Binance Research: Ethereum’s Switch to Staking Will Transform Industry
Binance’s latest research report has argued that with Ethereum’s pending switch to proof-of-stake in January, staking is set to have a major impact on the industry.
The report, published on Oct. 28, highlights that the largest 10 crypto assets supporting — or poised to support — staking represent a cumulative market capitalization of $25.8 billion.
As of press time, this means prospective staking dominance stands at roughly 10% of the total industry market capitalization.
Passive investment strategy
As previously reported, staking is specific to Proof-of-Stake (PoS) blockchains and essentially allows network participants to passively earn a form of “interest” by depositing their tokens to both maintain the network and potentially earn rewards.
As opposed to Proof-of-Work (PoW) blockchains like Bitcoin, nodes in a PoS network are engaged in validating blocks rather than mining them. A deterministic algorithm selects block validators based on the number of tokens a given node has staked in their wallet — i.e. deposited as collateral in order to complete the addition of the next block to the chain.
Ten largest crypto assets for staking, as of Oct. 2019. Source: Binance Research
Excluding Ethereum, the cumulative staking market capitalization, as of Oct. 24, is worth around $11.2 billion — $6.4 billion of which is staked.
Lock-ups and liquidity
Across all blockchains, Binance’s data indicates that 43% of tokens are staked vs. 57% in free circulation.
Among coins listed on its platform, altcoins Algorand, Tezos, and Cosmos displayed high staking ratios — the ratio of the amount staked at a particular point in time divided by the total circulating supply — at over 70% of coins staked. Tron and Qtum meanwhile exhibit a staking ratio of under 25%.
Binance outlines the potential risk-return profile of staking as a passive investment strategy vs. active trading. It notes that entrants should analyze the possible liquidity risks posed by different blockchains’ lock-up period.
While some chains may allow users to “un-stake” their coins instantaneously — but forfeit any unclaimed rewards — others may entail a mandatory lockup period that renders funds illiquid and could lead to missed active investment opportunities.
Ethereum 2.0 to roll out in January 2020
As reported yesterday, a senior ConsenSys executive has revealed that Ethereum 2.0 validators can expect to earn from 4.6% to 10.3% as rewards for staking on an annual basis.
To become a validator, participants are required to hold a minimum of 32 Ether (ETH) — worth $5,952 by press time. The transition to Ethereum 2.0 is currently slated for January 2020.