Coinbase has announced it is to start offering staking rewards to its customers in the UK and certain EU countries, which could offer around 5% interest on the Tezos they hold in their wallet.
Cryptocurrency exchanges could use staking to effectively pay their customers interest at more competitive rates than is on offer at traditional banks and blur the lines between what is a bank and what is not.
Having launched staking rewards on Tezos for US customers in November, Coinbase is now rolling out the offer to the UK, France, Spain and the Netherlands.
Zeeshan Feroz, Coinbase’s UK CEO, explains to Finextra Research that “fundamentally, as a consumer you have the ability to own a coin and earn a reward on top of it, while folks like Coinbase do the work behind the scenes to participate and support the network.”
What is Tezos and what is staking?
Tezos is one the newer crop of cryptocurrencies, having launched in September 2018 after raising $232 million via an ICO.
Its network is based on ‘proof of staking’ protocol, meaning it does not involve the mining work and the huge electricity output involved that other cryptos like Bitcoin are built on.
Staking is a process where users hold funds in a cryptocurrency wallet to support a blockchain network’s operation.
Where most cryptocurrencies networks are supported by “proof of work”, staking relies on “proof of stake”, allowing blocks to continue to be added without the energy-intensive mining.
Instead of users of the network competing to add the next block by solving complex mathematical problems, they are chosen as validator of the next block based on their current stake in the network.
Some commentators therefore suggest that PoS is a more scalable and sustainable model for a blockchain than PoW, because it lacks the burden of excessive electricity use.
“Proof of stake serves the same purpose as mining, but it uses no energy,” Feroz says.
“In mining, you show your commitment to the network by using a lot of energy, but in staking you’re saying, ‘I’ll wager what I own in order to secure this network’.”
Feroz sees reward programmes such as this as “the building blocks that mirror some of the structures and incentives in the traditional financial system.”
Banks and non-banks
Earning rewards for holding an asset bears similarity to earning interest on a savings account, which will raise questions over whether Coinbase is attempting the trick of becoming a bank in all but name.
By giving its customers around 5% reward for holding cryptocurrency on its exchange, Coinbase is offering a rate of return above and beyond anything like to be found in a savings account at high street banks.
“I think this is loosely comparable to interest,” Feroz says. “Yes, you have some sort of earning based on the amount you hold.
“However, it is fundamentally different from interest because there’s risk in it, and you are earning those rewards by…