Staking: the new Eldorado for businesses?

A breath of fresh air. "In the space of a year, the amount of cryptos immobilised in staking on portfolios has risen from 3% to 25%," boasts Johann Bornman, product manager at Metamask Institutional, the digital wallet developed by US start-up Consensys for businesses.

Staking is a process that involves immobilising cryptos to secure a blockchain. After a fairly quiet period, this paid activity has seen an unprecedented boom in recent months with Ethereum's move to proof-of-stake in place of proof-of-work. Ethereum is the second largest blockchain on the planet.

Now you can lock in your ethers (ETH) in exchange for an annual return of around 4% (financed by the protocol's money creation). For analyst firm Messari 🇺🇸, staking can be likened to a blockchain's "risk-free rate", which could be compared to US sovereign bonds.

Of course, just as the US can always go bankrupt, Ethereum could fail. Nevertheless, as this is not the most likely hypothesis, many see the staking return as the safest floor rate in an ecosystem.

This should therefore encourage more long-term investors to seek this form of return for their assets. First and foremost, companies that hold cryptos.

Overview on staking deposits and withdrawals on Ethereum. Source : Nansen

Many financial companies use it

"Until the Ethereum update we were only staking small amounts," explains the head of a European asset manager. "We significantly increased our positions after the successful transition to proof-of-stake."

On Kiln's side, a French start-up that has become a global benchmark for staking institutional players, the same trend is confirmed: "more and more brokers, trading firms and asset managers are showing an interest in staking in order to obtain returns on their cash", explains its CEO Laszlo Szabo.

Kiln recorded spectacular volume growth in 2023. "We have increased our sales fivefold since the beginning of the year", stresses Laszlo Szabo. The start-up currently has a 3.6% share of the Ethereum staking market, according to Rated Network.

Alongside it are a number of exchange platforms that also offer staking to their customers. American Coinbase has a 10% market share on Ethereum and also caters for institutional customers. The same is true in France, where Coinhouse offers staking on seven different protocols.

"Our users have tied up around ten million euros in recent months, two-thirds of which via Ethereum," says Nicolas Louvet, the boss of the French broker. "We had considerable demand. The market has evolved so much that today it would be malpractice for a platform not to offer such a product," he insists.

According to our information, Coinhouse uses Coinbase's services and does not manage any nodes of its own.

Up to 25% fees

"The staking offer is a godsend for exchange platforms, which can generate revenue in addition to trading fees," analyses Stanislas Barthélémi, consultant for KPMG.

On each staking reward, a platform recovers its small margin, which can be up to 25% for Coinbase. This cost is justified by operational management (running nodes), but it is possible to find less greedy alternatives.

The undisputed leader in staking is called Lido and charges "only" 10%. Unlike Kiln or Coinbase, Lido is not a company but a protocol based on decentralised governance exercised by LDO token holders.

Token holders vote to allocate ETH liquidity deposited in the Lido protocol to professional node operators (including Kiln). To date, there are 29 operators working Lido ethers and they account for 32% of the Ethereum staking market share.

The problem with Lido is that, being a protocol, it is poorly suited to the needs of institutional players. "Many professional players prefer to opt for a company that is well established," says Stanislas Barthélémi. Even if this choice is more costly, some traditional players prefer to avoid the risk of flaws in smart contracts as much as possible.

Credibility of activity

For Johann Bornman of Metamask Institutional, Ethereum's move to proof of stake has given the protocol credibility in the eyes of many traditional asset managers: "Beyond the financial gain, they see a concrete application of crypto by participating in securing a network."

This argument is also starting to work well with asset managers who want to offer products to their clients. On 3 September, WisdomTree, which has $87 billion under management, announced for the first time that it had integrated staking rewards for clients of its WisdomTree Physical Ethereum ETP (ETHW).

Franklin Templeton, which manages $1,400 billion 🤯 for its part, has also committed to staking by offering access to six networks including Ethereum and Polygon.

The traditional world still wary

"However, all these initiatives need to be tempered, points out Stanislas Barthélémi of KMPG, as very few traditional companies are getting into staking to make their cash flow grow."

Even if the activity is growing, it is still largely a minority. "When they receive crypto, companies very often exchange them for dollars or euros", he stresses.

Starting staking is in fact not yet within everyone's reach. The business requires a good knowledge of the subject. You also need to know how to choose the right partner to entrust your funds to. Not to mention the fact that there are as yet no tax rules specifically dedicated to staking in France (or, more generally, anywhere else in the world)...

"In application of the general rules, companies should logically consider that income from staking is taxable at its euro value as soon as it is received and even if there is no immediate conversion into euros," points out Alexandre Lourimi, a tax lawyer at ORWL. Before being included in corporation tax.

"Companies do, however, have the option of revaluing the amount of the assets on the basis of any loss of value the asset may have suffered over the past year", he adds.

So many difficulties mean that staking is still a business largely dominated by... private individuals. But with the structuring around a few specialist companies like Kiln, it should quickly take off with all companies that hold cryptos.