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- Prepare for 2023 - Insights from Staking Providers and Crypto Users
Prepare for 2023 - Insights from Staking Providers and Crypto Users
Staking Rewards surveyed 30 key Staking Providers and over 1,700 users to gain valuable insight into investor sentiment, validator operations and challenges, the latest innovations in staking, and the overall outlook on the crypto market. All the data collected was used to develop the Staking Ecosystem Report, which aims to help investors make informed decisions in the staking space and Staking Providers create better products and services.
Please let us know if you find this information helpful or have questions. Reach us via email or Twitter.
Without further ado, let's dig in!
Market
2022 was a rough year for PoS investors. Staked value in USD declined 79% year over year from $284B to $59B.
However, despite the fall, the staked value today is up 227% relative to November 2020, indicating long-term investors in crypto may still be profitable.
Regarding the distribution of staked value, the top eleven PoS protocols with over $1B in staked value have seen their relative value increase compared to the other select 127 PoS protocols. Selecting the correct winners in crypto is essential as the industry continues to focus on the head of distribution rather than the long tail.
The top eleven assets have grown from contributing 54% of staked value to now 88%. Ethereum has seen significant growth in its share of staked value, as it has skyrocketed to 40% of the value of staked PoS protocols. Other protocols, such as BSC, Cosmos, and Solana, have also seen steady growth in their share of staked value.
One other vital indicator that the market continues to move towards leading PoS protocols is the discrepancy in increasing staking ratio between protocols with $1B+ staked vs. those with less.
Despite the volatility, the industry continues to build and remains enthusiastic about the road ahead. The transition of Ethereum from PoW to PoS via The Merge has been a massive catalyst for staking and has seen new developments in validator technology, staking products, and consumer interest. However, the industry still faces challenges from bad actors and is grappling with regulation uncertainty and a general risk-off market.
Users
Our survey highlights that most crypto users are primarily interested in staking to build long-term wealth rather than weathering a bear market.
A whopping 80% of survey respondents said that they engage in staking, indicating a strong belief in the long-term growth potential of the crypto market. Long-term belief is further demonstrated by users willing to lock up their funds for extended periods through staking.
The most important factors for users when choosing which tokens to stake are the long-term view of the asset and rewards incentive. Team and community are currently not significant factors. We hypothesize a lack of interest in team and community because crypto’s transparency allows users to value a project based on its current output. This allows users to assess the skills and capabilities of the team more accurately than in traditional markets, where the lack of transparency makes it difficult to evaluate projects based on merit.
Validator Business and Challenges
PoS validators face several challenges regarding business operations and must increasingly compete with more effort, given user expectations and fierce competition.
Validator selection: 40% of delegators make Staking Provider selection decisions based on features provided, such as customer support and terms of staking.
However, it can be difficult for users to research Providers and understand the know-how required thoroughly. Providers must establish educational resources and tools to assist with selection. Validators must focus on providing innovative services and products to remain competitive, especially with larger validators. Strategies include building staking analytics, ease of use, and various features to attract users.
Commission rates: Commission rates are a hot topic within staking, and there is a contrast in opinions between delegators and validators. While 45% of validators agree that custodial provider commission rates are too high, only 24% of users feel that fees are too high or could be lower across all provider types. Read the full report for insights into controversial commission rate strategies.
Providers believe commission rates will trend down to TradFi levels. However, what's most concerning is that most validators are already operating close to breakeven and rely on commission rates as a primary source of revenue.
Alternative Monetization Strategies for Staking Providers
The PoS industry is rapidly evolving, with new opportunities for Staking Providers to monetize. Alternative monetization strategies include investing in deal flow, providing premium RPC/node services, building valuable tools and products for staking, and offering services to high net-worth delegators. MEV is another alternative source of revenue, although it is ethically debatable and uncertain from a regulatory perspective. Some staking providers are exploring ways to diversify their portfolios, such as investing in additional networks and using yield-enhancing strategies such as flash loans and arbitrage. The blockchain industry is ever-changing, and staking providers must stay on their toes to find the best monetization methods - especially with commission rates trending downward according to surveyed Providers.
Innovations
In the past year, there has been innovation in the staking industry in the form of liquid staking, which has increased the liquidity and composability of staked assets and reduced staking liquidity risk. Despite the innovation around liquid staking, less than 10% of the total staked value is done on liquid staking protocols. However, concerns remain about the effects of liquid staking on decentralization.
Validators see the ability to capture MEV as a significant innovation in the PoS industry, allowing them to extract value from transactions on PoS blockchains and providing an additional source of revenue.
Distributed validator technology (DVT) is seen as a critical innovation in the PoS industry, aimed at improving the resiliency of validators, reducing downtime and compromise, reducing the slashing risk of honest validators, and improving decentralization in Ethereum.
Decentralization
Our survey explores user preferences towards decentralization, validator market dynamics effects on decentralization, and infrastructure decentralization.
User Preferences: Half of the respondents delegate to non-custodial staking validators, while 21% use custodial validators. As users stake in an increasingly decentralized manner, they care more about decentralization. But, surprisingly, users staking with custodial validators care less about decentralization than even users who aren't staking.
A pivotal blocker to non-custodial staking is the need for more knowledge and a complicated and time-consuming process. Delegators on custodial Provider platforms are arguably the most likely to convert to non-custodial staking, given they’re already staking. This presents an excellent opportunity for non-custodial staking Providers to educate delegators.
Market Dynamics: Validator centralization is a significant concern in the blockchain industry. Staking Provider competition for AuM is fierce, competing with VC and institutional-funded Providers and dealing with the volatility of asset prices. Surveyed validators believe the threshold of a validator's AuM of a particular token should be around 10% or ~33% of the total stake; once a single validator exceeds that level, it should find ways to spread delegation.
As it stands, validators are potentially facing existential challenges that threaten their business and the entire decentralization ethos of blockchains. For example, 72% of Staking Providers believe larger providers in current market conditions will squeeze out smaller staking-as-a-service providers.
Infrastructure: Physical hosting offers increased decentralization, but increases costs; necessary infrastructure, know-how, and maintenance of physical infrastructure are significant hurdles to migrating to physical hosting. Despite potentially higher costs short term, Providers believe the industry will trend toward bare metal servers.
Institutional Adoption
As the demand for PoS protocols expands, institutions are increasingly looking to participate. However, several regulations and operational requirements must be met to ensure compliance and security for institutions. Institutions must understand the complexities of staking and be aware of the legal and security considerations. Regulations must be clarified to ensure institutional compliance, and additional tools and personnel must be employed to ensure the best possible execution. In addition, stakeholders must focus on improving usability, minimizing correlation risk, and providing clear performance standards and regulatory certainty.
Regulation
The Proof-of-Stake Alliance (POSA) shared several focal points on crypto regulations in our report for 2023:
Recent comments by SEC and CFTC Chair Benham and Senator Cynthia Lummis have suggested that the transition to PoS could make ETH a security. However, regulators now seem to be conflating staking with lending – a misconception worth addressing.
The IRS has announced plans to issue guidance on the taxation of staking rewards in 2023.
OFAC sanctions regarding the "Tornado Cash" cryptocurrency mixing service could result in "base layer" participants censoring blocks. To prevent this, POSA suggests STaaS providers adopt industry-driven standards, including refraining from investment advice, minimizing correlation risk, and tracking volatility in crypto.
If passed, the Digital Asset Anti-Money Laundering Act of 2022 would negatively impact all blockchain-based activity in the US, including staking.
Those in the industry must comply with applicable regulations, use the proper terminology, develop industry principles, and attempt to self-regulate.
59% of Staking Providers are neutral on the impact of regulation on the industry.
Narrative Outlook
The outlook on bullish and bearish narratives in crypto for 2023 is undoubtedly varied. Staking Providers are bullish on interchain security, liquid staking derivatives, distributed validator technology (DVT), MEV, and institutional liquid staking. On the other hand, Staking Providers are bearish on liquid staking pure plays, as the democratization of liquid staking leads to competition for pure-play liquid staking providers. They also have mixed views on NFTs; some see them as overpriced, while others see them as having the potential to go mainstream. Finally, yield farming and over-engineered traditional finance products are bearish to Staking Providers. However, there is also a positive outlook on interoperability, scalability, decentralized governance, and identity.
The top three bullish narratives among users are DeFi, liquid staking, and passive income and staking.
On the other hand, regulation dominates bearish outlooks from users, followed by DeFi, and the effects the general economy will have on risk assets.
Final Thoughts
The PoS industry is seeing increased competition, but validators must focus on decentralization and align their incentives with users to achieve long-term success. Staking Provider venture arms should differentiate their offering by providing more than capital, and all stakeholders must work together to create a more decentralized future. With collaboration and a focus on decentralization, the PoS industry can achieve long-term success.
In 2023 we’re paying attention to six key developments to understand better the industry's growth potential and momentum towards decentralization. The developments are Staking Growth Potential, Staking Rewards Inflation, Validator Business Developments, Regulation, Liquid staking, and Decentralization. Read the full report for a closer look at each development.
Journal Entries
New Verified Providers on StakingRewards.com
The Verified Provider Program is an initiative to increase trust and transparency in the staking industry by verifying that Providers meet a set of criteria, including but not limited to, risk management, longevity, and security measures. When we verify providers, we look at their business through a microscope and analyse things such as their on-chain reliability, their provider setup, and value-added services for the whole ecosystem. You can learn more about the VPP in our articles about Provider Batch 1 and Batch 2. Providers that are part of the VPP have a blue checkmark next to their names on our website and can be viewed here.
We are excited to announce the following new Verified Staking Providers:
If you are a validator and would like to join the VPP, fill in this form.
Summit Fireside Chats
Summit Fireside Chats is a new series where we interview validators, protocols, users and community members that attended the #StakingSummit. We discuss staking innovations, trends and banter about the market!
🔔 Solo Staking w/ EthStaker: Insights on Staking Pools, Commercialisation, Shanghai Upgrade, and MEV
🔔 Interview w/ RockawayX: Insights on ATOM, Overrated Projects, DEX Models, and Staking Summit
Global Staking Research
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Lido upgraded to V2 on Solana, improving the validators’ economy, including changes to the node commission and staking rewards.
Ethereum staking continues to go up and to the right.
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