Crypto exchanges compete for staking services
The scale of domestic staking services, where users deposit their coins to receive rewards, has expanded into the trillions of dollars.
With service brokerage fees emerging as a new source of income for cryptocurrency exchanges, competition among the exchanges has also heated up.
The accumulated amount of staking coins at Upbit, the largest domestic cryptocurrency exchange, exceeded 3 trillion won ($2.1 billion) as of April, according to industry sources.
Staking involves using investors’ coins to verify a blockchain network. In return for their participation, investors can receive a designated amount of coins as a reward. By staking their coins, investors actively contribute to improving the security of the blockchain network.
Although staking is often compared to a bank deposit in terms of holding investors’ assets for a period of time, cryptocurrency exchanges do not manage the coins like banks manage money. The coins rewarded are not compensation for management profits.
Participating in staking can be difficult for individual investors. Therefore, cryptocurrency exchanges often act as proxies and charge brokerage fees.
For instance, Upbit currently offers a service for five coins — Ethereum, Cosmos, ADA, Solana and Polygon. The estimated reward rates per year are 3.1 percent, 16.6 percent, 2.6 percent, 6.5 percent and 4.8 percent, respectively. In return for its brokerage service, Upbit deducts 10 percent from the rewards before distribution.
Such services have become a breakthrough for domestic cryptocurrency exchanges, which traditionally relied on transaction fees for revenue. With declining profits prompting efforts to diversify income sources, each exchange is noticeably expanding its staking services.
Upbit distinguishes itself as the only exchange that directly operates and participates in the entire process without outsourcing. The exchange emphasizes security by storing all staked assets in cold wallets, which are disconnected from the internet.
Bithumb and Coinone, the second and the third-largest in the market, offer a daily staking service to set themselves apart from Upbit.
This service allows investors to deposit and withdraw their coins freely, unlike traditional staking services, which require days to process holds and withdrawals.
Bithumb also announced Monday a rebranding of its staking service, along with special events for firsttime customers. It currently provides staking services to 15 coins.
Despite its popularity, experts warn investors about the inherent risks associated with staking.
“Assets in staking services are vulnerable to losses from hacking and technological malfunctions. Moreover, they cannot be ‘unstaked’ during the designated term. If the value of the coin plunges, customers who have deposited coins can experience significant losses,” Korea Capital Market Institute researcher Maeng Ju-hee said.
“Korea will need to establish regulatory frameworks for staking, including determinations regarding its status as a security.”