Understanding Staking as a Service. Part 2
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 Part 1 we explained the basics of the StaaS and its role for crypto finance. Here we look at the risks associated with StaaS and also consider its future prospects.
Staking as a service risks
When discussing the institutionalising role of staking as a service (StaaS) for crypto finance, the question is if the resulting system will be as transparent and decentralised as many crypto enthusiasts envision cannot be avoided. There are many risks and concerns associated with the evolving market, some of them being more justified than others.
One common concern is associated with the voting power of the StaaS providers in blockchains that support on-chain governance. High concentration of the blockchain tokens in one hands (StaaS provider) can result in so called plutocracy, which has negative impact on the blockchain as argued by Ethereum´s Vitalik Buterin. The post by Lanre Ige presents a contargument where more nuanced characteristics of the on-chain voting are presented. Overall, it might be difficult to take one or the other side as voting protocols vary from blockchain to blockchain and new ones are being developed constantly. When choosing a StaaS provider and blockchain to invest in, it is useful to get information about them, especially if you are interested in participating in the blockchain governance. When you delegate your assets to a StaaS provider, you often delegate your voting rights too. So you can think about it as a representative democracy where your interests are represented and should be protected by a StaaS provider.
Another concern expressed by some authors relates to possible development of some form of fractional banking on the basis of StaaS. The merits and (mostly discussed) failures of the fractional banking is a controversial topic. Without going into details and philosophical discussions (you can read more here, here), it is worth noticing that such concerns do not seem justified at all considering current design of the staking services: as noted by Jimmy Song, staked assets are locked in the underlying blockchain and cannot be lended out. So comparing StaaS to fractional banking is not really supported by any evidence so far.
While plutocracy and fractional banking are concerns of the ideological level mostly, there are also some risks associated with the structure of the emerging market.
At the moment, the StaaS market is growing fast with new players arriving every month. The growth is supported by the increasing amount of PoS blockchains and expectations of even bigger players entering (Ethereum, Polkadot). The entry barriers are not so high and there is still plenty of space for newcomers. However, the situation might change quite soon.
Already now there are few players who have had an early start and have gained significant reputational capital which is becoming more and more important in crypto finance. Furthermore, there are cases of vertical integration when StaaS services are offered by crypto exchanges and wallets. Support from the blockchains that some StaaS receive (financial or public) can also guide preferences of the crypto owners. With time, these factors will likely increase entry barriers in the StaaS market.
As a result, StaaS market might face the risk of high concentration (which is ironically against the major ideological point of decentralised blockchains) and uncompetitive behaviour. To study the problem, Cosmos developed a Game of Stakes net which demonstrated that potential cartels within blockchain are not in the interest of validators and blockchain overall.
If and when such market risks become a reality the crypto community will need to address the issue. Should the blockchain neutrality be ensured? Or should there be any limits on the staking share of one StaaS provider in the blockchain? How national competition regulation apply? The answers to these questions will affect the future of the StaaS business.
Another concern is depletion of the profit margins in the long run which might make StaaS business much less attractive. While decreasing profit margins can signal strong competition in the market and be beneficial for the consumers, depletion driven by non-competition factors (such as blockchain conditions, for instance) can increase the entry barriers and put pressure on small and medium incumbents (current players) and eventually result in higher concentration in the market. The revenues of StaaS providers depend largely on the blockchain growth, number of crypto owners ready to stake their assets, competitors and fees structure. The factors that affect these parameters can limit the market growth and ultimately deplete the profits.
Finally, there is always the important issue of security of the staked assets. One should keep in mind that the risks are different for custodian and non-custodian StaaS providers: with non-custodian services your assets are safe as you keep the private keys. So the only risk you are bearing in case of the StaaS security breach is losing your unpaid rewards (that is why responsible StaaS providers aim to pay out rewards as soon as possible).
Custodian StaaS providers can be much more vulnerable to hacking, as can be seen in several cases with the crypto exchanges (Cryptopia, Binance). The security concern is undoubtedly justified and inherent to any digital service. The crypto services are constantly working on improving the security measures and with the maturing of the systems such events will likely become much less frequent.
StaaS future
Without a doubt, StaaS is a big trend of 2019. What will happen with it further depends on several factors, one of the important ones being regulation.
At the moment the regulation of crypto is fragmented and varies a lot in different countries. The range of issues where regulators do not agree is enormous where some are providing support to crypto startups while other are considering banning cryptocurrencies all together.
To our knowledge, at the moment there is no special regulation for the StaaS providers. Custodian services are subject to the regulatory provisions applicable to such organisations in each country. The situation is likely to change though, when the StaaS market will become bigger and the regulators get a better grasp of crypto finance. While in some countries higher regulatory barriers can be expected, the others might take a path of support. The regulatory landscape will likely differ a lot over the world affecting geographic distribution of the market. This will create in some countries a sort of “regulatory paradise” for StaaS providers where many will migrate.
The other interesting development to look out for is how crypto finance will coexist with traditional finance. With higher involvement of the incumbent financial and tech companies and stricter regulation, crypto finance might move further away from the view of some crypto ideologists where crypto is an alternative parallel system which soon will dominate traditional finance. How financial incumbents will interact with the StaaS market? Will big non-crypto players define the landscape? The answer to these questions will define the future of StaaS.
Finally, one fundamental factor that will affect the StaaS future is the future of Proof-of-Stake itself. At the moment the outlook for PoS blockchains is bright: big networks are being built on PoS and the second biggest blockchain in the world — Ethereum — is planning to migrate to it rather soon. The number of articles and blog posts envisioning great future of PoS is growing, signalling overall positive investors’, developers’, and users’ mood. Existing concerns of potential centralisation and blockchain technology drawbacks slowing down the real-life application (when a centralised database can be operated faster and more efficient) can hopefully be overcome with the future improvement of the consensus rules and the development of the technology (as predicted by Vitalik Buterin). To sum up, the technological developments in PoS blockchains will have a major impact on the future of StaaS.
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.
