In a blog post published on March 29th, cryptocurrency exchange Coinbase has announced a brand new service for its investors – staking crypto assets to accrue value.
Coinbase Custody, which serves as a storage facility for institutional investors, is looking to expand its suite of services to include staking — a means by which Proof-of-Stake (PoS) cryptocurrency networks encourage activity. The exchange will start off with offering staking for Tezos (XTZ).
Proof-of-stake (PoS) is a type of algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. In contrast, the algorithm of proof-of-work (PoW) based cryptocurrencies such as Bitcoin uses mining; that is, the solving of computationally intensive puzzles to validate transactions and create new blocks.
In PoS-based cryptocurrencies it is required of the users to participate by depositing assets to the network and then helping validate transactions and create new blocks. As a result, they receive payouts much like traditional miners in a PoW system.
Additionally, users who have assets to stake but don’t want to take part in the arduous process can instead delegate their assets to someone else. Participants who choose to stake their crypto assets earn passive income, which ranges from around 5% to 25% annually, depending on the network and the level of participation.
In order to win over institutional investors who might be wary of the risk/reward profile of PoS, Coinbase Custody is assuring its clients that all staked coins will stay in fully-insured cold storage. As such, the exchange will post the necessary bond to bakers out of its own pocket; therefore there is “zero risk” to its custody clients.
Through its offline storage service, investors will be able to participate in networks such as Tezos using Coinbase as a regulated intermediary.
Sam McInvale – head of product at Coinbase Custody – has affirmed that one of the reasons why the exchange is starting off with Tezos and later on following on with other delegated PoS is especially because they are able to keep their clients’ funds in cold storage at all times.
He demonstrated that in the case of Tezos, bakers must post a bond equal to 10% of the total being staked. Hence if a client makes a $100 million worth of XTZ deposit, Coinbase would post a bond of $10 million worth of the tokens to its baker to meet that.
According to the exchange, clients will have the opportunity to make a return on their XTZ, which has been estimated at an annual return of around 6.6%, after all Coinbase fees have been deducted.
Custody clients with Tezos tokens will be automatically delegated from cold storage to the Coinbase baker. However, the exchange does not currently have plans to allow its custody clients to delegate to other external bakers.
Following this announcement, Coinbase revealed as well that it would add similar support for decentralized autonomous organization (DAO) MakerDAO’s governance token Maker (MKR), with further tokens to receive support throughout the year, which Coinbase Custody clients will be allowed to vote on.