J.P Morgan CEO, Jamie Dimon and two senior analysts at the firm argued in a report that as blockchains begin to operate more energy-efficient networks, a new way to make money, called staking, will gain traction as a source of revenue for institutional and retail investors.
J.P Morgan is an American multinational investment bank and financial services holding company. The company has participated in the cryptocurrency market since 2018 through its Blockchain Center of Excellence. In 2019, the bank launched its stablecoin representing the US dollar, JPMCoin. In March, J.P Morgan began offering clients Bitcoin exposure.
Currently, the Bitcoin and Ethereum blockchains use an energy-demanding process called proof-of-Work (PoW) to maintain the integrity of their blockchains, ensure all transactions on the network are valid and make sure the network’s distributed record is accurate.
The PoW system has been criticized by many to be energy-intensive and bad for the environment as the energy used to run these networks are not sustainable.
To create a more scalable and energy-efficient system, the Ethereum blockchain is switching from a PoW system to a Proof-of-Stake (PoS), in an upgrade called the Ethereum 2.0 in 2022. With this upgrade, investors lock up their funds on the blockchain in exchange for rewards.
Ethereum 2.0 was scheduled to launch in January 2020 and is now expected to enter its final launch phase in 2022.
The current market capitalization of PoS tokens is over $150 billion, according to the report. The report predicts that the ability to use cryptocurrency assets to earn yield through staking will make digital assets more attractive and help to grow mainstream adoption of cryptocurrencies.
According to the report, staking today generates an estimated $9 billion worth of revenue annually for the crypto industry. The report predicts that Ethereum’s transition to PoS in its long-anticipated Ethereum 2.0 upgrade in 2022, could push payouts to more than double, to $20 billion. It also projects that staking yields across the blockchain industry will double again to $40 billion by 2025
Currently, staking cryptocurrencies like Solana’s SOL or Binance Smart Chain’s BNB can earn yields ranging from 4% to as high as 10% annually, according to data from stakingrewards.com. The report predicts that as the volatility of cryptocurrencies decline, the ability to earn positive real return will be an important factor in helping the market become more mainstream.
The report stated, “Not only does staking lower the opportunity cost of holding cryptocurrencies versus other asset classes, but in many cases, cryptocurrencies pay a significant nominal and real yield. The yield earned through staking can mitigate the opportunity cost of owning cryptocurrencies versus other investments in other asset classes such as US dollars, US Treasuries, or money market funds in which investments generate some positive nominal yield. In fact, in the current zero rate environment, we see the yields as an incentive to invest.”
What this means
The report predicts that staking will become a growing source of income for everyone including cryptocurrency intermediaries like Coinbase. It estimates that Coinbase’s staking revenue could grow by approximately 1,820% to $200 million, up from $10.4 million in 2020.
The potential ability to earn consistent positive yield through staking cryptocurrencies is dependent on market volatility. For example, Ethereum’s competitor, Solana lets investors stake SOL and earn SOL as rewards. If the value of the SOL token were to tank, there would be no real gains. This is true of any staking cryptocurrency but as the cryptocurrency market matures and volatility decreases, staking will likely become a more reliable source of revenue.
Staking is an opportunity to earn passive income especially for long term holders of cryptocurrency tokens that operate on a PoS. Although volatility is its downside, its potential to be an investment option for institutional organizations and retail traders is very strong.
J.P Morgan is reportedly preparing to offer select clients a Bitcoin fund which is expected to launch during the summer.