At BitOoda, we try to keep our clients informed so they can stay current on developments in this very dynamic asset class. To that end, we’d like to identify trends that are currently on our radar and use this as a not only a medium to educate, but also connect and collaborate with market players. At the moment we’re currently monitoring the emergence of networks that are using Proof of Stake (PoS) as a consensus mechanism. This will be the first in a series of posts related to PoS as the technology and ecosystem continues to emerge.
Without diving into the deep end of the technicalities, the quick and dirty is that PoS is a transition away from using Proof of Work (PoW) “mining” to reach consensus on the current state of a distributed ledger. Proof of Stake requires those validating the network to “deposit” their token holdings to participate in validating transactions. Validators are then rewarded with network transaction fees in return, and bad actors are penalized by losing a portion or all of their deposit. Subsequently, a user’s ability to participate in validating transactions is dependent on their ownership of the protocol’s cryptocurrency as opposed to computer hardware that can solve cryptographic puzzles.
But why make the transition when the Bitcoin PoW protocol has demonstrated a decade of security with no downtime? To start, PoS is significantly less energy intensive than PoW. Bitcoin mining alone is approaching the same amount of power consumption as Israel. Advocates also believe that PoS is less prone to centralization. Bitcoin mining has trended towards industrial mining operations as economies of scale occur when purchasing larger quantities of electricity, ASIC hardware, and cooling equipment. With many of the emerging PoS networks, your probability of gaining more share of transaction fees is proportional to your staked tokens.
Momentum certainly seems to be picking up for Proof of Stake networks. Ethereum has stated the intent to convert to PoS, and other high profile networks include:
The current market cap for Proof of Stake tokens in live networks is $11.2bn, with an estimated $25bn in stake-able tokens set to come online in 2019 to early 2020. Keep in mind the current total net market cap of digital assets ~$175bn.
Proof of Stake networks are beginning to go live, and we are seeing a movement in the infrastructure landscape to allow asset holders to generate yield on tokens that were otherwise sitting idle with a custodian. From an infrastructure standpoint, Coinbase truly put Proof of Stake into the spotlight with the announcement that they’ll allow clients to stake Tezos — or baking as it is referred to in this network — and earn a yield on that custodied asset. We’re also seeing the emergence of Staking as a Service companies that white label staking technology to funds, custodians, and exchanges.
At BitOoda, we’re closely monitoring staking to see how the space develops. Will this be a niche part of the market, or will it become an integral service for custodians to offer their clients? Are there any centralization risks if custodians are handling the majority of the staking, and what unique risks could emerge for staking firms that could be mitigated with structured products?
We’d love to start the conversations with any of our readers that have a view on staking. As always, please feel free to contact us to share some thoughts on the space.