers are developing into a new force in crypto finance which has the potential to bring the better out of it for the users. Good things do not come without risks though, and in the next post we will look at the concerns associated with StaaS and its future.
Disclaimer
This content has been produced by Validators IVS for general information purposes only. While care has been taken in gathering the data and preparing the content, Validators IVS does not make any representations or warranties as to its accuracy or completeness and expressly excludes to the maximum extent permitted by law all those that might otherwise be implied. Validators IVS accepts no responsibility or liability for any loss or damage of any nature occasioned to any person as a result of acting or refraining from acting as a result of, or in reliance on, any statement, fact, figure or expression of opinion or belief contained in this content. This content does not constitute advice of any kind.
