Crypto traders have staked billions of dollars on Kraken over the last year to earn interest. The exchange’s product chief explains what staking is, and shares 3 of the top-yielding tokens on its…

Jeremy Welch
Jeremy Welch is the chief product officer at Kraken, the fourth-largest crypto exchange by trading volume.

  • Jeremy Welch is the chief product officer at Kraken, the fourth-largest crypto exchange.
  • Welch breaks down what staking is in crypto and shares a development called parachain auctions.
  • He also lays out a key risk in staking called slashing, which penalizes misbehavior on networks.
  • See more stories on Insider’s business page.

When JPMorgan puts out a research report estimating staking as a $40 billion business opportunity for the crypto economy by 2025, it probably means that the niche industry has become too big to ignore.

So what is staking?

At the most basic level, some investors have interpreted staking as a type of high-yield crypto savings account that generates lofty interests for cryptocurrency or token owners; others liken the act of staking to holding stock in a company where investors might get voting rights and dividends in exchange for keeping the shares.

However, neither is exactly accurate on a deeper level. “What’s happening is you have these cryptocurrency networks and the cryptocurrency networks need a way to decide the direction of the chain and consensus,” Jeremy Welch, chief product officer at crypto exchange Kraken, said in an interview.

Whereas bitcoin is built on the proof-of-work system that rewards its miners for solving complex equations, other cryptocurrencies, such as ethereum 2.0, use proof-of-stake that requires users to “stake” their ether tokens to become a validator in the network.

“The chain architecture is taking cryptocurrency that you own in that protocol, and enabling you to deposit into accounts to show your ownership, ” he said. “And by actively doing that, you’re getting certain permissions around potential voting rights, and helping to secure the network. Cryptocurrency owners are their engagement with the network. And in return, you get a reward from the cryptocurrency network.”

How to earn rewards by staking

There are two main ways of staking, according to Welch. One way is to run one of the nodes of the cryptocurrency by downloading the software code and running that software code. Another option is to utilize the services of providers such as Kraken, Coinbase, and Binance.

“In Kraken’s case, we are running the cryptocurrency node, the special software, for our clients,” he said. “Clients can deposit their funds and we are able to actually lower the barrier in terms of the minimum amount needed to be able to stake.”

Kraken is able to offer clients access to staking with lower overhead because the firm spreads those minimums across many clients, according to Welch. Among crypto exchanges, the firm, which offers staking for 12 tokens, has been a leader in terms of the number of assets staked.

“Billions of dollars worth of assets have come onto Kraken to these stakes in just the last year or so,” he said, adding that assets staked in ethereum 2.0 alone on the platform have crossed $1 billion.

Kraken’s staking platform added Cardano (ADA), Solana (SOL), and Flow (FLOW) this year but its highest-yielding staking assets are Polkadot (DOT), Kusama (KSM), and Kava (KAVA), which offers between 12% to 20% yearly rewards.

Aside from its staking platform, the firm also introduced a new protocol feature called parachain auctions, which are essentially options to build new chains on top of Polkadot and Kusama.

“You could take tokens that you’ve earned from staking and you could actually allot some of that towards one of these parachain auctions,” Welch explained. “If your auction wins, then you do get another reward there and you’re helping make sure one of these projects launches, which is really cool.”

The risks of high rewards

With high rewards, comes risks as well. One of the key risks for staking is slashing, which refers to when validators lose staked tokens due to malicious behavior or network accidents.

“The cryptocurrency protocol itself is designed to look for nodes that are staking properly, and to look for nodes that might be doing strange or malicious actions,” Welch said. “The nodes might go offline if someone doesn’t have a good internet connection or if they are not keeping the node updated and maintained, and if those things happen the node will get ‘slashed’ or penalized by the network.”

That means a high level of diligence and vigilance for people who are staking on their own.

“If you are running your own node, then you have to maintain it,” he added. “If you’re sticking with that node, then you need to make sure that it stays healthy so that you’re not running one of these slashing risks.”

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