Coinbase blows the horn of PoS mining, and the custodial staking service boom is coming

Coinbase Custody will begin to provide staking (PoS mining) services to institutional clients, starting with the Tezos project, and will subsequently support popular PoS projects such as Cosmos and Polkadot;

Customer assets will always remain in Coinbase's cold storage, reducing investor risk;

Since staking requires some funds to remain online, Coinbase will use its own funds for staking verification and bear the corresponding risks;

Coinbase said its customers can expect to earn 6.6% in annual revenue after deducting related fees.

Leading cryptocurrency exchange Coinbase, through its custody arm, is attempting to attract its institutional clients to a new world of staking crypto assets.

Over the weekend, Coinbase announced that it would start with the Tezos PoS network, and according to the company’s estimates, investors can expect an annual return of around 6.6% after fees.

(Image from Coinbase)

The difficulty for Staking (PoS mining) investors is that running a PoS node requires holding part of the funds online, which is "hot" in cryptographic security terms. This means that the private keys controlling these funds are more vulnerable to theft than when they are offline. The corresponding concept is cold storage.

In order to win the favor of as many investors as possible, Coinbase Custody guarantees its customers that all of its customers' funds will be stored in fully insured cold storage. In order to do this, Coinbase must use its own security deposit to pledge to the validator.

In the case of Tezos, validators must put up 10% of the total stake and remain online, so if a customer deposits $100 million worth of XTZ tokens with Coinbase, the custodian must put up $10 million worth of XTZ tokens to validators to meet this demand.

In this regard, Sam McInvale, product manager of Coinbase Custody, said:

“So if the exchange gets hacked, we might incur losses, but our customers’ funds will always be safe.”

In the coming weeks, CoinBase will add governance support for the Maker protocol that created the Dai stablecoin, which has been integrated into more than 200 projects. Coinbase said it will also add Tezos voting in the second quarter and hopes to add other well-known PoS chains later this year, explicitly mentioning Cosmos, Polkadot, and possibly Algorand.

However, it should be clear that Coinbase Custody and Coinbase Exchange are two separate projects. Therefore, projects listed on the Custody platform will not necessarily be listed for trading on the Coinbase Exchange.

The staking service market is booming, and Coinbase wants to get a piece of it

Of course, while Coinbase is helping these decentralized networks, its goal is to get a piece of that market.

McInvale said that after launching the service, Coinbase expects to receive 20%-25% of today’s Tezos production, saying:

“So the actual revenue for the customer will be 6.6% and we will get the rest.”

Coinbase said it has signed several agreements with institutional clients and believes the current approach will be scalable.

McInvale added:

“We understand the current demand situation, we have a pretty good idea of ​​how we can scale over the next six months, and when more chains move to PoS and then the staking thing really starts to take off, then we have other ideas about how to manage that in the future.”

As these PoS networks come online, interest is growing in a number of so-called staking-as-a-service providers, such as Figment, Cryptium, and Battlestar Capital, as well as new and established custody providers, such as Anchorage and Copper, who are also preparing for PoS chains.

Earlier this week, Battlestar Capital announced a partnership with cryptocurrency lending project Celsium Network, claiming that its custody returns reached 30% per year.

There is an important distinction here. BattleStar is operating non-separate accounts (CoinBase accounts will be separated because this makes customers and regulators more comfortable.) Instead, BattleStar operates staking pools (also known as PoS pools) that benefit from scale.

Therefore, staking-as-a-service companies pursue the maximum return of PoS networks by combining investors’ tokens. Jason Stone, founder of Battlestar Capital, explained that the CoinBase model may be suitable for investment institutions that do not care about their business, while Tezos assets held in non-segregated accounts can net 12.5% ​​to 14% per year.

Coinbase, for its part, points out that it is not competing with firms like Battlestar Capital. McInvale explained:

“We are not going to be a public staking-as-a-service provider where anyone can delegate their coins to a Coinbase custody validator and share in the block rewards.”

Looking ahead, McInvale expects to see some interesting arbitrage opportunities, such as between trading and investing, especially when Ethereum moves to PoS, and he also said that lending assets versus investing assets will form interesting business models.

Additionally, Coinbase said that the institutions it spoke with were optimistic about staking networks, especially given the recent general rise in prices for such assets.