Staking is emerging as a way of ensuring Sybil-resistance in permission-less, public blockchain networks. Delegation protocols allow anyone holding a Proof-of-Stake (PoS) cryptoasset to participate in securing these networks and being rewarded for it. An industry surrounding the staking ecosystem is forming. Low barriers to entry mean that any party dealing with staking tokens may become involved directly or indirectly.
After learning about validation and delegation, as well as the incentives in play when considering to participate in staking, this third part of the “Proof-of-Stake Ecosystem” series will cover which players can be expected in a PoS network.
The first group of stakeholders in PoS network that comes to mind are investors, which are usually split into a retail and institutional market. But not only investors will be holding staking tokens; a significant portion is usually held by foundations funding the development of a decentralized network. Other holders include entities dealing with cryptoassets as part of their business activities or as a result of their funding. Similarly, projects hosting their applications or assets on a PoS network might consider to improve the security of it by participating in staking.
Another important stakeholder group are third party services that facilitate the purchase, trading, storage and access to cryptoassets. These will need to consider if and how they will enable their customers to participate in this emerging space. Centralized exchanges, cryptoasset custodians and wallets belong to this group.
An essential emerging part of the PoS puzzle are third party infrastructure providers that enable participation in staking for all of these token holders. This group is also referred to as staking pools, staking providers, or delegation/staking services.
Finally, block explorers, rating websites and potentially delegation marketplaces will assist token holders in choosing fitting staking providers by aggregating information and curating available delegation services, which can be done in a variety of ways. The following graphic depicts an overview of potential participants in the PoS ecosystem:
As highlighted in the second part of this series, the decision to participate in staking comes down to a cost and risk versus rewards analysis that should be carried out by each potential participant. While some may choose not to participate in staking at all, those who will are essentially faced with the decision to either run staking infrastructure themselves, delegate to (a set of) staking provider(s), or potentially a combination of the two.
In the following, I will cover each stakeholder group shortly discussing their connection to staking including some examples.
This is the most diverse group that consists of individuals owning the staking token, ranging from developers and enthusiasts to a grandma that got gifted some cryptoassets by her grandson for Christmas. Retail investors may become part of the staking ecosystem in a variety of ways depending on how they store their cryptoassets. Some technology enthusiast will run staking nodes themselves to improve decentralization of their favorite project. Others might participate in staking through the exchange they decided to leave their cryptoassets on. Some will delegate to their favorite staking providers based on their own research, other will rely on information provided by staking service curation sites or marketplaces (current examples include sites like MyTezosBaker and marketplaces like Rocketpool or Vest).
The staking space for institutional investors differs from that of retail investors, as these entities are mostly bound by regulations or other limitations guiding how they may store and utilize their cryptoassets. Institutional investors include VC firms that invested in an early stage PoS project, hedge funds that may own a staking cryptoasset, and potentially a wide range of other traditional investment companies such as family offices or even banks. These entities may simply hire their own team to run staking infrastructure. Another option would be to partner with a professional staking provider, or to participate in staking through their custodian (see below). Finally, institutional investors can also make use of delegation protocols and outsource validation work by delegating to staking services. We are already starting to see early examples of institutional investors running their own validator infrastructure (e.g. Polychain), hybrid fund/staking provider structures (e.g. Mythos Capital and Mythos Services), as well as partnerships between funds and staking providers (e.g. Bison Trails and Notation Capital).
Businesses Dealing with Cryptoassets (Treasury Management)
This is a group that is seemingly largely disregarded, but that might make up a significant portion of the staking market. Many companies and projects involved in the blockchain space will or do currently hold cryptoassets that could be staked. At this point these were mostly received in ICOs or through grants, with a few crypto payment processing companies serving as examples of businesses that are holding cryptoassets.
Applications and Assets Build on Top of a Proof-of-Stake Blockchain (Business Dependency)
In line with the previous group that may hold stakeable tokens received in the fundraising process or through business activities, many projects and companies involved in the blockchain ecosystem may have an interest in securing the PoS network on which their application or assets are built. By staking the network’s native cryptoasset, such projects can help to improve how difficult it is to attack the network on which they are relying. An example of a blockchain startup that voiced their interest in staking is Gnosis.
This is one of the most important and controversial participants in a PoS network, as foundations are usually controlling a large share of the staking token. Participating in staking would potentially increase a foundation's control over the network even further. On the other hand, foundation support for staking might be necessary to secure the network (especially in the early days). Furthermore, staking may provide a way to continuously fund development of a decentralized network. Delegation also enables additional ways to support parties advancing it (e.g. by delegating to validators that contribute to the project). The Tezos Foundation’s approach is an early case study in how foundations might participate in the staking ecosystem by seeding the ecosystem and lowering their influence overtime.
Third Party Services
Cryptocurrency wallets have a variety of choices on how they may incorporate staking opportunities in their products. Some potential directions include running their own validator infrastructure or partnering with a staking provider to offer staking to customers. Another direction would be to simply incorporating the delegation protocol and to let users decide how they want to participate in staking themselves. Here, Balance is leading the way with early experimental drafts of how staking might be integrated in their wallet.
Centralized exchanges are another interesting case, as they are essentially controlling their customers funds and may potentially participate in staking on behalf of their users. Another option could be to create some separate type of staking account in their system or integrating a delegation option in the exchange interface itself. An early examples of an exchange participating in staking is gate.io.
Some cryptoasset owners are required to store their assets with a third party and others do not want to be in control of their private keys themselves, which is why a large market of cryptoasset custody services has emerged (BitGo, Coinbase Custody, PolySign, etc.). As an example, US hedge funds with over $150 million in assets under management need to store their assets with a certified custodian. This circumstance puts custodians in a potentially powerful position in the staking economy. Custodians might run their own validator infrastructure or enable customers to delegate tokens to a set of curated partner staking providers etc. Because custodians are a strongly regulated business, it is currently unclear if and how these entities will be able to participate in staking.
Finally, one of the most important emerging parties in the staking context are professional staking providers. These are entities that are focusing on creating secure and reliable staking infrastructure for delegators and other partners. These teams can work together with all of the parties as described above. Chorus One is an example belonging to this group that aims to provide a high quality staking service in multiple Proof-of-Stake networks. Some notable other staking providers that are helping to advance and educate people around the validator and staking ecosystem include Certus One, Cryptium Labs, Figment Networks, Lunamint, and Staking Facilities.
The following post of the “Proof-of-Stake Ecosystem” series will go into some more detail regarding factors that could threaten the security of a PoS network. The series will conclude with a discussion of potential mitigation strategies.
Featured image by Christine Roy taken from Unsplash.