Crypto staking businesses are making an absolute fortune

For a long time, proof-of-work crypto mining has been the dominant force for securing blockchains, with blockchains Bitcoin and Ethereum controlling more than 60% of the entire crypto market share.

But the majority of the new crop of upstart blockchains that have caught steam this year — Solana, Fantom, Terra and Avalanche to name a few — are based instead on proof-of-stake, the same approach to network consensus that Ethereum plans to adopt next year. And that’s quickly made staking a very rich business.

In fact, judging by the revenues of top staking firms, crypto staking is now in the same echelon as bitcoin mining. 

“The business model is so incredibly operationally efficient that you can create real cash cows here into perpetuity,” says Evan Fisher, founder of Portal Ventures (and former senior associate at Insight Partners). “If you look at the growth they’ve seen, it can feel too good to be true. The total addressable market is massive.”

What is crypto staking and what do staking firms do?

Staking is an alternative way to secure a blockchain. A validator (equivalent to a miner) must pony up a required amount of the blockchain’s native tokens and spin up a node. The node will then be able to produce and validate blocks and will receive staking rewards in the range of 5-10%. But there’s a catch: If the node is found to be acting maliciously, its token holdings can be seized, or even destroyed, as a penalty (a process known as slashing).

Proof-of-stake blockchain platforms have seen an explosion in value since the beginning of this year. While ether (ETH) is up 440% this year, newer proof-of-stake platforms have risen even faster. In particular, solana (SOL) is up 12,900%, fantom (FTM) is up 12,300%, terra (LUNA) is up 4,500% and avalanche (AVAX) is up 3,500%. This value increase has made staking across all of these platforms much more lucrative. JPMorgan has called staking a $9 billion industry.

Third-party staking firms have emerged to stake the assets of institutional clients for a fee. These firms will typically take a 5-10% cut on these staking rewards. In addition, regular crypto users can delegate their tokens to staking firms, which will then take a publicly known portion of the rewards, typically within a similar range.

Staking companies can, of course, stake their own assets using their own staking equipment. When they do this, they’ll receive 100% of the staking rewards. This is a much more efficient approach but requires them to have the upfront capital or to reinvest their own profits.

Clayton Menzel, head of protocols and opportunities at staking provider Figment, tells The Block that it’s currently seeing around $10 million in revenue per month at current prices — and is projecting around $100 million of revenue for this year. Figment says it has more than 100 institutional clients and runs validators on 45 networks, looking after more than $7 billion in assets.

"The majority of our staking revenue comes from our institutional clients, with some earning from retail delegators as well since a lot of our validators are public. We do stake tokens that are on our balance sheet, but it is nowhere near the majority of our revenue," says Menzel.

Not far behind, staking provider Chorus One is looking at about $30 million in yearly revenue at current prices, according to co-founder Brian Crain. He says Chorus One has 50,000 customers and looks after $6.5 billion in assets.

Coinbase Cloud, formerly Bison Trails, has $30 billion in staked assets but will not say how much revenue it's looking at. Other staking providers include Blockdaemon, Staking Facilities and Stake.Fish.

While revenues are rapidly rising, costs remain low. Unlike mining, which involves buying expensive computing equipment and spending a lot of money on electricity to run those machines, staking is a relatively inexpensive task. Menzel explains the main costs are staffing, equipment and insurance premiums.

“It can be fairly profitable in terms of revenue in comparison to base cost. On some networks, you’ll see upwards of tens of millions of dollars a year if you’re doing well. Ethereum is also going to completely change the game. Once it moves to proof of stake, you’re looking at $400 billion worth of assets staked, earning potentially 10% a year,” says Menzel.

On the flip side, he acknowledges that running nodes for certain blockchains can be expensive. In particular, he estimates that running a validator for Solana — a high-throughput blockchain platform that has risen to the top 5 by market cap this year — costs around $100,000 a year.

How is the staking business like the mining business?

Staking as a business can be compared to running a bitcoin mining pool since the majority of the income comes from taking a cut on token rewards.

For comparison, the largest bitcoin mining pool AntPool earned around 4,460 BTC in block rewards last month. Assuming it takes the industry-standard fee of 2.5% then its revenues are in the ballpark of $8 million per month. 

That means staking businesses are now comparable in size to bitcoin mining pools.

While staking companies are not quite as large as the bigger bitcoin mining companies — which, unlike mining pools, use their own equipment — they are getting much closer. Marathon and Riot Blockchain currently mine around 400 bitcoin each per month, which is around $22 million in revenue at current prices. While their fixed costs will be higher than for a staking company, that still keeps them ahead right now.

Another big similarity to bitcoin mining is that both types of businesses depend on the current state of the crypto markets. “We are fully exposed to the crypto market: if it goes down, our revenues collapse in the same way,” says Crain.

What’s different about a staking business?

The staking and mining businesses are also very different from each other. In bitcoin mining, all you need is computing power and you can process blocks on the network and earn rewards. There’s no competition other than how fast you can crunch the numbers and there are no extra requirements.

Staking is far more community-oriented. In order to attract capital, a staking provider needs to build up a reputation among users of the blockchain. Reputation is crucial because individuals are choosing to trust their funds — and the security of the network itself — to stakers. Choose badly, and the network could be more susceptible to attack.

“If you are a bad actor on one network, that’s going to bleed into everything else,” says Menzel.

Staking firms commonly try to create key relationships with emerging blockchain platforms far in advance. “When we decide to support a new network, that relationship gets built a year before the network launches,” Menzel says.

It is a challenge to keep up with everything that is required to maintain a stellar reputation, Crain says. It involves making sure that validators are online all the time, for instance — and that inevitably involves fixing things in the middle of the night.

Another key element of being a validator is participation in network governance. Validators are responsible for voting on proposed changes to the underlying protocol. This could be a change to the way the blockchain works, or it may have to do with the economics of its token. The process requires staking companies to engage with each community, understand how each protocol works and make decisions in the best interest of the respective blockchains.

“We vote on every single proposal on every single network,” says Menzel. “I think that’s another interesting differentiator between proof of work and proof of stake. As a token holder you are making decisions on the future outcome of what the network is.”