While the world anxiously awaits the approval of a spot bitcoin exchange-traded fund (ETF) in the US, there is another crypto innovation that promises to unleash a flurry of economic activity, enabling an even bigger wave of mainstream adoption and consolidation in global finance. system.
This article is part of CoinDesk „Stocking Week.” Christopher Perkins is a Managing Partner and President of CoinFund.
It’s the advent of crypto-native staking rates, made possible by proof-of-stake (PoS) blockchains like Ethereum, that will offer a similar application of traditional interest rates – closing a key gap in its evolution and development for the crypto-economy.
In traditional finance, interest rates underpin the world’s largest markets and act as a fundamental pillar of economic activity. Staking rates will power the next generation of financial products, improve risk management, and unlock new functionality for institutions and consumers alike by providing a new class of standardized benchmarks in the crypto industry.
Staking rates are to crypto what interest rates are to traditional financial markets.
Interest rates drive modern economies. In traditional finance, interest rate decisions are highly centralized, controlled and reserved for the highest levels of government. Eight times a year, the Federal Open Market Committee (FOMC) meets to determine monetary policy and set interest rates in the United States. Each decision of its 12 members has long-term consequences for the global economy, affecting monetary policy, the unemployment rate and consumer behavior.
Interest rates serve as important financial criteria for borrowing and lending, and are used in valuations and asset pricing. They determine the cost of capital for the business. Interest rates power trillions of dollars in financial products, and the interest rate swap market only underpins them. $500 trillion In hypothetical terms, this makes it the largest derivative asset class in the world.
Until recently, the crypto industry was without anything close to fiat interest rates, leaving a huge gap that slowed its evolution and made it relatively inaccessible to the majority of market participants.
Ethereum, however, became the source of the stake „The Merge” A standardized staking ratio for the protocol – similar to the traditional “risk-free” ratio – was born. Standardized staking rates like CoinFund CESR Measure the income paid to qualified moderators by looking at the collective Ether (ETH) staking rate, the average they receive, the annual protocol awards and transaction fees. (Disclosure: CESR is based on CoinFund’s staking rate system and is calculated, published and licensed by CoinDesk indices.)
A decentralized and truly global version of traditional interest rates can provide uniform utility to market participants, help measure performance, hedge risk and create new financial products. It can be provided without opaque and centralized control over central bank decision-making.
In traditional finance, borrowing, lending and derivative products are often priced relative to a fixed benchmark that provides a basis for comparison and evaluation. It provides transparency and certainty when market participants pay or receive prices above or below a known reference rate calculated by a third party, rather than being subject to something arbitrary and dictated. As a result, service providers may compete in relation to a common reference. As applicable to the crypto industry, staking providers that pay yields relative to an industry benchmark promise to attract a new class of clients who demand the transparency of standardized rates.
In addition to financial benchmarks, standardized stacking rates serve as reference rates in derivative contracts, including listed futures, swaps and options. Derivatives enable risk management (i.e. hedging) and speculation by shifting risk in an economic system.
In traditional markets, interest rate swaps allow users to swap fixed and floating liabilities, making fixed rate products possible. Demand for fixed rate financial products is almost insatiable: interest rate swaps are the largest derivatives markets in the world. Staking rate swaps (fixed and floating) can provide the same utility to the crypto industry by adopting standardized staking rates. By entering into staking rate swaps, staking service providers can offer attractive fixed yields to a new class of institutional and retail clients.
Meanwhile, other industry participants may be attracted to the real yield of the floating side, while others may seek to limit the spike in transaction fees as gas prices balloon and the floating rate increases.
Derivatives markets become illiquid when they provide real utility for hedgers, while also attracting speculators to take on risk. All the elements of deep, liquid derivatives markets abound in the crypto economy with the introduction of standardized staking rates. Clear stacking rate swaps and listed futures have the added benefit of mitigating counterparty risk by providing unbundling and central clearing – a challenge across the crypto industry – while DeFi derivatives and perpetual swaps can also play a role in hedging and forwards. Basis swaps can serve as a new on-ramp for investors looking at the relative trajectory of traditional interest rate yields versus stacking rates.
Standardized stacking ratios will play an important role in new financial products. While a spot Ether ETF is welcome in US markets, investors will demand a total return Ether ETF driven by standardized staking ratios. A new class of structured products will enable investors to benefit from the real yields offered by shareholder Ether, a sometimes non-inflationary asset that competes well with its traditional counterparts.
With nearly infinite use cases, standardized stacking ratios will create a new stacking economy. Like traditional interest rates, they promise to usher in a new era of innovation across the crypto ecosystem as a new staking economy is born. As the forward curve unfolds, stacking ratios can be used to inform valuations as a discount rate, to calculate Sharp proportions And do everything its fiat interest rate counterparts can do without the need for central control. The time has come for standardized staking rates.