Coinbase’s New Staking Service That Could Lure Wall Street To Crypto Investing
Coinbase is looking to entice many of its institutional investors into cryptocurrency by pointing them towards the newest craze in crypto investing- staking digital assets to earn interest.
The U.S.-based exchange announced via a blog post published on March 29 that it had launched staking and would begin with Tezos (XTZ) before following that up with MakerDAO’s (MKR).
Coinbase Custody will now pay an annual interest estimated at around 6.6 percent when they stake XTZ in the proof-of-stake (PoS) network. Coinbase will take between 20 and 25 percent of the staked profit, which brings the 8 percent yield from the Tezos stake to the 6.6 percent an investor takes home annually.
Proof-of-Stake (PoS) networks, which could include Ethereum (ETH) if migration plans succeed, is set to present an alluring opportunity for investors seeking to earn passive income on their crypto holdings.
Participants stake or deposit their digital assets, which are used by a network node to help validate transactions and ‘mine’ blocks. The investor then earns profits from the payouts received, something akin to the interest earned from a traditional investment.
Coinbase seeks to win over institutional investors by guaranteeing that all staked assets will be held offline, in its fully-insured and segregated cold storage platform. The exchange has also said that it will post a bond for each of the staked investment, giving clients a further benefit of “zero risk.”
For the bond, (in this case as a ‘baker’ on the Tezos network), Coinbase will have to pay out 10 percent of the total stakes meaning that if investors stake $100 million worth of XTZ, then the exchange will have to post a $10 million bond.
According to Sam McIngvale, Coinbase Custody’s product lead, the funds used to buy the bond belongs to the exchange and not from clients, which means that at no time does Coinbase Custody expose their clients’ funds to risks.
Even in the case of a hack, it’s the exchange that would lose its funds, not the clients.
Newer PoS networks like Tezos offer multiple keys, meaning that holders have different keys for spending or withdrawing assets and different ones for staking. The latter is used in the ‘baking’ system to delegate funds.
It means that the main risk an investor or holder of XTZ faces is that of missing out on payouts or not being able to join staking cycles if they lose their keys.
In this new offering, customers who hold XTZ in custody will automatically delegate funds to the Coinbase baker and await their profits.
Apart from Tezos, Coinbase will add support for Maker (MKR), the DAO that created the Dai stablecoin. With a clamor for stablecoin integration on the rise, Dai has seen increased activity with over 200 projects currently looking to integrate the coin.
In Q2, Coinbase will add Tezos voting, before proceeding to roll out more governance support for many other reputable proof-of-stake chains, including the likes of Cosmos and Polkadot. The exchange could also eventually add Algorand before the end of 2019.
McInvale noted that Coinbase has inked a number of deals that will see some of the top institutional customers join the venture. He added that for now, the platform trusts its approach is scalable.
He also said that future management plans are in place should “things really start to take off,” as several other PoS chains begin to launch.
Coinbase’s offering comes at a time several firms have sought to launch staking-as-a-service products, including Anchorage, Figment, Cryptium, and Battlestar Capital.
Battlestar Capital reportedly offers its staking customers up to 30 percent in returns for holding their crypto. The startup announced this earlier in the week, revealing it has partnered crypto lender Celsius Network to expand its offering.
Disclaimer: This is not investment advice. Cryptocurrencies are highly volatile assets and are very risky investments. Do your research and consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.