Pantera Capital Partners: How Retail Investors Can Participate in the Multi-Billion Dollar Staking Market

Original title: "Staking Tools"

Original author: Paul Veradittakit, founding partner of Pantera Capital

Original translation: Perry Wang, Chain News

Pantera Capital recently led a $4 million seed round for Stader Labs, an India-based staking DeFi protocol. In addition to Pantera, several top investors including Coinbase Ventures, True Ventures, Jump Capital, Huobi Ventures, Terraform Labs, Solana Foundation, Near Foundation, etc. also participated in this round of financing. With the protocol launching its mainnet in a few weeks, I think now is the right time to explain what Stader Labs does, how it fits into the broader staking ecosystem, and why we at Pantera are so excited about the work they are building.

What is the current staking situation?

This is an important moment for Proof of Stake (PoS) blockchains. Ethereum, the largest public blockchain platform for smart contracts, is transitioning to Ethereum 2.0, which involves a shift from the current Proof of Work (PoW) consensus mechanism to PoS consensus. Polkadot, Solana, Cosmos, Terra, and other well-known PoS public blockchains have experienced a surge in market capitalization, increased community excitement, and early adoption by developers.

Similar to the multi-billion dollar cryptocurrency mining industry, we expect PoS networks to release similarly sized rewards to participants (“validators” or “stakers”) who secure these blockchains, which have a cumulative market cap of over $350 billion and are expected to pay out over $10 billion in staking rewards in 2021 alone.

Source: Staked (Q2 2021)

While there are many staking products that serve institutional clients, such as Staked, the process is difficult and often daunting for retail investors. They must:

· Identify the validator and decide which validator to delegate their tokens to based on the validator’s fee structure, past performance, reliability, and other factors. This information is often limited, leaving consumers confused.

· Continuously monitor the performance of the delegated validators to decide whether to further diversify assets, move funds away from specific validators, change fund allocations, etc.

· Determine how to best deploy staking rewards, whether to re-stake, earn income elsewhere, or sell on the secondary market?

It is not difficult to see that all of the above tasks can quickly become a burden for many participants in the ecosystem, especially in the rapidly changing world of crypto.

As a result, most retail stakers lose money or expose themselves to unnecessary risk. For example, on Terra, only 20% of delegators stake through at least three validators, which makes them lose potential airdrops and incur a higher risk of being "slashed" (or punished).

In short, "smart money" can get the best staking strategy with its resource advantages and 24/7 monitoring. However, this is not the case for stakers with smaller funds.

This asymmetry also has a negative impact on the decentralization of these networks. Since retail crypto holders typically stake through large, reputable validators - and often put all of their eggs in just a few baskets - the result is that large validators have outsized influence over the network. For example, Terra’s top 30 validators contribute over 70% of the network’s staked supply. Similar dynamics are seen on other blockchains. While these words may sound alarmist and may not be entirely justified, we should be looking for ways to reduce the risk of such whale collusion.

Source: Solana Beach

What is Stader, and how does Stader address the above issues?

Stader is a DeFi protocol that aims to bring staking rewards to the masses. The Stader protocol allows users to easily deploy tokens into complex staking strategies with just one click.

Of particular note, Stader has several key features:

· A variety of structured staking financial products ("pools") composed of different validators with different risk tolerances and strategies. Users can determine which pools they find attractive based on their investment philosophy, similar to buying a staking "index fund".

· Liquid staking, eliminating asset lock-up periods in some delegation mechanisms.

· An optional auto-compounding feature so that users don’t have to manually re-set their earnings.

· Simple airdrop claiming. For Terra in particular, this ensures that users don’t miss out on valuable airdrops for Mirror, Anchor, and other tokens.

Source: Stader

These features enable retail stakers to maximize their staking rewards when delegating, while alleviating many of the headaches caused by the current process. Additionally, the Stader protocol encourages decentralized allocation of assets between validator nodes, which helps to enhance the decentralization of the entire network.

Source: Stader

After iterating on feedback from over 500 beta testers, Stader is preparing to launch its mainnet in a few weeks. The team is first entering the Terra ecosystem, where billions of dollars of LUNA are staked, but the retail staking infrastructure is still quite primitive. The Stader team is also actively seeking integrations with many of the most popular DeFi protocols in Terra, most notably Anchor and Mirror.

But Stader’s reach is certainly not limited to Terra: many of their features will be attractive to stakers on many other PoS blockchains as well. The team is currently building a minimum viable product (MVP) on Solana, which will be available soon. Expansion to other prominent PoS chains — specifically Ethereum, Polkadot, Polygon, and NEAR — is also on their medium-term roadmap.

Later this year, Stader also plans to launch the protocol’s native token, which will be used for many in-protocol activities. While the precise token economics have yet to be unveiled, it is known that the token will derive value from its governance utility and a percentage share of protocol revenue.

What will the future hold for Stader?

While Stader’s current yearn.finance-like products are the infrastructure that the current ecosystem lacks, their grand vision does not stop there, but hopes to push the entire staking industry to a higher level in the long term.

The first is to build a powerful “staking API” that can be easily used by third parties. This allows institutions, wallets, DeFi protocols, and almost any participant in the decentralized world to instantly access a variety of staking services. Stader hopes to become the middleware for staking services, allowing DApp developers, professional investors, and everyone in between to get staking rewards without pressure.

Stader is also eager to build a launchpad with staking rewards, while giving stakers on every blockchain exclusive access to new project token . New projects in DeFi, NFT, games, and other fields can benefit by raising funds from true believers in the ecosystem (long-term stakers). With over $10 billion worth of staking rewards paid out annually, launchpads with staking rewards could become a new way for new projects to raise funds, spurring mass action across the blockchain community.

As gaming continues to intertwine with blockchain (a trend I explored recently), Stader could even allow game developers to incorporate staking into their games. PoolTogether is a simple no-loss savings game that utilizes a shared pool of funds for yield farming, with the interest earned randomly distributed to winners. Similar logic could be applied to staking. It’s not hard to imagine players staking assets as an alternative to in-game purchases, or even entire games centered around earning rewards. Stader could be the go-to infrastructure for game developers who can then worry about staking funds without having to worry about the mechanics of staking.

In addition to lending, investing, and saving, cryptocurrency holders now have another economic activity: staking. As staking becomes more common and controls an increasing share of the ecosystem's funds, the market urgently needs to provide instant, efficient, and elegant staking delegation services to the masses.

Stader is expected to achieve this challenging (but very important) goal.

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