In early July, JPMorgan released a report in which two of the bank’s analysts projected that the staking industry would be worth $40 billion in rewards by 2025. The report anticipates that once the Ethereum 2.0 network completes its transition from proof-of-work (PoW) to proof-of-stake (PoS,) payouts will more than double, up to $20 billion from the current $9 billion. Within the next four years, it will double again.
With the rapid rise of staking over the last few years, it’s hardly surprising that traditional finance analysts are starting to take note. While the JPMorgan analysts are correct that the market will continue to grow, however, even $40 billion could be a conservative estimate.
If that seems ambitious, then consider how quickly the current market for staking has accelerated over the last few years. Of the top six staking platforms, only Cosmos and Algorand launched staking before 2020. The other four — Cardano, Ethereum 2.0, Solana and Polkadot — only went live with their variation of PoS over the last fifteen months or so. Furthermore, those platforms now account for around half of the total staked value.
In the wake of this dramatic growth, venture capital (VC) investment is pouring into the crypto space. As one of crypto’s proven growth segments, decentralized finance (DeFi) is currently attracting the kind of investment that is making mainstream headlines. The Financial Times reports that private investors have already backed 72 DeFi companies this year, outpacing 2020 even before the year is halfway through.
The vast majority of these DeFi apps are based on PoS platforms, indicating that we can see traffic levels on those networks increase exponentially over the coming months and years. More traffic means more fees which means more generous rewards for validators and stakers, making staking a no-brainer for generating passive income.
PoW proves vulnerable to mining clampdowns
The reasons why projects are turning to PoS hardly need revisiting. Ethereum’s scalability problems under PoW are well-documented and much-discussed. PoS offers the opportunity for faster throughput and lower fees. However, recent events underscore more than ever why PoW is no longer fit for purpose.
As the Chinese authorities have taken Draconian steps to outlaw cryptocurrencies, miners have staged a mass exodus to avoid falling foul to the law. Some have migrated across international boundaries and some have dumped their mining equipment on the market, resulting in Bitmain halting shipping of its newest models.
It’s to Bitcoin’s (BTC) credit that the price has held as well as it has, indicating the resilience and maturity of the crypto markets.
However, the events in China have underscored that PoW is vulnerable to the kind of censorship that blockchain aims to resist. Bitcoin’s power consumption proved to be its biggest weakness over recent weeks, and it’s a scenario that could repeat in any other country where PoW miners choose to exploit low-cost electricity.
The climate controversy
Bitcoin’s energy consumption also has another Achilles Heel, and one that’s been hotly debated this year — its effects on climate change. While renewables offer one workaround, PoS offers a far more attractive workaround — eliminating energy consumption dependency altogether.
Many environmental advocates invoke the analogy of coal-guzzling power plants to illustrate the dangers of PoW. Taking this analogy a step further, PoW can be considered as the engine that drove crypto through its “Industrial Revolution” phase. For the digital era, however, we need a more sustainable and resilient engine that can reach cruise speeds for long into the future without losing power or causing unknown collateral damage along the way.
PoS — a model for the future
None of this is a criticism of Bitcoin or PoW, both of which have proven their ability to last the distance. Bitcoin’s resilience means it will be around long into the future. However, new platforms and projects are self-evidently shunning PoW in favor of PoS. Therefore, it seems inevitable that many PoW platforms will simply fade out through lack of use over time.
Ultimately, for the blockchain sector, this is a good thing. Aside from the endless accusations of environmental destruction, a shift to PoS will ensure that the ecosystem is more resilient against external forces. Furthermore, by eliminating the need for expensive mining equipment, PoS makes joining a blockchain network as a validator more democratic and removes barriers to entry. Making staking more attractive improves the likelihood of validators joining the network, increasing security.
As the returns available in the traditional financial markets diminish over the coming years, and while governments seek to recoup the debts they incurred over the last year or two, staking will become an increasingly attractive prospect for investors. For those of us who’ve watched the inexorable rise of staking over the last year or two, the only question is: Does the JPMorgan prediction go far enough?
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