A lot of people have made a lot of money in crypto the last few years.
A lot have lost money, too.
It makes identifying the next big trend for increasing the value of both your cryptocurrency holdings and your irl currency—aka hard cash—essential, if at least just to protect your assets.
David Lawant, director of research at Bitwise Asset Management, has his eye on the next big thing: “For the industry as a whole, we expect staking to become a big business,” says Lawant, who co-authored the CFA Institute Research Foundation’s book on crypto. His firm has $1.3 billion of assets under management.
Some crypto investors are already earning an annual percentage yield of over 1,000% by “staking,” and earning a huge amount of passive income along the way.
So what exactly is staking anyway, and why is Lawant so sure it will become a big deal? And what does it have to do with the much-anticipated Ethereum “merge” that is also coming down the pike?
What’s ‘staking’?
Staking gets its name because it can only be done with cryptocurrencies that run on proof-of-stake blockchains.
Cryptocurrencies like Bitcoin and Ether currently run on the proof-of-work model, in which miners must complete complex puzzles to validate transactions and create new coins. This process requires a huge amount of computer power and is often criticized due to its environmental impact.
The greener option is proof-of-stake, and Lawant is convinced staking is part of the wave of crypto’s future.
With proof-of-stake, users validate transactions according to how many coins they contribute, or stake. In return for staking more coins, users have a higher likelihood of being chosen to validate transactions on the network and earn a reward.
This reward can include an annual percentage yield, and the exact percentage depends on which blockchain is used.
For example, once Ethereum, the blockchain powering Ether, migrates to a proof-of-stake model due to an upgrade slated for this year, validators who want to stake Ether can earn yields in return for their support. That’s the “merge” that the Ether community is really excited about. The more Ether a validator stakes, the higher likelihood they’ll be picked for a reward.
Currently, Ethereum has both a proof-of-work and proof-of-stake chain running in parallel. While both chains have validators, only the proof-of-work chain currently processes users’ transactions. Once the merge is complete, Ethereum’s blockchain will shift fully to the proof-of-stake chain, called the Beacon Chain, making proof-of-work mining obsolete.
The Beacon Chain already allows those who want to stake Ether to support the network and earn yields, “which today are at around 4% to 5%,” Lawant said. “Once the merge is implemented, these yields are expected to expand significantly because stakers will start receiving additional income.”
Some predict staking rewards of 7% to 12% post-merge.
Other blockchains, like Solana and Cardano, are already running under proof-of-stake. One could earn an estimated reward of 5.8% per year to stake Solana’s SOL token, while doing so with Polygon’s MATIC could result in an estimated reward of 19.5%.
Each blockchain has different requirements to stake, along with different risks associated with doing so.
This process essentially bets on the viability of the cryptocurrency being staked, which ties into the extreme amount of risk. As The Business of Business reported, “These rewards often come as tokens of the cryptocurrency itself, and if the underlying coin becomes worthless, your staking rewards become worthless too.”
Sometimes, there are restrictions on how soon you can take out your cryptocurrency after staking, certain penalties for not actively validating transactions, a minimum amount needed to stake, etc.
Nonetheless, investors are still giving it a shot.
Some cryptocurrency exchanges have also cited income made from staking.
“You can already spot early glimpses of that in the earnings results of companies like Coinbase, which cites staking as one of its leading products aside from crypto trading,” Lawant said.
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