It seems that Proof-of-Stake blockchains are appearing on the radar of one of the world's largest banks, JPMorgan. While Wall Street seems enamored with Bitcoin and Ethereum, which both are Proof-of-Work chains, the staking applications on PoS is appealing to the bank.
The recognition is driven, in part, to Ethereum's anticipated switch from Pow to PoS next year. If this takes place, the jump, according to the bank, in total monies earned will skyrocket.
Hunt For Yield
Our present financial system is causing investors to go on a hunt for yield. No longer do traditional assets such as Treasuries pay much. This is the result of the zero interest rate environment we find ourselves in.
Many feel this led to a push towards equities. Few doubt the stock market is pumped well beyond what is considered reasonable value. The challenge is that, without many alternatives, people are stuck there. Outside of junk bonds, few things are offering much of a return.
Some believe that interest rates are bound to go up. This is something that is unlikely since the Central Banks backed themselves into a corner from which they cannot escape. It they start raising rates, or tightening to any great degree, the markets will simply crater.
I put together this article a few weeks ago explaining why the Fed would not be tightening for long.
Since we are in an era of low interest rates for the foreseeable future, investors are going to be looking for yield. JPMorgan believes that DeFi returns as a result of staking on PoS blockchain could be the answer.
DeFi Outside Of Yield Farming
Yield farming got all the attention over the past year. The media likes to sensationalize things and what took place in the yield farming arena was an easy target. However, if we look past that, we see a true financial network being established which is providing outstanding returns.
According to JPMorgan's numbers, people are presently earning around $9 billion per year by staking their cryptocurrency on PoS chains. It believes this number will double when Ethereum switches to around $20 billion, working its way up to $40 billion by 2025.
In other words, there is a fair bit of money in play.
We often lose sight of what is taking place in the world of yield. In cryptocurrency we discuss "mooning" and "Lambos". Everyone is looking for the 100x token.
This is not how these Wall Street types think. Their entire world is built around returns and risk. They want to maximize the former while reducing the later. In this environment, higher returns means taking on a great deal more risk.
Isn't it ironic that they are looking at cryptocurrency as an answer?
Solid Yields
If we move past the Lambos for a moment, we realize that cryptocurrency is offering some terrific returns. Certainly there is the volatility of the underlying asset which is something to always consider. However, with a growth in market size, this should start to settle down over time.
StakingRewards is a site that lists the top staking tokens and what the payouts are. Their numbers state that the staking of cryptocurrency pays between 3%-13% annually. Here we see how this is far higher in the zero interest rate environment currently being offered.
This certainly is something that is going to appeal to large money managers.
When looking at cryptocurrency staking compared to traditional yield assets such as Treasury bonds, this is what they had to say:
"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."
This is going to open up some floodgates. The crypto industry is starting to speak in the language that money managers understand. They do not operate in a world of mooning or 100x moves. Instead, they are all about ROI, APY, and the yield curve. Risk/reward ratios are the models they follow as opposed to mooning stock prices.
They also look at portfolio mixture. This means they will add some higher yield, larger risk holdings, even if a small percentage. When we take this across the total amount of money managed, even 1% adds up to a lot of inflows.
Of course, to maximize their fees, do not be surprised if the larger banks end up having their own staking platforms that they operate. It is just as easy for them to set this up as opposed to getting involved with one someone else runs.
Why Proof-of-Stake?
There is no reason why the analysts focused upon Proof-of-Stake. The only reason that makes sense is the fact that it offers smart contract capability along with lower transactions fees and faster times. This is going to be crucial if Wall Street money managers are going to get involved. Scaling is still an issue that has to be dealt with on many of the bigger chains.
Of course, this could be viewed as an opportunity for Hive. While many are overlooking this situation, once our infrastructure is in place, we could see an entirely new ballgame. The biggest selling point in terms of DeFi is the fast and fee-less transactions. To a major bank, the transaction fees might not be vitally important. They do, however, cut into returns.
Considering their position, if a fund loses a quarter of a percent in transaction fees, that is money that could go into their pocket. Institutions of this nature will try and eek out every tenth of a percent. When we factor in the amount of money they are dealing with, we can see how this can lead up some tidy totals.
What a bank like JPMorgan does, by its involvement is add legitimacy to the entire DeFi platform. While they will try to control what they can by building it themselves, that is the game for rich people. They appeal to large account holders and that is fine.
Where a platform like Hive can penetrate is with everyone else. Many are not customers of an institution like JPMorgan and cannot operate in that realm. For the most part, they probably only consider accounts that have $1 million or more in them. That excludes a lot of people.
We are seeing moves by the ecosystem to further involve ourselves in DeFi. Providing solid yields at every layer really does help our offering. The Impact of Hive Backed Dollars is just one example of how offering a return of 7%-10% with low risk is very appealing. This put it right in the middle of the yield range mentioned above.
It is obvious that DeFi nor cryptocurrency is going away. We are seeing too many large players taking a massive interest in what is happening. This means it is up to us to keep building and providing the alternate system to what the banks want to erect.
While they will still have the rich people, the difference is we are able to offer everyone else what those people have access to. That is a remarkable change from how the present system operates.
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