Jesper Johansen, CEO and Founder of Northstake, joined Keith Black, Managing Director of RIA Channel, to discuss proof-of-work and proof-of-stake crypto protocols.
A proof-of-work protocol is used by bitcoin miners to validate and write blocks of transactions to the Bitcoin blockchain. Every ten minutes, one bitcoin miner globally is awarded 3.125 newly minted bitcoin for their role in supporting and securing the blockchain network. While bitcoin miners profit from these block rewards, they expend significant costs on electricity, data centers, and mining computers.
Ethereum transitioned from a proof-of-work to a proof-of-stake protocol in the September 2022 merge. Tokens that validate transactions using a proof-of-stake protocol use 99% less electricity than the proof-of-work process. Validators are chosen to write transactions to the Ethereum blockchain based on the size of their financial investment in Ether tokens. While bitcoin continues to issue new tokens, after changes to the Ethereum algorithm, Ether tokens are now regularly retired or burned, reducing the outstanding number of tokens over time.
Through the distribution of fees paid by users of the Ethereum blockchain, validators who contribute both capital and computing resources are paid an annual staking yield of approximately 4% to 6% of the value of their Ether holdings. Investors who choose to delegate their holdings of Ether tokens to a validator through staking can earn approximately half of the yield earned by the validator, perhaps 2% to 3% annual yield paid in Ether tokens. While validators are required to stake a minimum of 32 Ether tokens (recently over $77,000), investors may choose to stake any amount of Ether tokens. This compensates investors for holding Ether tokens but does not require them to contribute computing resources and run a validator node. Token holders can stake their Ether through a centralized exchange, such as Coinbase, or through a decentralized liquid staking protocol, such as Lido.
Northstake assists institutional investors in earning yield on proof-of-stake tokens. An institutional quality solution is required for fiduciaries who want to ensure that the staking process is as safe as possible. Tokens that are staked are not immediately liquid, as it may take a number of days to unbond or exit from the staking transaction. Northstake works with large investors, such as prominent non-US ETF issuers, to solve this issue of delayed liquidity.
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