In the ever-evolving world of blockchain and cryptocurrencies, the concept of staking has become a game-changer. As we venture into 2024, it’s time to take a closer look at the state of staking in the cryptocurrency landscape. In this report, we’ll explore the history of staking, the current market size, leading staking networks, available Annual Percentage Rates (APRs), infrastructural advancements, opportunities, threats, and the rapidly growing sector of Liquid Staking.
Introduction to Proof of Stake
To understand the significance of staking in 2023, it’s essential to grasp its historical context. Proof of Stake (PoS) is a consensus mechanism designed for processing transactions and creating new blocks in a blockchain. It differs significantly from its predecessor, Proof of Work (PoW), the original consensus mechanism that validated transactions by solving complex cryptographic puzzles.
Under PoW, miners compete to solve these puzzles, requiring massive computational power and energy consumption. PoS, on the other hand, reduces the need for intensive computation. Instead of miners, validators hold and “stake” tokens as collateral, securing the blockchain in a more energy-efficient manner.
This article by the Ethereum Foundation explains the energy consumption of Ethereum dropped by ~99.95% after the transition to Ethereum 2.0 and PoS, further strengthening the environmental argument for adopting PoS as the standard consensus.
This graphic from the Ethereum Foundation outlines the relative energy consumption per transaction when comparing PoW to PoS, using Bitcoin and Ethereum as a comparison.
MultiversX have gained plaudits for their environmentally friendly approach as the first recognised carbon-negative blockchain.
The State of the Staking Industry
Staking has seen remarkable growth in recent years. According to stakingrewards.com, the global staking market cap has surged to an impressive $187.9 billion, with rewards totaling a staggering $5.85b billion annually, as of October 2023. This data underscores the growing adoption of PoS as a means of securing blockchain networks.
This data is supported by the staggering growth in popularity and adoption of ETH staking since the inception of Ethereum 2.0, as laid out by Vivek Chauhan & David Lawant in their recent CoinDesk article.
Comparing Layer 1 Solutions: MultiversX, Injective & Ethereum
While Ethereum has long maintained its status as a frontrunner in the staking space, networks like MultiversX (formerly Elrond) and Injective are rapidly gaining prominence. Ethereum, with its transition to Ethereum 2.0, has captured ~33% of the global staking market, with $63.5 billion locked in staking, as of January 2024.
In contrast, MultiversX (EGLD) and Injective each capture less than 0.5% of the global staking market according to Staking Rewards data. However, this modest market share indicates significant room for growth.
MultiversX (EGLD) and Injective offer innovative solutions to some of the structural challenges faced by Ethereum, such as usability, speed, cost, and smart contract design. Issues that could pose challenges for the further scalability and growth of Ethereum in the coming period. MultiversX & Injective position themselves as compelling alternatives for the emerging Web3 era.
MultiversX Explorer shows the percentage of staked EGLD is steadily growing, indicating a consistent support for the MultiversX network and a consistent demand for EGLD.
Exploring Staking APRs
In 2023, the staking Annual Percentage Rates (APRs) vary across networks based on the different token emission dynamics at play. According to Staking Rewards the benchmark APR for PoS network delegators is 5.68%.
- Injective: Injective stands out at present with an inpressive staking APR of 15%. Their token is also backed by a robust scarcity mechanism where a % of INJ used as gas through dApps on the ecosystem are burnt weekly.
- MultiversX (formerly Elrond): MultiversX offers competitive staking APRs of 6% on the native token EGLD. EGLD stakers on MultiversX can earn meaningful returns on their staked assets while contributing to network growth and stability as the network continues to mature and grow. There are also multiple liquid staking opportunities emerging on MultiversX.
- Ethereum: Ethereum provides stakers with APRs ranging from 3% to 4%, presenting an opportunity to earn ETH by securing one of the most influential blockchains globally.
Evolutions of Staking
PoS has brought about fundamental changes in the blockchain infrastructure. By reducing the computational work needed to verify blocks and transactions, PoS has made blockchain networks more efficient and scalable. Networks like MultiversX (formerly Elrond) and Injective have capitalised on these advantages, offering improved performance, scalability, cost-efficiency, and usability.
MultiversX adopted a first principles approach to building their blockchain and pioneered adaptive state sharding which can handle high throughput, at great speed with negligible costs.
A comparison of how MultiversX compares to other leading blockchains during the MultiversX Hypergrowth phase.
Injective is built on the Cosmos ecosystem and leverages the unique interoperability potential of the ecosystem to create a DeFi supersystem with unmatched liquidity depth and speed.
A comparison between Injective and other leading Layer-1 chains, published in late 2022. Block speeds on Injective have since increased to sub-second block completions.
Opportunities of Staking
Staking presents numerous opportunities for participants and investors. It allows individuals to earn rewards, actively engage in network validation, and contribute to network security. The transition to PoS has also made blockchain participation more accessible, removing the barriers to entry associated with PoW and making blockchain technology more energy efficient.
Threats to Staking
While staking offers several advantages, it’s essential to be aware of potential threats:
- 51% Attacks: PoS networks can be vulnerable to 51% attacks, where an attacker would need to own a majority of the staked cryptocurrency. While this is expensive and less practical, network security measures must be in place to mitigate this risk.
- Centralization: There’s a risk of centralization in PoS networks, where a few large stakeholders dominate the network. This concentration of power can undermine decentralization principles and decision-making control.
- Smart Contract Vulnerabilities: Smart contracts used for staking can have vulnerabilities that attackers can exploit. Ensuring thorough audits and security measures are in place is crucial.
- Regulatory Challenges: The regulatory environment surrounding staking can be uncertain in some jurisdictions. Regulatory changes or restrictions could impact network operations and participants.
- Software Bugs and Upgrades: Like any software-based system, staking networks can experience bugs or require upgrades. These issues may disrupt network operations and require swift response and coordination among participants.
Liquid Staking: The Fastest Growing DeFi Sector
In the DeFi space, Liquid Staking has emerged as the fastest-growing sector, capturing a significant $19.56 billion in market value according to DeFiLlama. This innovative approach allows stakers to utilize their assets in DeFi protocols while maintaining network security. Liquid Staking integrates the dynamic between staking and DeFi, amplifying the growth potential of blockchain ecosystems in the process.
DeFiLlama Table illustrating the dominance and growth of Liquid Staking compared to other DeFi sectors of of October 2023.
- Hatom: A liquid staking protocol on MultiversX that distributes staked EGLD among verified and trusted partners to ensure decentralisation. Hatom also offers a lending and borrowing protocol, allowing liquid stakers to use their staked assets as collateral.
- Salsa: Introducing custodial liquid staking for enhanced security and peace of mind for those who don’t want to be responsible for managing the security of their own assets.
- JewelSwap: Another platform that offers liquid staking to EGLD holders and the MultiversX community.
- Stride: Allows users to stake INJ and mint stINJ (staked INJ) in return, which can be used to generate yield in the Injective DeFi ecosystem. Stride is the first liquid staking protocol for the Cosmos ecosystem and facilitates liquidity for major tokens such as ATOM.
- Lido: The most popular ETH staking platform that offers liquid Ethereum (ETH) staking solutions. It allows users to stake their ETH while providing DeFi liquidity and earning yield from both staking and DeFi farming. However, there are some security and centralization concerns around the structure of Lido.
Potential Trends to Watch in 2024
As we look ahead to 2024, the staking landscape continues to evolve rapidly. Some potential trends to watch for include:
- Network Diversification: More blockchain networks are likely to adopt PoS, providing participants with a broader range of options for staking.
- Regulatory Clarity: Regulatory frameworks for staking are expected to become clearer in various jurisdictions, providing greater certainty for participants.
- Interoperability: Efforts to enhance interoperability between staking networks and DeFi platforms may accelerate, creating new opportunities for participants.
- Innovation: Continued innovation in staking mechanisms and DeFi integration could redefine the staking ecosystem.
Staking is only set to continue its upwards trajectory as a popular choice for cryptocurrency holders to earn secure and stable yield on their chosen assets. Liquid staking represents a pivotal development in the crypto and blockchain space, allowing users to maximise the utility of their staked assets while participating in decentralised finance ecosystems. As the DeFi sector continues to evolve, liquid staking is poised to play a central role in its growth and expansion.