Staking, the act of locking one token into a smart contract to earn the same or a second token as reward, is one of the industry’s oldest use cases. It sounds so simple, and yet this act has proven the key to securing blockchain networks worth billions of dollars, all through a bond system that incentivizes working for the collective good.
In 2023, staking is more vital than ever thanks to PoS becoming the dominant consensus mechanism across L1 and L2 coupled with the rise of staking derivatives that are unlocking deeper liquidity onchain. With innovation continuing apace, you can be forgiven for having missed some of the key staking developments that have occurred in crypto this year. Here’s what’s new – and what’s still to come in the world of onchain staking.
The Rise of Restaking
One of the most powerful new capabilities to emerge from staking is restaking: the ability to use the same stake to secure multiple protocols. EigenLayer is at the forefront of this trend, pioneering a solution that allows staked ETH to be used to safeguard cryptoe-conomic activity on other chains. One of the year’s most hyped projects, EigenLayer is opening in phases, causing maximum FOMO whenever the ETH staking cap is raised. Aided by airdrop rumors, expect the interest in Eigen to rise to a crescendo in Q4.
To Stake or Not to Stake
If staking is a net good for crypto ecosystems, why is it so controversial with lawmakers? It basically comes down to the rewards that stakers can earn: some financial regulators, the SEC in particular, believe this makes staking tokens potential securities and that exchanges should be barred from offering this service. In the US, exchanges have been forced to wind up their staking programs this year, but all is not lost. Recent court cases, not least Grayscale’s appeals win against the SEC, have given the industry confidence to fight back against regulators. Don’t be surprised if staking becomes de rigueur in the US once more in the near future.
Babylon Sets Out Its Stake
What’s Bitcoin got to do with staking? It is, after all, the primary network to have stubbornly clung to Proof of Work all these years, with no signs of it pulling an ETH and embracing PoS. Be that as it may, Bitcoin may have a future to play in securing Proof of Stake chains according to Babylon. The team behind Babylon network have released a lite paper that details the first ever trustless and self-custodian BTC staking protocol that can be used by PoS chains.
Like the restaking proposed by EigenLayer, Babylon’s litepaper proposes using a non-native asset to secure other chains. This solves problems associated with finding sufficient collateral to secure emerging networks. Led by Babylon founder David Tse and his research team, the paper’s authors propose a cryptographic scheme that harnesses Bitcoin’s scripting language to secure PoS chains.
Ethereum Staking on Demand
US exchanges might have had to rein in their staking programs, but other entities are expanding theirs. Crypto.com has rolled out onchain staking for ETH, SOL, and DOT. Meanwhile, Bitget Wallet has launched its own ETH staking service with gas fee subsidies to reduce costs for users.
Elsewhere, in Dubai, custodial crypto staking is now available after the Virtual Asset Regulatory Authority (VARA) revised its Custody Services Rulebook. Finally, back in the US, the IRS has declared staking rewards as taxable income. While no one relishes paying more tax, the clarity this brings will allow more US citizens to participate in staking in knowledge of their total liabilities.
