The origins of staking

Participation in proof-of-stake blockchain consensus is not unlike voting with shares of a company.

Stakeholders vote with their crypto assets to process honest transactions submitted to the blockchain network and are penalised for dishonesty and inactivity. In exchange for the work done, these voters receive rewards in the form of new token issuance by the network and transaction fees paid by users.

In blockchain networks, these voters are called validators, and they put their crypto assets at stake to vouch for the validity of transactions.

However, speculation became the main use case of staking during DeFi and NFT Summer.

In a matter of months, blockchain developers took the “staking” concept to the extreme — spawning Ponzi after Ponzi that issued hyper-inflationary tokens to earlier stakers using cash from later stakers. It’s surprising in hindsight that the market gobbled up this model without a second thought.

But what if there’s a better way to drive adoption in Web3 via staking? Let’s explore a use case that’s based on transacting for something of value rather than speculation.

The Stake-to-Subscribe model

The Stake-to-Subscribe business model proposes that users stake their crypto assets and share a small percentage of the rewards earned with a vendor of their choice instead of paying a subscription fee.

Even though the net effect should be the same for both users and vendors — where users pay some amount of money to vendors — it can make users feel like they are essentially getting the product/service for free. This is because users will have to stake their crypto assets somewhere and pay a fee anyway. Taking ETH as an example, staking pools typically charge a 10% fee on staking rewards for providing infrastructure and convenience.

So why not pay this fee to support their favourite creator instead?

Why is this exciting?

For blockchain networks

More people running validator nodes = a healthier settlement layer.

Most alternative Layer 1 blockchains (L1s) trade-off decentralisation for scalability in their initial stages. However, as they start to mature, they will need to start thinking about making their chains more decentralised by increasing the diversity of their validator node operators.

One way to do this is by coming up with innovative ways of lowering the minimum token collateral requirement to become a validator — which sounds like a favourable trend for individuals looking to participate!

For creators

The stake-to-subscribe model allows creators to tap into the Web3 native users in their audience for monetisation — a segment that is indisputably (to me, at least 😎) set to grow with time.

And although I specifically mention “creators”, this model is extendable to any entity with an audience.

🎥 Creators: Users “stake-to-subscribe” to premium content or as a way to support the work of creators — e.g. Patreon, Buy me a coffee

🏗 Community builders: Enable members to stake ETH with them to support community-building efforts instead of incumbent staking pools

🏛 Decentralised Autonomous Organisations (DAOs): Use staked ETH as a voting mechanism instead of issuing their own tokens. Allows DAOs to signal higher Ethereum alignment and avoid ponzi-like mechanisms and user behaviour that are unavoidable with issuing own tokens

💰️Funds: Hear me out — A US$250bn market cap asset at the current low. 4.2% annual yield with 10% fee rate = 0.42% fee on AUM equivalent without having to take custody (read: licensing). Tell me this is not better than running an ETF.

🧑‍💻 Individuals: Learn how to run blockchain nodes and partner up with any of the above personas. Running 10 validators on behalf of others takes ~30 minutes per month for an additional income equivalent to 33% - 50% of minimum wage in SEA — More details on this here.

Subscription revenues coming from this channel also grow with the price of the underlying crypto asset. For example, both staking rewards and the fee clip increase in USD terms when ETH prices increase.

And the best part? The skillset for running nodes on one blockchain is highly transferrable to another!

Alright, this sounds good on paper, but in reality, being a creator is already a 24/7 job — which means that only a small subset of creators will likely pick up the skills needed to run blockchain nodes.

How do we scale this model then?

How will this actually work in practice?

Scaling this model will require 2 types of players to partner up — the Creator and the Operator.

Operators are individuals who learn how to run blockchain nodes. They do not have their own following, so they take care of all the technical aspects of running the ETH staking pool, such as setting up, maintenance, and scaling. This leaves the Creators free to focus on distribution, which, in this case, is to attract TVL from their followers.

Given this method, there are 4 key components that I am working on — the pooling layer, education, hardware sponsors, and matching layer.

Pooling layer

Ethereum does not have a staking delegation feature on the protocol level. So first, we need a way for individual node operators to spin up staking pools on top of their home staking hardware.

An example of such platforms is Stakewise V3’s liquid solo staking vaults. Their vault marketplace is permissionless, so anyone who knows how to run ETH validator nodes is able to list their infrastructure here. Attracting their own TVL (total value locked), however, is something node operators have to figure out themselves.

Education

The next crucial piece of the puzzle is to impart the know-how of running blockchain nodes to non-technical people en masse.

And because I believe this model has the power to uplift the lives of many people in developing markets, we want this know-how to reach less privileged people — e.g. students and low-income earners in Southeast Asia.

At Stakesaurus, we create technical content on node operations and run workshops free of charge for students. However, working adults pay a fee that subsidises students attending for free.

We are currently working with local Web3 communities and universities across SEA to ramp up the reach of our workshops over the next 3 months.

Hardware

Despite the accessibility of being a PoS validator, it still requires an initial investment of US$700 - US$900 into hardware — a non-trivial amount to the less privileged.

Further, the payback period on hardware for new node operators can be extremely long if they are not able to attract sufficient TVL.

We are reducing friction on this front via sponsorship for hardware. Such sponsorships can be awarded to shortlisted node operators retroactively by batches. The selection and reimbursement criteria will be based on on-chain and off-chain performance metrics to mitigate abuse of this good-willed initiative.

In return, sponsors benefit from the PR value of showing Ethereum alignment and helping to improve the lives of underserved communities in SEA.

Matching layer

The heart of the stake-to-subscribe model is the partnership between creators and node operators.

Although the ideal scenario is to let both parties pair up organically, we expect that this matching process needs to be bootstrapped initially. The reason is that most of these new node operators will likely not have the network and credibility to secure a partnership with an already successful creator.

This is why Stakesaurus and our partners will need to serve as a curation layer by systematically selecting the best operators of each batch and recommending them to creators — e.g. by working with local creator communities.

We can also match node operators with TVL directly.

Diversification of yield sources is an important criterion of treasury management in Web3 projects. Tail risk events (e.g. correlation penalty) can instantly wipe out yields earned over a long time or even the entire staked capital. Smaller pools with locally hosted infrastructure are more robust against correlation penalties.

In fact, TVL matching is already being done indirectly if you are staking ETH via Rocketpool, Stader, Diva Staking, or even Lido.

How can you get involved?

As you can tell, this is a novel concept and will require quite a herculean effort to make work. So, any support is welcome and greatly appreciated!

Recapping the 4 key components we are focusing on — We’d love to chat if you are able to support any of the value drivers or fit our potential partner profiles.

That being said, feel free to reach out even if you don’t think you fit neatly into the table above!

Oh, and I’ll call this the Creator-Validators Initiative.

- Sam