Understanding the Staking Market: Overview for Crypto Investors

Over the recent years, crypto staking has emerged as an opportunity for investors to maximize their digital assets.    Users stake crypto on platforms and products to aid in securing the network and operations of a chosen blockchain and earn passive income rewards. However, with the rapid advance of blockchain technology, crypto investors can find themselves lost.   In this article, you’ll learn…  

• What is staking and its market size
• Different segments of the staking market
• Staking benefits and risks 

  …and more! Let’s get started!

What is Staking and How Does It Work?  

Staking is a consensus mechanism to verify transactions on a blockchain network. Stakers set up computer hardware (called a node) that connects to the blockchain, adding to the overall network infrastructure. They then stake a portion of cryptocurrency to validate transactions of the network. Finally, stakers receive rewards often determined by the amount and duration of the tokens staked.    Industry experts first proposed staking in 2012, as an alternative to mining, Bitcoin’s consensus mechanism. Mining, to this day, requires expensive hardware and high electrical consumption.    Peercoin, the first cryptocurrency to support staking, appeared in 2013. ​​Blackcoin, the first pure staking protocol, followed in 2014. While neither project remains relevant today, they paved the way for the current staking-based networks such as Ethereum and Solana.

How Big is the Staking Market?

The staking industry has grown to an estimated $173 billion as of December 14, 2023.  Ethereum staking (ETH) takes majority market share with $64.2 billion of staked ETH, representing 37%. Solana and Cardano follow suit with 16% and 8.7%, respectively.   In terms of staking types, traditional staking (whether solo staking or through pools and staking-as-a-software providers) continues to dominate the market. In addition, liquid staking has emerged as a potential new industry. Investors have placed over $27 billion into liquid staking platforms as of writing. Liquid staking caters primarily to Ethereum staking.

Different Segments of The Staking Market

Solo Staking

In Solo Staking, participants stake their tokens on a blockchain network without relying on a third party to do so.  In a Proof of Stake (PoS) network, a staker sets up their own computer, which runs a copy of the blockchain software. By staking the required cryptocurrency, the node then turns into a validator, which verifies transactions on the network. A staker then receives native tokens as rewards. PoS networks have been criticized for being too expensive for the normal crypto participant. Ethereum staking, the most popular option for solo staking, stakers must deposit 32ETH ($72,000 in today’s prices). As such, third-party staking mechanisms have risen to address this affordability issue.

Delegated Staking

Delegated Proof of Stake (DPoS) works similarly to Proof of Stake consensus but eases the financial requirements of POS staking. Not everyone can stake tens of thousands into a cryptocurrency. Delegation solves this.   Stakers pool their tokens together and assign these to a delegate. The delegate with the most staked tokens will go on as the chosen validator (also known as a witness) and earn staking rewards.    In this manner, a staker does not need to cough up thousands to participate in securing a blockchain network nor benefit from staking rewards. Solana and Cosmos remain industry leaders among DPoS networks, with over 60% of each network’s tokens staked.   Despite its benefits, critics have pointed out that this delegation system tends to centralize the cryptocurrency into the hands of a few large players.  

Staking as a Service Platforms (SaaS)

SaaS platforms handle the hardware and software requirements while users provide the staked tokens. A staker maintains full control of his or her staked assets by possessing the withdrawal keys. The validator keys are handed over to the third party for validation. If the third party does not maintain the node properly or mishandles validation, the staked assets could be penalized. Stakefish and Allnodes have grown in popularity, especially for ETH staking. Their ease of use and staking dashboards have attracted numerous users. Both platforms have supported hundreds of thousands of staked ETH throughout their operating history.

Liquid Staking

Liquid staking falls under third-party staking. Users stake their cryptocurrency on a third-party platform or centralized exchange, which pools the staked tokens for network validation. Users then receive liquid staking tokens (LST), equivalent to their staking capital.  LSTs represent a user’s staked tokens on a blockchain network. These liquid staking tokens may be used on other protocols for trading or generating yield even further.  This available liquidity has made liquid staking protocols a favorite amongst crypto investors. Staking providers Lido Finance and Rocket Pool stand atop the liquid staking market with $21 billion and $2.6 billion staked ETH, respectively. While Ethereum staking remains the largest staking system, other networks such as Solana and Injective have begun to attract interest.

Potential Benefits for Crypto Investors

Staking primarily acted as an alternative consensus mechanism to mining, it has evolved into an entirely new financial industry. Certain staking (liquid staking protocols) now fall within the broader decentralized finance (DeFi) industry.   DeFi has similarly grown beyond the Ethereum staking industry and caters to other networks and product types as well.   Investors earn income from their crypto assets and diversify their holdings.

Passive Income

Prior to staking, crypto investors held their digital assets and profited only upon the sale of their investments. Now, a staker also earns yield on their investments.    Ethereum staking and Solana staking offer 4% to 6% APY (annual percentage yield). Other smaller blockchain networks, such as Cosmos and Injective, offer over 15% APY to entice stakers to their platforms. 

Outsized Returns

New staking protocols often reward early users with native tokens as an add-on reward. Stakers earn both staking rewards and native tokens, which could maximize their portfolio returns.   JITO Network, the largest liquid staking platform for Solana (SOL), offered their native token JTO to those who staked SOL on their platform. JITO released over $225 million worth of tokens to early users.    After airdropping the token to users, JTO immediately listed on multiple crypto exchanges. Stakers earned a single-digit yield from SOL and tens of thousands of dollars from the additional JTO rewards.

Risks Associated 

Staking can come off as a great way to safely earn passive income. You deposit your cryptocurrency and earn a fixed yield. Like any investment, however, there are no risk-free returns. Be on guard against staking risks.

Malicious Attacks

Staking platforms operate via smart contracts (self-executing code) through the internet.    Bad actors have targeted DeFi applications and platforms. Malicious links scatter throughout the web, looking to prey on unsuspecting investors. At the same time, attackers swoop in to exploit the technology or drain tokens from the platform, leading to capital losses for users.   In November 2023, a hacker exploited a security flaw on KyberSwap. Close to $50 million in Ether and other tokens were stolen.

Regulatory uncertainty

Many global regulators and governments have yet to solidify their policies around cryptocurrency and the staking industry.  Since 2022, US-based crypto exchange Coinbase has been pushing for more tailored regulations for the crypto industry. The Securities and Exchange Commission (SEC) finally denied the petition in December 2023. The crypto industry has operated in a regulatory gray area for years and it’s uncertain how certain matters are handled by regulatory bodies.

Staking versus Other Investment Strategies in the Crypto Market

While staking remains the most popular method to earn passive income, other crypto innovations offer similar opportunities. The rewards, risks, and effort differ among the options.

Liquidity Pools

Decentralized exchanges (DEX), such as Uniswap, rely on liquidity pools.   Liquidity pools operate via smart contracts and consist of a basket of tokens (usually a pair of crypto). Whenever a user wants to make a trade, it is executed against the pool.   To encourage investors to deposit cryptocurrency into the pool, DEXs offer rewards. Sushi Swap, one of the largest DEXs, provides users 5.70% per annum for its ETH/USDT liquidity pool.   While the effort and returns appear similar to ETH staking, users may experience significant losses through impermanent loss.   Impermanent loss happens when token prices rapidly change, affecting the value of a user’s share in a liquidity pool. Given crypto’s volatile nature, less risk-averse investors may want to tread carefully.

Lending Platforms

Lending platforms operate as decentralized banks. These platforms utilize smart contracts to operate in an automated manner.   Users may earn passive income by depositing their cryptocurrency. The platform then manages the funds and lends them out to borrowers.

Different crypto asset offerings on Marginfi

  Marginfi, a popular Solana lending platform, caters to a wide range of crypto, from high-risk coins such as Bonk to stablecoins such as USDC and USDT. Lenders earn 5.11% APY by depositing USDC. Meanwhile, borrowers pay 7.75% APR (annual percentage rate) upon taking loans on the crypto.   In terms of returns, lending platforms rank similar to staking but provide a variety of returns.   Whereas staking platforms provide rewards mostly in the protocol’s native token, lending allows investors to earn even on lower-risk crypto such as stablecoins.

Blockchain Games

For over a decade, gamers have earned incomes by receiving and trading in-game items. Online games such as CSGO 2 and Eve Online have provided a robust in-game economy for players.   Blockchain games have expanded upon this with digital asset ownership and in-game rental economies.

Digital property rental on Bigtime.

  Bigtime, a massive multiplayer online role-playing game (MMORPG), supports a rental system where players may lease property from other players and investors.   A property can be purchased for $1,590 and leased for $100, a stellar 75% per year return.   While blockchain games offer more lucrative returns versus staking, the former entails more effort and risk. Aside from passive rental income, investors may play or hire players to earn from in-game drops and currency. At the same time, blockchain games may be unsustainable, and in-game economies and assets may decline.   In 2021, thousands of players and investors earned $10-$50 a day from Axie Infinity. Investors purchased Axies, playable monster characters which players rented. The in-game economy and assets ultimately collapsed

Conclusion

Investors must keep up to date with the numerous innovations in the staking market. Numerous platforms and protocols will arise to attract investor capital. Before diving into any of this, make sure to research and perform due diligence.   Check out our staking guides!   At the very least, reflect on your personal risk tolerance.

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