Stakes rising: the business of creating cryptocurrencies

The adage “money begets money” is being given a twist in the world of decentralised finance. Here, people can make cryptocurrencies by creating cryptocurrencies. It’s a process called “staking” that promises eye watering interest rates – if you can stomach the inevitable risks that come with it.

Cryptocurrencies run on blockchains that rely on their users to validate the transactions that are carried out on them. Transaction validators are rewarded with a batch of freshly minted cryptocurrencies that happen to run on that blockchain.

Some blockchains (not bitcoin) require validators to stump up a “stake” of cryptocurrencies as a form of deposit. Lazy or malicious validators can be fined for sloppy service – or lose their deposit (stake) altogether if they prove to be bad actors.

The rewards can be lucrative – easily 5% or even into double figures. But there are risks. Rewards vary depending on how many other validators you are competing with and a range of other factors. If the cryptocurrency you have locked up as a stake dives in value, there’s no way to sell out fast.   

Validating transactions on a blockchain is hardly child’s play. It requires know-how and specialist computer hardware and software. So it’s no surprise that crypto financial firms have stepped in to provide “staking as a service” – taking care of the complicated stuff for a fee.

Switzerland’s Sygnum bank, for example, helps clients stake Tezos coins on the Tezos blockchain. But even Sygnum needs a helping hand to do this. The licensed bank has turned to Swiss crypto specialists Taurus, which has a direct connection to Tezos.

Taurus says it provides staking services to other clients, including private banks, without naming names.

The staking business appears to be taking off. Bitcoin Suisse, a financial services firm that is applying for a Swiss banking license, says staking as a service accounted for 3% of its revenues so far this year, rising to 6% of total income in the third quarter.

And now everyone is getting excited about a new version of the Ethereum blockchain – imaginatively entitled Ethereum 2.0. Ethereum is the second largest blockchain behind bitcoin. The upgraded version reached a milestone on December 1 when would-be validators staked enough ETH tokens (the cryptocurrency that runs on the Ethereum blockchain) to get the ball rolling.

Bitcoin Suisse says that its staking as a service clients pledged 87,000 ETH tokens – a sum equivalent to $51 million (CHF46 million). That equates to around 17% of the 524,288 tokens needed to get the blockchain off the ground.

Shirts to be won and lost

True to the experimental nature of blockchain and digital assets, no-one quite knows how this new business stream will pan out in future – or how many shirts may get lost on the way. Unscrupulous hackers, bugs and charlatans lurk in the back streets of decentralised finance waiting to pounce on the unwary.

But the space is also attracting a growing number of institutional investors, large funds and family offices who are streetwise in the ways of finance. They are betting that cryptocurrencies are here to stay and will increase in value. If they have got it right, their punt may well beget a handy return.