Proof of Stake (PoS) represents the newest wave of innovation embraced by many of the most popular blockchain projects on the market today. Many so-called third generation cryptocurrencies, such as Algorand, Cardano and Polkadot all rely on some form of PoS to help achieve consensus in their networks. Even Ethereum, the world’s second largest cryptocurrency by market capitalization with millions of users and thousands of decentralized applications (dApps) has chosen the path towards PoS as the future of their protocol with the upcoming launch of ETH2. There are many reasons why PoS has risen to popularity in recent times, however three key reasons include being better for the environment, more inclusive, and more conducive to long term decentralization. Staking, however, is not a “set it and forget it” process for most blockchain enthusiasts. For many, the barrier to entry to participate in staking is high, as it requires monitoring staking performance, choosing which validator on the network to support and in some cases having their return on investment harmed by slashing.
To mitigate these challenges, Staking as a Service (SaaS) offerings are increasingly popular as a reliable, consistent way of staking funds. Basically, Staking as a Service means letting holders of a Proof of Stake cryptocurrency participate in consensus via a trusted staking provider, such as an exchange or financial institution. These entities provide such a service to maximize returns for their customers, while also receiving a fee for doing so. This service allows holders of PoS crypto assets to participate in staking without needing the knowledge or expertise to do so. Such activities are not without their drawbacks as well, however. In this post, we’ll explore the ins and outs of SaaS, and why it is relevant in 2021.
Why Staking as a Service?
The need for intermediaries has long been the case within the blockchain industry. Trusted intermediaries such as exchanges are the gateways to acquiring digital assets for both consumers and institutions alike. Despite the decentralized nature of these assets, exchanges provide the on and off ramps needed to participate in the industry as it stands today. SaaS represents a value-adding service that these trusted parties offer to clients both large and small. Many institutions doing business today have evolved beyond simply buying and selling assets. SaaS represents a new step in adding value to clients’ holdings. Through staking, participants have an active role to play in keeping networks decentralized and secure. The following are some of the benefits that SaaS brings to both retail investors and enterprises.
Potentially Lucrative Return on Investment
SaaS services allow holders of PoS coins to tap into the lucrative financial opportunities that staking platforms may bring. The reason why it is lucrative to participate in staking is because holders of the native token are stakeholders in the network, who can be rewarded for participating in consensus. Unlike traditional mining, those with “skin in the game” have the right to participate in block production, or delegate their right to participate in block production to a validator on the blockchain. These validators are given the right to produce the next block in the chain, and are rewarded for doing so. The rewards given for doing so are there to incentivize participation in the network itself. This stands in contrast to traditional Proof of Work consensus mechanisms, in which only miners themselves can be rewarded.
PoS represents a relatively novel, new way of earning a return on an asset that is completely different from traditional investments. Rather than relying on interest or dividends, PoS networks may offer a handsome reward for staking, ranging from around 5% or more per year. The reason SaaS is relevant is because the institutions supporting such a service can guarantee a level of performance and consistency necessary for maximizing return on investment. While it is possible on PoS networks for a user to delegate or stake their funds to an individual validator, there is no guarantee that if anything happened to that lone operator their staking rewards would keep flowing. As PoS networks are dynamic and decentralized, a single operator going offline or ceasing operations would harm a stakeholder’s ability to earn tokens. SaaS provides a level of assurance that rewards will be generated reliably by professional operators. This is bolstered by the fact that many SaaS providers have insurance against slashing, a common factor in many PoS blockchains for poor performance, meaning returns are never cut for any unforeseen circumstance.
Staking is not a passive activity in many cases. While virtually anyone can become a delegator or validator in these open, permissionless PoS networks, there are certain obstacles for newcomers. Choosing the right person or group to delegate to for staking can be a confusing task. It requires understanding the differences between certain validators and the fees they have set, navigating the user interface of the chosen wallet, and continually checking that the operator is performing as promised. Such steps are often seen as barriers to entry for ordinary users to participate in staking, as there is too much complex terminology or steps needed to seamlessly participate.
SaaS takes the complexity out of staking for users by managing the staking process on their behalf. For SaaS customers, they can enjoy a familiar user experience with a platform they are already familiar with, and leave the staking process in the hands of the provider. This dramatically reduces the barrier to entry to get started with staking, as institutional SaaS providers make getting started as simple as a few clicks. The rewards generated also go directly to a user’s wallet hosted by the SaaS provider, adding to their original holdings.
Keeping up with Network Inflation
Inflation takes place in the context of blockchain when the amount of assets one owns becomes diluted relative to the overall increasing supply of the cryptocurrency. With an asset such as Bitcoin, an owner will have their holdings diluted as more Bitcoin is mined and added to the circulating supply. As this takes place, the overall holdings one owns becomes smaller in relation to the total amount of assets in the system. Inflation often takes place in fiat currencies when a large amount of money is printed into circulation. This reduces the relative value of the fiat currency as a result. While no arbitrary amount of capital can be printed in a decentralized blockchain, the same dilution of value takes place as more of the asset enters the circulating supply.
Traditionally, cryptocurrency exchanges or institutions provided custodian services for customers’ assets. These assets typically enjoyed the safety and security granted by such entities. However, with the rise of SaaS, such institutions can offset the inflationary effects that holders are subject to, as circulating supply increases. By participating in the staking of PoS blockchains, users’ holdings increase in line with the overall inflation within the network. This means that as circulating supply increases, so too do the holdings of the individual. This has the dual effect of incentivizing participation in staking coins which are held, as well as negating inflation’s pressure on one’s crypto holdings. SaaS providers can therefore protect customers’ funds from leaking value over time from inflation.
Concerns over SaaS
While there are many advantages to SaaS offerings, there are also concerns that have been raised over the ethos of such offerings in the blockchain industry. Here are some of the key questions with regards to SaaS which have been identified.
Decentralization is a core pillar to the blockchain ecosystem. This means that no central authority can decide how the network is run, but rather a consensus must be reached for vital functions such as block production or network upgrades to take place. PoS has become popular in part because anyone who simply owns tokens of the PoS blockchain can participate in block production in a small way. Originally this was the case with Bitcoin, as anyone with even a simple computer could participate in mining. Over time however, block production within Bitcoin has become increasingly centralized by industrial sized operations, resulting in fewer and fewer large mining pools.
Staking is an alternative paradigm which allows anyone to participate in consensus, without needing expensive equipment. As a result, it is seen as more egalitarian and fair. Questions have been raised, therefore, over SaaS following the true spirit of decentralization. Having large entities control a bulk of users’ stake would give central actors a big say in the block production, moving control away from the masses and towards the few.
PoS networks often have a form of governance in which token holders vote on proposals and improvements to the network. Without a central entity to improve a blockchain, it is down to a community of token holders to participate in making the blockchain better. The theory is that those with the most at stake have the biggest incentive to see the network succeed, and will vote on what improves the prospects of the blockchain they are invested in.
Governance in relation to SaaS poses a question mark, as the custodians of users’ tokens may indeed grant the institution the right to vote on proposals as a result of holding such coins. This would give such SaaS providers outsized influence on the system beyond simply collecting tokens from participating in consensus. SaaS service providers who vote on governance proposals may have different incentives or ideas for what is good for the blockchain. This could potentially create a dilemma between those who hold tokens on behalf of others for the purposes of staking, rather than those who own their own tokens entirely.
Ever since the inception of Bitcoin, the environmental impact of mining has been widely recognized within the blockchain space. Bitcoin mining that had previously been possible on a simple laptop computer, now consumes more energy on a yearly basis than the entire country of Belgium. Today, PoS represents an alternative to mining that has a negligible impact on the environment around us. Despite the advantages and lucrative returns, staking remains opaque and confusing for many everyday users. SaaS provides a secure on-ramp, typically in an easy-to-use interface, for anyone to begin their staking journey. This ensures a level of quality and hands-off management that many users desire.
Despite the advantages, there are many who question if SaaS is true to the core spirit of decentralization. Centralized staking providers controlled by single entities may pose a risk to decentralization by controlling too much of the stake in the system. Also in question is the level of outsized influence such service providers have on the governance of the network. Overall, SaaS provides an accessible way to engage with new, innovative Proof of Stake blockchains which are sure to shape the industry over the years that follow.