Investing in cryptocurrency is like putting your money in highly volatile growth stocks. Your profits (or just as likely your losses) will be determined by whether the price of your digital assets goes up or down. There is little akin to value stocks that pay out a regular dividend.
That’s why it’s intriguing to see Coinbase offer a new service called “staking,” which promises to let cryptocurrency owners collect fixed income. The San Francisco company announced the service on Friday, saying investors who own the digital currency known as Tezos can park it with Coinbase and receive a stream of revenue in return.
Tezos is distinct from digital currencies like Bitcoin or Ethereum in that it doesn’t rely on “mining.” The mining process, also known as “proof of work,” has people compete to solve math problems with the winner earning the right to add to the next block to a blockchain ledger and receive a reward.
Instead, Tezos is a “proof of stake” system that uses a weighted lottery in order to select who will contribute the next piece of the blockchain. The more units of the currency someone owns, the greater likelihood they will win the lottery, which takes place every 60 seconds, and receive the financial reward for doing so.
Currently, anyone who holds 10,000 units (this number will soon drop to 8000)—approximately $10,000—of the Tezos currency can participate in the blockchain building process (known in Tezos lingo as “baking”), but it’s a technical affair that requires running a software node. As a result, many Tezos holders may prefer to just sit on the currency rather than deploy it in the baking process.
Coinbase’s decision to offer staking changes the calculation. It means investors can offload the technical work to Coinbase, having the company do the “baking” on their behalf, while they passively collect income.
According to Sam McIngvale, who leads Coinbase Custody, the company will take a 20% commission for providing staking services. The company says investment funds like Polychain Capital and Andreessen Horowitz’s crypto-focused investment fund have expressed interest in using the service.
“The launch of Tezos staking through Coinbase Custody serves an acute need that existed up until now—a way for institutional players who want to rely on a custodian while taking an active role in the network,” said Kathleen Breitman, co-founder Tezos.
