This is a continuation of my original post on the state of Ethereum staking in Latam: The economics of Ethereum staking in Latam: the real business of staking lies on underrepresented regions.
Exploring the problem space
In my previous blog post, I presented the case for Latin America as the place with the greatest potential for the betting industry due to its unique characteristics. In this follow-up article, I will delve deeper into the challenges we face while covering possible solutions taking into account the new technologies that are about to hit the market.
First let’s look at the problem space. When wanting to stake Ether, individuals and institutions usually look for:
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Performance guarantees
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The ability to handle large volumes (scalability)
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Good BizDev/DeFi integrations
Let’s look at each one of these:
Performance guarantees:
There’s no point in staking with an operator that’s unable to ensure a decent (ideally near-perfect) uptime. Remember there’s money at stake and underperforming just means the user will take worst returns than expected.
Generally speaking, our internet connection isn’t the most stable and in a lot of places we see power outages with some level of frequency. Guaranteed performance is indeed an issue.
Thankfully the Ethereum ecosystem has been working on redundance solutions, commonly known as Decentralized Validator Technology (DVT), where the key of the validator is split between multiple nodes while constantly being rotated. Which results in significantly better performance for the validator.
Scalability:
A fully-fledged service must be able to handle large volumes without issue - for example, Lido was able to handle a withdrawal request of 400k $ETH while constantly receiving thousands of deposits.
Being realistic, coming close to Lido’s capacity is really hard, but if we aren’t prepared for some level of volume, we’re just ngmi.
How we solve this, while being as aligned as possible with empowering solo stakers, is by creating a ‘path to staking’.
Path to Staking
Recruitment of new operators is crucial to help the system grow, therefore you need to have demand for people wanting to operate nodes that are also able to provide proof of enough competency and resources to do so succesfully to not affect the performance of the pool.
On the Path to Staking, we encourage individuals to start validating on testnets or blockchains like Gnosis (where the stake requirement is ~100 USD). By sharing their validator dashboard and demonstrating their ability to run a validator with good metrics for a X period of time, we can onboard them into the pool.
Here we (i) ensure growing capacity for the pool (ii) grow the amount of trained solo stakers and (iii) improve the geographic distribution of nodes.
BizDev:
This is probably the most important section, breaking even with this service means we’ve done an outstanding job at making institutions (DAOs, funds, etc.), which are the ones to move the needle here, feel comfortable enough to use our services versus competitors.
First things first, we must have a competitive enough service, there’s just no way around that, and that’s the reason performance guarantees and scalability are important.
But even if we have a good-enough product, that may not be enough. Some ideas:
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Social consensus. I talked about this on the previous blog post, if we can have enough social consensus in the community about the importance and benefits of geographic decentralization, using such service is an immediate PR/marketing win for any player. This overall is very effective within the Ethereum community.
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Extended benefits. Carlos calls this ‘KipuStakers as a Service (KSaaS)’, a region-wide like ETH KIPU can offer packages with extended benefits for projects willing to use the service for a determined amount of time - ‘Stake X Ether during X time and get other benefits like sponsoring ETHLatam, or grassroots activities with our network of local communities and more’, making it very attractive to delegate funds (remember they don’t even lose the funds and still get market-standard returns!).
Exploring the Numbers:
Now let’s delve into some quick numbers to see how really viable is this crazy idea. Currently, staking’s APY ranges from 4% to 6%. Considering a full 32 ETH validator, the estimated yearly earnings amount to approximately $2,980 USD at current prices.
Costs and Revenue:
If we consider the average monthly internet bill to be $50 USD for 100Mbps, we can deduce that a full validator’s earnings would be enough to cover this expense.
For instance, with a cluster of 4 validators, we would need at least one full validator to earn $200 per month, covering the monthly internet expenses. Considering the annual earnings of $2,980, the monthly revenue from a full validator amounts to approximately $248 (about $62 per node). - but this assumes we get to keep 100% of the rewards, which isn’t realistic.
Currently protocol fees range from 10% to 15%, split between operators and the protocol. This means we need 10x more Ether (320 $ETH) than the last example to just cover the internet bill. Ideally we’d get at least 15 validators (480 $ETH) for a cluster of 4, which gives a bit more of room to have this split between operators and the protocol.
And if we wish to have one node in each of the ~20 Latam countries, 75 validators (2400 $ETH) seems like the bare minimum to get this going. Not a small amount, but definitely attainable, this is what we’re working towards at KipuStakers.
With this one I close for now my writings on staking and complete the 3 weeks of publishing for ethereum.org’s writing cohort!
Far from feeling like I’ve delivered the quality of content I wished, it’s been an awesome experience and I hope to keep publishing content on a regular basis with Crypto Writer’s Guild in place.