The market has agreed that staking is a really good deal — more so than core developers ever anticipated. There’s not just demand to build on Ethereum, but a wildly unanticipated demand to participate in Ethereum’s consensus, aka staking.
Stakers put down collateral in the form of ETH to validate the network and receive rewards in the form of ETH. Yield is dependent on the size of the validator set, which, in theory, creates a market equilibrium — if yield is too low, people unstake. If the validator set is too small, yield increases and new stakers are incentivized to enter the set.
This article is part of CoinDesk’s “Staking Week.” Justin Kalland is the vice president of innovation at Horizen Labs Ventures.
In the purest form of staking, affectionately called “home staking,”you run a small, unobtrusive, energy-efficient PC with Ethereum software and you control your assets. But there are two cohorts who want to stake but don’t want to “home stake.” The first set is people who don’t have the motivation, time or tech savvy to learn how to set up the necessary PC. The second set is people who don’t want to lock up their ETH for a ~3%-6% yield – they’re interested in more risk and more reward.
These two cohorts have given rise to a part of the ecosystem that is both a boon and a bane. They allow their stake to be managed by a third party who gives them receipt tokens, which means that this third party doesn’t have anything “at stake” but still retains some influence over the network. It provides a service and takes a cut of the rewards.
On the one hand, third parties democratize access to staking. The barrier to stake is quite high in terms of initial investment and tech knowledge, and “staking-as-a-service” providers make on-boarding easy. They are are a net positive for the chain.
On the other hand, third parties, or in other words middlemen, the types of market participants that crypto is meant to eliminate, come with problems.
Ethereum’s Shanghai hardfork in April enabled people who had been staking for years to finally withdraw. It was a massive derisking event for those interested in staking. Since then, the queue to get into staking has been several weeks to months long. The metaphorical bouncer has not had a moment’s rest.
Everybody is piling into…
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