🥩 What's At Stake - Issue No. 44


Coinbase has announced a new feature for its "Coinbase Custody" customers: staking as a service. Coinbase Custody is a high end product primarily used by fund managers to store large investments in various crypto assets. As the name suggests, these customers do not have custody of their own keys. Rather, Coinbase handles the work of maintaining highly secure (and insured) cold storage systems. Many companies offer similar services, but to date, this has always come with a tradeoff: tokens that enable some active use in the network, such as staking or voting, have been unavailable to participate. With Coinbase Custody, investors can leave their coins in storage, but also stake them to earn block rewards. The company is starting with Tezos staking, but plans to make MakerDAO governance voting available soon as well. One can assume that staking and voting for other coins will follow shortly. Link.

Tezos is an ideal network to begin offering the service because of its approach to staking. It allows token holders to delegate their funds to specific stakers using a "manager key". This private key is tied to the account where the funds are stored, but is not the same as the key needed to transfer or spend those funds. This allows Coinbase to keep the coins themselves secure in cold storage, while still making them available to delegate in a self-service web based interface. Link.

Coinbase is the first high profile company to allow staking and voting with fully custodied coins, but it's safe to assume it won't be the last. This is a trend I expect to continue. For example, Battlestar Capital, a blockchain startup focused on offering staking as a service, recently announced that it will launch with support for six different networks. With the launch of high profile staking networks like Cosmos, and with Ethereum's planned transition to staking in ETH 2.0, this is a business that is primed for growth. Link.

There's a lot to unpack in this growing trend toward staking and voting as a service. It comes with both upsides and downsides for the networks that utilize these functions and for the broader crypto ecosystem.

On the plus side, it can be argued that enabling more token holders to easily participate in staking and governance helps to decentralize these functions. For example, in the Tezos network, allowing institutional holders to delegate their stake might help hold the validators accountable. Any bad behavior or poor performance on their part risks losing this delegated stake -- and thus a large chunk of their rewards. Likewise, governance votes in the crypto space have seen paltry participation. Providing an easy interface for users to vote, without putting their coins at risk, could go a long way toward improving this.

On the other hand, full third party custody comes with risks to the networks involved as well. For one, there is nothing forcing the institutions holding these coins to obey their users' wishes. Entities like Coinbase can compile massive staking or voting power as custodians. They might choose or be compelled to abuse that power. Also, any centralized custody solution, no matter how advanced, comes with risks of being hacked. With so many coins in one place -- and with the those coins holding power on their networks -- the trust and security model of entire crypto protocols can be reduced to the trust and security model of the top few custodians. This is different from other assets, like Bitcoin, where the worst thing a hacker can do is steal whatever coins are custodied.


8.9%. The percentage of the total MKR token supply which voted in the recent governance proposal which raised the interest rate on Maker CDP loans. Despite being such a high profile project, not even one in ten tokens showed up for this cri