In brief

  • The market cap of proof-of-stake blockchains has grown to more than $175 billion in 2020, according to a new report from Staked.
  • The Staked report found PoS blockchains were paid average annual returns of 11.2%.
  • As Ethereum 2.0 develops, 2021 could be the year PoS security shows it can compete at scale with proof-of-work mining, says the firm.

Mining Bitcoin and other cryptocurrencies has been the foundation of the digital currency industry for more than a decade. But Staked, a blockchain staking infrastructure firm, thinks 2021 could be the year that staking starts to have a major impact.

Why? Because 2020 was a pretty big year already: More than $20 billion in annual staking rewards were paid out over the course of the year, according to the firm’s State of Staking Q1 2021 report. And proof-of-stake blockchains, says Staked, now make up 25 of the 100 most valuable crypto networks.

What’s proof of stake, and how is it different than Bitcoin you ask? Here’s a quick rundown:

Bitcoin and most of the other early cryptocurrencies used hardware mining, or proof of work, to keep the blockchain secure. This involves a number of high-end computer processors solving complex mathematical problems. Small at first, the power requirements for proof-of-work mining for Bitcoin grew quickly, and now rival the energy use of some small nations.

By comparison, proof-of-stake blockchains maintain security by having some users “stake” tokens associated with the network using lower-powered hardware nodes. If a staking node has poor uptime or sends malicious transactions, the staked tokens are at risk of being forfeited as a negative incentive to play by the rules. In return, staked coins earn interest as a reward for consistently good behavior and uptime.

As staking networks grow in popularity, their supporters (and investors) believe this will demonstrate that proof-of-stake blockchains can offer security at scale comparable to networks that use hardware mining.

The launch of Ethereum 2.0 in December 2020, along with the rise of alternative staking chains like Polkadot and Solana, has helped grow the proof-of-stake blockchain market cap to more than $175 billion, according to Staked’s report. And the firm expects that figure to keep growing in 2021.

“Every proof-of-stake blockchain project needs to ensure that the returns paid to participants is lucrative enough to tie up their holdings and bear slashing risks. Otherwise, their entire security model is at risk,” Staked CEO Tim Ogilvie told Decrypt.

“I'd expect the yield from staking to come down over time as people get comfortable with the risks and staking gets easier. But I also think the most successful projects will actively think about ‘monetary policy’ for their chains, ensuring the right balance between security and inflation.”

Staked found that staking across various blockchains earned an average weighted yield of 11.2% per year, a healthy return compared to the less than 3% average dividend yield provided by the S&P 500 over the last decade, according to Investopedia.

Staked also found that Ethereum 2.0 staking, which allows ETH to be deposited but not yet withdrawn, accounts for nearly 60% of the total market cap of staking networks. The Eth2 upgrade is expected to bring lower fees and higher transaction throughput to the Ethereum network, in addition to the staking rewards launched in December.

And despite excitement around the Eth2 upgrade, only a bit more than 2% of all ETH have been contributed for staking so far. That’s a small amount compared to other staking blockchains making headlines in 2020, including Solana with more than 30% of all tokens staked and Polkadot at more than 65%.

The next phase of the Ethereum 2.0 upgrade is tentatively scheduled for 2021, which could unlock withdrawals, making it easier to put tokens in when you know you can take them back out. That could be a boon for staking growth, and could help make 2021 the year proof-of-stake security truly comes into its own.

Editor's note: This article was updated after publication to clarify that the total market cap of proof-of-stake coins stands at $175 billion, not million.

Disclaimer

The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.