GM DOers!
$75,000,000,000 👀
That’s how much value in crypto is staked to secure blockchains right now.
$75 BILLION… with a B
Last week we covered the business of blockchains, and this week we are covering the business of securing blockchains.
And let me tell you, this business is booming!
Proof-of-Stake blockchains are still very new, less than 7 years old. Yet here we are, $75 Billion in value securing blockchains across the internet.
I see no reason why this industry is not in the TRILLIONS (...with a T) of dollars in the next 5 or so years. Yeah, it’s THAT big (...and I’m that bullish lol)🤷♂️
You can see the current top 10 blockchains by staking Marketcap in the table below.
In today's report, I’m going to break down this industry to help you understand it further as well as provide insight into its potential growth, and how you can get involved and capitalize on the opportunity.
After all, we can and should ALL be supporting the security and decentralization of the technology that is giving everyone on planet Earth access to digital ownership and digital rights.
For a more detailed explanation of proof-of-stake (PoS) and its comparison to proof-of-work (PoW), check out an article I wrote on the Ethereum merge here.
In short, staking is simply using the native token of a blockchain as “collateral” to run a validator. Running a validator allows you to validate transactions on a blockchain.
Ultimately, you are enabling the blockchain to produce blockspace and ensure it does so accurately and permissionlessly.
To incentivize people to stake their assets and run a validator, stakers receive a reward from the blockchain, which could come from gas fees, issuance and/or other means, such as MEV.
The more validators on a blockchain, the more decentralized the blockchain becomes.
If there was only 1 validator, it would be easy to shut down, but if there are millions around the world, it becomes practically impossible.
In this regard, it is extremely important that, over time, PoS blockchains seek to find ways to incentivize more validators to secure its network, whether that be from paying higher rewards, lowering costs to run a validator, or making it easier and more accessible for anyone to do so.
That said, as we know from last week's report, blockchains must do this in a profitable and sustainable manner.
This is why Staking-as-a-Service was born. The new “SaaS” products are focused on making staking more accessible to anyone around the world.
Before we get into Staking-as-a-Service, however, let’s get a quick lay of the land of PoS blockchains so we can all better understand the staking industry…
Let’s start by getting an idea of the amount of validators securing blockchains. Below is a breakdown of just that for some of the most relevant blockchains in the industry: Ethereum, Solana and Binance Smart Chain ($BNB).
Ethereum leads the way with 549,569 participants around the world securing the network. You might be wondering why we can’t see Solana or BNB on this chart though? Let me remove Ethereum and see what comes up…
There’s Solana, sitting at 2,058 validators. Again, a bit odd we can’t see BNB though? Let’s remove Solana from the chart.
There we go! 29 validators securing the BNB network. For context, BNB has a Marketcap of $50,000,000,000 (...that’s with a B) and it’s being secured by 29 people…
I’m going to a bachelor party this summer that’s more decentralized than this blockchain (not even joking, Dave, the bachelor, is a pretty cool guy 🤷♂️).
The point here is that all blockchains are NOT made the same. There is a significant range in decentralization and participation of staking across PoS blockchains.
While Staking-as-a-Service is growing across various blockchains, the majority of the recent boom and new products comes from Ethereum.
So that is where we will focus our attention for this report. Not just because that’s where most of the action is happening, but it’s also where the greatest opportunity lies currently.
Remember the table I showed you above? There’s one metric that stands out significantly from the rest. Take a look at the Staking Ratio column below.
Staking Ratio = The % of total supply of a blockchain’s token which is being staked.
Ethereum sits below 15%, yet every other blockchain is 40%+ with some as high as 97.9%!
What gives? 🤔
There are 2 reasons for this and this is also why the opportunity for SaaS in the Ethereum ecosystem is so great.
Ethereum only transitioned to PoS in September of 2022 (6 months ago). This is still early days for Ethereum PoS vs. many of the other blockchains.
Ethereum staking doesn’t yet have the ability to withdraw your stake. Meaning, if you stake, you actually can’t remove any of your $ETH or the rewards.
That functionality is currently being built and will launch (likely) in April of 2023. Many participants, especially institutions, won’t stake their $ETH until this feature is live.
Just to put this into perspective, if the Ethereum staking ratio simply increased to the level of the second lowest ratio, which is Polygon’s 40%, then the Ethereum staked market cap would move from $29 Billion up to $77 Billion, all without a change in price.
…Though, think about how much $ETH will need to be bought / taken off the market to move from a 15% staking ratio up to 40% 👀.
Anyway, hopefully this helps you understand the dynamics of this market.
Staking is still new and has some very interesting developments occurring in the short term.
Combine that with a more long-term view by asking the questions: “Will more or less people use blockchain in the future?
And will more security be needed for more blockchains in the future?”, and you can see where the trend of the staking market is heading.
Anyone can run a validator on Ethereum if they choose to, it’s permissionless. However, it requires 32 $ETH (~$50,000 USD currently), a basic laptop or computer, and some technical knowledge.
As I mentioned above, the goal of a blockchain should be to make the ability to stake as easy and cheap as possible.
Not everyone can afford $50k or if you’re like myself, have the technical knowledge (or the will to learn) to run their own validator.
That is where the new business of SaaS comes in.
Currently on the Ethereum blockchain there are 50+ businesses helping others stake their $ETH, and, in total, there is 17.6 Million $ETH staked.
Essentially, what these providers do is allow anyone to provide any amount of $ETH to stake. They then pool it together to equal 32 $ETH and run the validator for you.
Finally, they then distribute the rewards to the user after taking a cut.
Business is pretty good for SaaS providers so far. Below is an estimated chart of weekly revenues based on their protocol fees. Coinbase is bringing in almost $900,000/week!
Below we can see the top 15 providers by $ETH staked, however, it's important to understand that not all staking providers are made the same.
They charge different fees, have different features, and have different trust requirements.
Let’s dive into them...
First, we have centralized companies providing SaaS, like Coinbase, Binance and Kraken.
Hopefully I don’t need to tell you why we shouldn’t use these services. In fact, #12 on this list is Celsius, the centralized exchange that went bankrupt last year.
We don’t use centralized exchanges to stake because we have to TRUST that they will stake our tokens and give them back, rather than VERIFY 👀🔛⛓️.
Then we have protocols which provide on-chain, non-custodial services, which are along a spectrum of decentralization.
Of these, the two biggest are Lido (on the less decentralized side of the spectrum at the moment, though working towards more decentralization), and RocketPool being the most decentralized of SaaS providers.
Each of these providers have different features for users who wish to stake their tokens.
Let’s start with the feature that is the most innovative and has the coolest name… LSDs
Also referred to as Liquid Staking Tokens, LSDs are essentially a receipt-like token that allows users to directly participate in staking while also maintaining the ability to use their LSD elsewhere (like in DeFi), or transfer ownership/sell their staked tokens, without needing to unstake.
Rather than stake my $ETH and never use it again, the LSD allows me to use it to take out a loan or generate more yield elsewhere.
Depending on the protocol, for my stake rewards I either receive more of these LSDs or the LSD itself goes up in value vs. $ETH.
The other nice thing about these LSDs is that I don't even need to interact with any SaaS providers to stake tokens, I can simply buy these on any DEX and become the new owner of existing staked tokens. 🤯
Currently, 80%+ of all staked $ETH has an associated LSD. The main providers here are:
Lido = $stETH
Coinbase = $cbETH
RocketPool = $rETH
An interesting new innovation out of Index Coop is something called the “Diversified Staked ETH Index” or $dsETH which is an ETF-like token that uses a protocol to buy multiple LSDs on your behalf, so you have less risk on one specific protocol.
This is the beauty of programmable assets on the blockchain, they act like legos and can be permissionlessly built on top of to create better or more user-friendly products.
There is one final piece to this staking ecosystem to be aware of.
SaaS protocols are run via DAOs and thus have native tokens which enable decentralized governance of the protocol, access to additional rewards and benefits, among other utilities.
In total, there is a market cap of SaaS tokens valued at over $3 Billion, the largest of these being: Lido = $LDO and RocketPool = $RPL.
I’m not going to get into the intricacies of these tokens today, however, next week I will do a deep dive on the tokenomics of my favorite SaaS token, which I currently invest in 👀
They are doing some very interesting stuff for their token in regards to its utility within the ecosystem. Stay tuned 🙂
There’s much debate about what happens in April when Ethereum turns on the ability to withdraw your staked tokens. Will people unstake and sell, or will this enable more people to stake?
In the short term, who knows, it could go either way. But in the long-term, it’s up only. Every other blockchain allows you to withdraw and their staking ratio is 40-97%.
Ethereum, the only one with a one way ticket to stake, is sitting at 15%.
More important, however, is the fact that Ethereum has managed to provide a staking reward of 7%, one of the highest in the industry, while also being the only profitable blockchain with sustainable tokenomics.
What this means is that you can hold $ETH, a deflationary asset, and earn 7% on that asset by doing nothing but staking it. This is unheard of in any financial market and will no doubt be a massive story in the coming years.
In my opinion, the staking ratio of $ETH as well as the price of $ETH will both increase significantly in the coming years, likely bringing the SaaS marketcap of just the Ethereum ecosystem into the Trillions, not to mention the many other blockchains who will eventually have their own large SaaS ecosystems too.
As the importance and the use of blockchains continue to grow, their security requirements will grow with it.
Whereas some blockchain specific industries like DeFi, Music NFTs or Art are not guaranteed to grow if blockchain succeeds, the SaaS industry is tied directly to the success of the overall blockchain industry.
So long as blockchain grows, so does this industry.
Contribute to web3 by supporting the foundational layer of its technology, blockchain… and earn some sweet rewards while doing it!
There are many ways in which you can do this, and the best choice for you depends on how much you want to stake and what your technical knowledge or desire is.
Those with 32 $ETH and some technical experience are best to run their own validator. This is the least risky of any and also the most rewarding, as no one is taking a cut off your rewards!
For those without 32 $ETH, I would recommend either staking with Lido or Rocketpool or simply buying the $stETH or $rETH tokens on Uniswap. This can be done on the Ethereum L1 and even on L2s like Arbitrum and Optimism.
At the moment, you can earn around 5% APY on your $ETH by doing so.
Do understand, however, that even though protocols like Lido and Rocketpool are decentralized (or on route to becoming so), there is still smart contract risk.
While that risk is minimal, it’s still more risky than simply holding $ETH in a non-custodial wallet.
To alleviate risk, it’s best to diversify your $ETH.
In my case, more than 50% of my $ETH is NOT staked. It’s simply held in a cold storage wallet, free from any risk.
The other 50% is split amongst $stETH and $rETH across the Ethereum L1, Optimism, Arbitrum, and in my Argent wallet on zkSync (another L2).
Of course, all of my $stETH and $rETH has been moved to a cold storage wallet and is held there.
I do not and would not recommend staking with any centralized exchange, or holding these assets in a browser wallet that interacts with any web3 dapps.
Finally, don’t leverage your $stETH or $rETH in DeFi!
Guys, these assets increase 100s of %/year on a long term basis, don’t risk it all to get an extra few %. It’s ridiculous!
Stake your $ETH to support the ecosystem and earn some rewards while doing it in a very low risk environment, and then leave it at that.
Let’s not get greedy friends. If this industry turns into a trillion dollar industry as suggested, you’re going to do just fine 😎
Oh, and obviously none of this is investment advice. If you lose it all, that’s on you, friend.
But how about YOU, dear reader? Reply to this email and let us know if you:
A - Stake at home
B - Use a SaaS
C - Don’t stake at all
Thanks for reading and see you in the next one!
And as always, if you have any questions, ask them here or jump on our Discord to discuss it with our community!
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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