1st Dec: The most important crypto date since the launch of Bitcoin
Arguably the most important event in cryptocurrency history, since the launch of Bitcoin in 2009, is scheduled for 1st December 2020: launch of the Ethereum Beacon Chain.
Earning 15% on a currency?
The Beacon Chain sounds technical, but in practical terms, it means that any of the holders of the second-largest cryptocurrency (around $40 billion is held, about a fifth of Bitcoin’s figure) will now be able to earn perhaps as much as, initially, 15% per annum, by staking their holdings. Staking may sound technical, but for many investors, there is nothing technical about 15%.
Staking can be thought of as a contract with three parts. First, you promise to honestly choose the correct entries to go into the distributed ledgers that record cryptocurrency transactions. Second, you put your holding into an escrow account, where it is held as surety for your honesty (hence the term “staking”). Third, you are paid a fee, unless you are dishonest, in which case you are subject to loss.
Bye Bye Banks
In the old-fashioned world, the core function of banks is remarkably similar to what staking achieves. Banks record transactions in a ledger (previously using quill pens, nowadays on a computer). They receive fees for this, either directly, by charging their clients for debits and/or credits, or indirectly, by levying monthly fees and charging a high interest rate on overdrafts, and through numerous other routes. They use this income to pay their costs, including wages, and the remainder is profit that goes to the shareholders.
So staking puts holders of a cryptocurrency in a position similar to the employees and shareholders in a bank. They are paid to ensure that transactions are correctly recorded.
When you make a payment, you may think in terms of money moving out of your account into someone else’s, but of course, nothing is physically moving; all that happens is a debit entry in the ledger against your account, and a credit entry in the other person’s. This principle is just the same in both the old world and the crypto world.
The fourth function of money
Up to now, the two largest crypto units, Bitcoin and Ethereum, looked very snazzy but were really rather old-fashioned, in the sense that all they could do were the three things that currencies have done down the ages: store of value, medium of exchange, and unit of account. With staking, a fourth thing is added: the currency becomes the bank.
I’ve recently watched some videos on crypto by respected academic commentators. One of their themes is that cryptocurrencies don’t fulfil all of those three old functions very well, implying that they aren’t very good currencies, maybe not even currencies at all. But that’s like saying the internet isn’t a good source of news, because you can’t fold it up and use it to make paper darts or wrap fish and chips in, like you can with old-fashioned newspapers. Cryptocurrencies, like the internet, do things that could never have been conceived of with the old medium.
Bitcoin can’t be staked, but can still benefit
Three more points to finish with. First, staking is not new, you can already do it with recently-launched Polkadot and some other small cryptocurrencies. One or more of these may yet become successful but currently they are small; it’s the sheer size of Ethereum that makes staking of it so important. Second, transactions in Bitcoin are recorded by “miners” who use large-scale computing power to solve puzzles, most likely that will never change. But Bitcoin is at the heart of the cryptocurrency ecosystem, its ubiquity and tested robustness make it unique, so for investors it’s a natural complement to hold in a crypto portfolio alongside stakable units. Thus, the value of Bitcoin can still be underpinned by the rewards earned from staking holdings of other cryptocurrencies. Third, staking is really only the start of what cryptocurrencies can eventually do, they can be used to drive futures and derivatives contracts, embedded in the heart of physical supply chains for goods, and more.
Summary: 1st Dec is the big one
In short, cryptocurrencies can take over most of the current functions of banks, and logistics, and accounting, and stock exchanges and so on. Cryptocurrencies can still do all this even if most people never hold them directly, because they can link with future digital currencies issued by the central banks and operate in the background, rather as many people drive a car without ever looking at the engine.
The start of staking in the second largest crypto unit is a crucial step down the route to this new future, and the prospect of getting good single digit, or even double-digit, yields will draw many new investors in. That’s why 1st December 2020 matters so much.