In blockchains that use a PoS system — as opposed to proof-of-work (PoW) — nodes in the network engage in validating blocks, rather than mining them. A deterministic algorithm selects block validators based on the number of tokens a given node has staked in their wallet — i.e. deposited as collateral in order to compete to add the next block to the chain.
As Bloomberg reports, staking holdings in a PoS network can yield returns from 5 to as high as 150 percent, depending on the size of the participant’s stake. This offers investors the chance to earn a form of interest on their holdings, as long as they are willing to lock up their funds to both maintain — and potentially profit from — a given blockchain network.
Kyle Samani, managing partner at crypto fund Multicoin Capital Management, argued that:
“Regardless of market conditions, staking provides returns denominated in the asset being staked. If you’re going to be long, you might as well stake.”
Bloomberg reports that firms specializing in staking holdings for clients are proliferating in the context of the crypto market slump. Paul Veradittakit, partner at major crypto investment firm Pantera Capital, proposed that not only market conditions, but also the increasing popularity of PoS protocols, is driving the trend:
“As we see more [PoS] protocols emerge, the ability to stake your tokens and earn interest from staking is a great way to make money, an ability to make strong consistent returns.”
Staking in a still embryonic industry that nonetheless carries some risks, Bloomberg argues. By staking their coins, investors cannot immediately free them up for trading, and can therefore potentially miss out on cashing in at the optimal moment. Some uncertainty also remains as to whether PoS token rewards may in the future be viewed as securities by regulators.
Moreover, especially for clients of crypto staking firms, Bloomberg’s Aaron Brown argued that “staking requires a certain amount of trust, unlike proof-of-work. My observation to date is when crypto requires trust, disaster follows. It [may be] reported as hacking, but it is usually insider malfeasance or gross negligence.”
As reported, crypto staking startup Staked — which targets institutional PoS token investors — has just announced the closure of a $4.5 million seed funding round, led by Pantera Capital. Other participants of the round included major industry firms such as Coinbase Ventures, Digital Currency Group and Winklevoss Capital.