Institutional investors are either the bane of crypto, or its savior. It just depends on who you ask. For some, major institutional involvement is a validation of the theory that digital assets must have inherent value – after all, risk-aversion is a well-established characteristic of those who are accountable for the funds of their clients.
For others, the participation of institutions is a self-fulfilling prophecy that will lead to the further economic domination of the banking class, rather than the repudiation of inequality.
And then there are the others – because there are others.
Institutional in scale, in risk-tolerance, and in an unabashed profit motive: yet willing to disrupt the banking industry and embrace disintermediation, to decentralize finance and return some of the resulting yield back to investors instead of sinking it into further profits for Wall Street.
There aren’t many in this category, but the technology that is enabling them is here – and the infrastructure to support their mission is also arriving.
It just may not be fast enough for some.
Shaking Up Staking
Alex Mashinsky of Celsius Network heads up a company that has already lent $2 billion at a lower-than-average interest rate, while allowing those who deposit their tokens to earn interest on their stake. As we’ve mentioned in the past, Mashinsky is not shy about his mission to change the way banking works.
— Alex Mashinsky (@Mashinsky) July 28, 2019
“When you make a deposit at JPMorgan or Citi, they pay you one percent then they turn around and lend me your money on my credit card and charge me 25 percent,” Mashinsky explained to Crypto Briefing recently. “So they keep 95% of what they make from it. And they can get away with it, because they have a license and we can’t get around them. They’re just sitting in the middle [being] toll collectors.”
Celsius has been working with Battlestar Capital, a staking-as-a-service company, and BitGo, a crypto custodian, to provide a service that relies on the three core competencies of the companies.
The idea behind the “three legs of the stool” is simple: Celsius lends fiat currency against crypto assets; it then takes the crypto collateral it receives from its borrowers and works with Battlestar to stake those tokens; the return from this arrangement allows it to offer lower interest rates to borrowers, and to actually pay stakeholders based on the returns earned from validating PoS transactions. Meanwhile, the funds are insured for up to $100M by BitGo, which represents a crucial safety net for institutional investors.
Many proof-of-stake tokens offer attractive rates of return, including large-cap coins such as Dash. But while Dash, for example, requires a minimum of ~$105,000 (1000 DASH) in order to earn rewards, Mashinsky has categorically stated that this doesn’t come close to the level of democratization he demands as he builds his crypto lending business.
“It shouldn’t matter if you have one coin, or a thousand DASH tokens – everybody should be rewarded for staking their tokens equally,” claimed Mashinsky.
One of the key benefits of BitGo’s solution is the depth of its tech stack— but such depth can lead to lengthy lead times for adding new staking tokens. There are some interesting new players in the Custody space, such as Fireblocks and Paxos, which Stone believes will react more nimbly to the rapidly-evolving staking business.
“If we want to stake a token like Qtum, it can take BitGo six months to provide support for that,” explained Jason Stone of Battlestar Capital. “That’s just far too long in a market that’s moving this quickly. I think if someone built an insured staking service that was a lot more proactive, there would be tens of millions of dollars’ worth of crypto moving into that business almost immediately. If they build it, we will come.”
While the concept of providing insured custodial services is not entirely new, the blending of models is, admits Mashinsky, “hard to find”.
“You’re looking at companies that have grown up doing one thing, and now to lead the market they need to do at least four. Lend, stake, guard, and insure. And they need to do this at a variety of scales that meet the needs of both the retail and the institutional investor,” he explained.
Peace of mind is not a commodity that’s always on tap in the crypto industry – but if Mashinsky and Stone get their way, they believe that a mass influx of institutional money could be the result.
“The value proposition is almost ridiculously strong,” said Stone. “This model means your underlying asset is safe, you’re earning rates that are among the best available in any asset class due to the disintermediation, and you’re still exposing yourself to the potential for significant value appreciation over the long term.”
“If that doesn’t get them rolling in, I’m not sure what will,” he added.