Staking-as-a-Service

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Similar to gold, Bitcoin is generally considered an interest-free asset. Although the mother of all cryptocurrencies can be lent in credit transactions against interest income - Bitcoin as a blockchain network, however, does not yield any interest. It' s a different story with most other well-known projects. These generate income on their own. As a holder of coins, you can make them available to a blockchain network and receive regular staking income in return.

These opportunities to earn money with digital assets are attracting more and more interest. According to a recent report by the crypto exchange Kraken, the global staking market is currently worth $170 billion and is thus no longer a marginal phenomenon. Annualized staking earnings are around 15 billion. Blockchain networks Solana, Terra, Ethereum and Cardano represent the largest share. Staking services are also offered on Tezos blockchain and others. As JP Morgan analysts expect, these total earnings are expected to grow to $40 billion by 2025. 

Staking provides safety

From a holder's perspective who entrusts the network with his coins, a valid question arises: why does staking exist and what is its purpose? To understand exactly what staking is, a fundamental component of digital assets must be understood. Their blockchain networks are conceptually based on the principle of decentralization - there is no central entity that decides on the correct transaction history. Nevertheless, in order to reach a general consensus, a consensus mechanism is needed to ensure in a decentralized manner that transactions are validated in the correct order in a secured manner.

Bitcoin uses the so-called proof-of-work mechanism to reach consensus. In this context, one also speaks of a PoW blockchain. The PoW mechanism requires the provision of computing power by miners, who continuously maintain the transaction history by always adding new transactions to the blockchain.

Prominent alternative to this is the proof-of-stake consensus mechanism of so-called PoS blockchains. As Kraken writes in the above-mentioned report, the latter account for 30% of the total market capitalization of digital assets in Q1 2022. To guarantee the consensus of these blockchains, no power-intensive computing power is used here. Rather, capital must be expended in the form of the blockchain's own coin. These coins must be "clocked", i.e., made available to the network and bound by it for the staking period. These staking periods vary depending on the blockchain network. While Cardano or Tezos, for example, have no lock-up period, other blockchains such as Solana, Terra or Polkadot have lock-up periods of varying lengths.

Those who «stalk», become valiators. They are the actors who add new transactions to the blockchain. At the same time, the validators follow the so-called consensus rules. These set the rules of the game according to which the various network participants must behave. If, as a validator, you violate the network's consensus rules during this process, you put your own capital at risk in the form of the coins you have staked. This ensures validators have an incentive to abide by the rules.

Where do returns come from?

As a staker, you ultimately contribute to the consensus building and security of a respective blockchain network. For this service, you not only get a say in the governance of the network, you also receive a reward in the form of blockchain-owned coins. In this context, one speaks of the so-called staking rewards. For different blockchain networks, these vary in amount. For a single network, the amount of staking rewards depends on how much of the total coin supply is staked. The higher the total amount of staked coins, the lower the percentage that an individual staker receives. If the total amount of «staked» coins changes over time, the staking earnings will change as well.

But where do the staking returns come from? From a blockchain network's point of view, the easiest way to enable these returns is to inflate its own coin. This can be compared to a public company issuing new shares. Holders of the preferred shares («staked» Coins) receive additional share ownership, while holders of common shares (not «staked» Coins) receive nothing. Their relative shareholding decreases measured against the increased total number of shares.

The same happens to coin holders who do not engage in staking, which is why staking returns are in principle equivalent to wealth redistribution. And those who «stake» do not actually receive a return, but ensure that their relative stake in the network does not decrease. If a blockchain network paid stakers in an external currency such as U.S. dollars or Swiss francs, it would be much easier to talk about a return.

Alternatively, staking revenues can be financed by charging transaction fees. Use of the network requires payment of a transaction fee, which can be passed on to stakers. It is also possible to destroy the transaction fee revenue to create a deflationary effect that counteracts the inflationary staking revenue. 

Staking-as-a-Service: A must for banks

So, for those who hold digital assets of proof-of-stake networks, staking is mandatory in order to avoid dilution of their own position. To a certain extent, this fact results in obligations on the part of the banks.

Not only are more and more banks being prompted by the rapid development of digital assets to include these new types of assets in their offerings, they are also becoming increasingly aware of the need to offer staking as a service. If digital asset owners come to realize that staking is a must for the reasons mentioned above, banks will have no choice but to offer Staking-as-a-Service services.

Due to this fact, it can be assumed that there will be an increasing merger of custody and staking in the near future. Custody solutions for digital assets offered by banks will necessarily have to include the staking component. If a bank does not offer a staking service, it runs the risk of losing customers and the assets it manages to competitors.

As a bank, staking opens up an additional source of income. As mentioned above, staking is a difficult undertaking. In order to stake independently, it is not only necessary to have the technical know-how to set up and operate a staking infrastructure at all. Equally important is knowledge about the respective blockchain networks and how their staking revenues are formed. This is where a bank can lend a hand to provide its customers with curated staking access. 

InCore Bank is the first Swiss business-to-business bank to offer staking services for multiple networks, opening up new revenue opportunities for financial institutions. Thanks to InCore Bank's fully integrated services, financial institutions are able to seamlessly and effortlessly offer staking to their customers. This offering is initiated directly through e-banking, allowing customers to receive regular statements of the revenues earned through staking.

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Daniel Blatter joined InCore Bank in 2015 as Head Digital Services. He has more than 25 years of professional experience in the IT and financial industry and previously worked for several years in development and product management at finnova AG Bankware. Daniel Blatter holds degrees from ETH and the University of Zurich, Switzerland, among others.