Coinbase and a source of income for retail and commercial owners of cryptocurrencies utilizing the proof-of-stake protocol. The opportunities to “earn” will grow meaningfully with the Ethereum merge anticipated for later 2021, which will boost the size of the proof-of-stake ecosystem. Furthermore, we are witnessing significantly faster growth of the proof-of-stake ecosystem as new tokens increasingly follow the proof-of-stake protocol rather than proof-of-work, in part reflecting concerns about the energy consumption and resource utilization needed to mine Bitcoin and other proofofwork tokens. We estimate that staking is currently a $9bn business for the crypto economy, will grow to $20bn following the Ethereum merge, and could get to $40bn by 2025 should proof-of-stake grow to the dominant protocol. We see Coinbase possibly getting to a $500mn staking revenue run rate by the end of 2025.

 Proof-of-stake explained. Proof-of-stake is the smaller of two primary protocols used to validate transactions on the blockchain for cryptocurrencies. Owners of proof-of-stake tokens can act as cryptocurrency validators themselves or outsource to staking intermediaries, putting a portion of their token holdings “at stake” in order to earn a position to validate the blockchain. As compensation, those selected to validate the blockchain earn in-kind (generally) cryptocurrency rewards that can be interpreted as investment income, generating a yield for token holders.

 Staking is one of the ways cryptocurrencies generate income yield for token owners. The crypto economy continues to evolve and now offers a number of ways to generate investment income, sometimes very meaningful investment income.

Token holders can generate “income” by lending tokens to other investors for a fixed yield, generally protected by overcollateralization of the borrower. In addition, owners can commit their cryptocurrencies as sources of liquidity in trading, collecting a fee similar to what equity exchanges pay liquidity providers called the “maker” rate. Staking is another way to drive investment income. Although staking income tends to be lower than lending / liquidity services, it also seems to have much lower risk of fraud and theft and is more predictable and recurring.

 Staking makes the crypto ecosystem more attractive as an asset class. We think staking will make the cryptocurrency marketplace increasingly attractive relative to other asset classes, yield-generating or not. While tokens issued as rewards for validating the blockchain create a natural token inflation, the process does allow those that stake to earn positive real returns/real yields. Not only does staking lower the opportunity cost of holding cryptocurrencies versus other asset classes, but in many cases cryptocurrencies pay a significant nominal and real yield. As the volatility of cryptocurrencies falls, we see the ability to earn a positive real return as one of the factors driving the cryptocurrency market to become more mainstream.

 Staking as a meaningful revenue opportunity for the crypto economy and for exchanges such as Coinbase. We estimate staking is currently generating $9bn of revenue for the cryptocurrency ecosystem, divided between the intermediaries that act as validators and the end token owners that delegate their token holdings.

Exchanges such as Coinbase provide staking infrastructure/expertise that leverages end-customer cryptocurrency holdings to maximize the income earned for their clients, which earns exchanges commissions/spread for themselves. We see staking as an increasingly large revenue pool for intermediaries and estimate it is a ~$200mn revenue opportunity for Coinbase in 2022, up from $10.4mn in 2020.