Coinbase Brings Tezos, Ethereum-Based MakerDAO Staking To Crypto Investors

Coinbase Brings Tezos, Ethereum-Based MakerDAO Staking To Crypto Investors

03/29/19 10:45 PM 2019-05-16 07:56:14
While Coinbase recently suffered the departure of a key staff member, the San Francisco-headquartered crypto startup has forged ahead. In a recent blog announcement, the industry startup, valued at a
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While Coinbase recently suffered the departure of a key staff member, the San Francisco-headquartered crypto startup has forged ahead. In a recent blog announcement, the industry startup, valued at a jaw-dropping $8 billion by private financiers, revealed that it would allow clients of its Custody offering to stake Tezos (XTZ) and Maker (MKR), giving investors access to a broader roster of products.

Coinbase Allows Custody Clients To Bake Tezos, Govern Through Maker

Starting Friday, users of the Tezos protocol, a blockchain that facilitates smart contracts and decentralized applications, that also are clients of Coinbase’s high-ticket products will be able to bake their XTZ on the platform.

This makes Coinbase Custody, which holds licenses in notoriously stringent New York State, the first “full-service, regulated, comprehensively-insured, and 100% offline staking provider in crypto.”

Users staking XTZ, which is how Tezos funds maintainers of its recently-launched blockchain, will receive approximately 6.6% APR after Coinbase’s cut. Coinbase’s newfangled system allows institutional stakeholders, many of which were likely too afraid to participate in Proof of Stake (PoS) schemes previously, to stake certain crypto assets, thereby creating another revenue stream for such long-term investors. Kathleen Breitman, the co-founder of Tezos, an ICO that raises millions near the peak of the previous market cycle, expressed:

“Achieving our mission of creating a ‘digital commonwealth’ means facilitating participation for all, and that includes the institutional customers that Coinbase Custody brings to the space.”

With this staking offering, Coinbase will be running its own nodes and validators, ensuring that there are no third parties involved in the process of baking XTZ or whatever other crypto assets, thus exponentially reducing attack vectors.

Although Coinbase Custody currently has few ambitions, this facet of the multinational cryptocurrency firm intends to open its doors to on-platform governance in the future. First, in the following quarter, Coinbase will allow holders of XTZ and MKR to govern through these asset’s respective platforms. Previously, Coinbase only supported classic custody for the aforementioned two assets. This new feature is important, especially for the Ethereum-based MakerDAO, as it ensures that DAI (the stablecoin of this specific ecosystem) remains pegged to around a dollar.

Ethereum Could Be Next… But Some Are Concerned

While Coinbase seems to be setting the stage for the widespread adoption of staking, some are skeptical of the future prospects of this specific consensus mechanism, especially for a network like Ethereum.

After a number of failed attempts, due to bugs and consensus misalignment, the fabled Constantinople blockchain upgrade went live earlier this month. Constantinople, for those who missed the memo, introduced changes to Ethereum’s virtual machine that reduces smart contract gas consumption (lower fees), along with a -33% shift in how much Ether is issued each block. Although this blockchain upgrade had roots in bolstering the short-term scalability prospects of Ethereum, Constantinople moves the project one step closer to the advent of Serenity.

But, the New York-based Delphi Digital recently expressed concerns about the viability of staking, especially in the context of current market conditions, which have drastically depressed the value of ETH.

The research boutique, which recently joined hands with 51Percent and accepted Bitcoin bull Anthony Pompliano as a board member, broke down how the planned PoS model, especially the cryptoeconomics facet, could pan out in real life.

Delphi’s team, headed by Tom Shaughnessy, note that the proposed yields offered through staking “look low,” even without factoring in operational expenses that come with running a server. The proposed yields offered to validators, which will be equivalent to miners on the Serenity chain, will be 18.19% APR at most — this being the case only if there is 5,000,000 Ether staked, even as transaction fees spike through the roof. More conservatively and representative of real life, validator yields will likely be well under 5%, possibly even as low as 2% to 3%. On the matter of the economic sustainability of these returns, the researchers remarked:

“It’s clear that not only will network fees (gas spent) be the primary driver of higher validator yields, but that the reward structure is not economically sustainable without significant growth in those fees.”

The American group then goes on to break down an Ethereum validator’s net yield, factoring in the expense of running hardware or a cloud server (which introduces centralization) for validation. They note that at current prices levels, staking will be wildly unprofitable, maybe even more so than the levels that capitulating Bitcoin miners faced in December of 2018. Mythos Capital founder Ryan Adams notes that per Delphi’s chart, at $100 per ETH (effectively current levels) and with 400 ETH in daily network fees, the annual yield would be -26%. Ouch.

In a number of other scenarios laid out in the chart, prospects for validators seemed just as dire. Save for scenarios where Ether is booming and network fees are high, which seems unlikely considering the moves to decrease gas usage across the board, validators would be losing their hard earned money in exchange for processing Ethereum transactions. Thus, Delphi determined:

“We absolutely believe that continued Ethereum adoption and building on the platform will help the fee market develop, but it becomes a bit of a chicken or the egg situation. A diversified and profitable validator network is crucial for the security and the longevity of the network, but that’s unattainable under the currently proposed specs without significant network fees.”

Title Image Courtesy of Marco Verch Via Flickr

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