What’s at Stake in Proof-of-Stake?

tl;dr: the emerging Proof-of-Stake models offer the potential for consistent yields on crypto-assets. At the same time, new questions remain about the long-term impact and consequences of staked networks.

This is a follow on to yesterday’s post, How Much Skin Does Everyone Else Have In The Game?

There, we dove into the percent of a network’s token holders that have staked. Today, I wanted to explore another aspect of staking.

Particularly so, because a large number of networks are launching as Proof-of-Stake.

Combine that with the emergence of Staking-as-a-Service and there’s going to be an entirely new set of issues such as taxes, yield management, and network governance issues, that didn’t exist before.

Staking is a Fool’s Errand?

Ben Davenport wrote a post called A Stake to the Heart, which argues that the rich get richer (they get a portion of the block rewards) while those who didn’t stake, start to “lose ground.” Eventually, power is concentrated.

What’s more, he argues that the tax implications (at least for US residents) of earning income from staked assets will make it sub-optimal or even onerous.

For him, staking is a long-term losing proposition.

Staking Delivers Value

In rebuttal to this, Crypto Explorers alum, Michael Kogon wrote Proof Of Stake: FUD vs Reality and challenges Ben on all three points.

Staking as Penalty For Non-Stakes. Not the case according to Michael, because those who don’t stake are choosing the convenience of liquidity. The difference between cash deposit and CD

Staking Yield Taxation. Again, Michael challenges this and links to the IRS Guidelines to do so. Basically, yield on a staked asset is like the yield on any other asset.

Wealth Transfer..Michael argues that those who don’t stake get wealth in a different way, by the accrual of the token price which they can liquidate on exchanges.

I realize that these may seem like “in the weeds” stuff, but for me, there’s a very exciting element to this.

We are watching innovation happen in real-time (Proof-of-Stake) and it is crashing into markets/real world (taxes, centralization of power, etc.)

It’s in this collision, tension, and for that new models are formed and new opportunities are created.

To see it happen and to be able to participate in it at its inception. For me, that is just very exciting because the lasting impacts of what happens in these debates and technical decisions will be felt for years to come.


What’s at Stake in Proof-of-Stake? was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.