BUSINESS IDEA FOR BLOCK PRODUCERS / STAKERS
In a sense, block producers are becoming the new banks. Traditional banks receive new fiat from the Fed and loan it out for greater returns. Block producers receive a portion of inflation.
Whilst this reward flow is not totally predictable, there are several things that all block producers, and stakers, will ultimately try to do:-
- Create an exchange
- Create products (derivatives) that monetise profits / leverage off your flow
Revenue from an exchange comes in multiple forms:
- Transaction fees
- Internal pool management / interest on fiat
- Licensing fees
- Membership fees etc.
Transaction fees are easy to understand whilst internal pool management comes from the fact that you can net off buyers (bids) and sellers (offers) amongst each other, and meanwhile earn interest on all the fiat sitting in your bank account, without ever having to go to the external world (blockchain) to transact. One only needs to transact externally when you incur a net short or net long position.
Of course sitting with a massive net-long position as an exchange is very valuable from a staking perspective, giving you as the exchange substantial voting power. However, as “whales” accumulate more length themselves, they tend to prefer to transact OTC, so as not to move the price on exchange. I fully expect to see OTC brokers become more prevalent and transparent in this space.
Licensing fees come from licensing products such as indices, or other market information to 3rd parties as information providers / journalists etc. Membership fees could arise where one decides to have tiered membership levels, although I haven’t often seen this in the crypto space.
There are of course many other revenue opportunities, such as introducing your own exchange coin to scoop up small trade amounts, creating mini internal markets for following popular traders etc.
This is one I haven’t seen too many BP’s or stakers do yet, but I’ve no doubt it is coming. Essentially, as a BP or holder of wealth (coins), you have a long position. At the moment, there are attempts to leverage one’s long position by lending / swapping your coins for another coin etc. to try and benefit from the inevitable pumping of alt-coins as they rise with volatility. But this will all inevitably stabilise as vol drops with price rises. Even now we are seeing vol in BTC start to drop / stabilise as it struggles to push to higher and higher price levels.
In more mature markets, many longs will try to leverage off their position by writing (selling) covered calls and other types of financial derivative. It’s always far better to offer a derivative in the thing you actually own versus something you do not own. Otherwise you could get nailed by the product basis risk i.e. a divergence in price between different products. Essentially writing or selling an option is like selling insurance, but for a specific future (expiry) date . You earn the premium and when the expiry date arrives, one of two things happen. If the strike price is not exceeded, nothing happens. If the strike price is hit, you pay financially the difference between the strike price and the market price. If you own the underlying (e.g. EOS) then you simply give this amount to the buyer. However, the black & scholes formula for pricing options means that buyers usually need to have a black swan event occur for them to make money. One can back calculate implied volatility from the prevailing options price, and compare this to historical volatility derived from the spot price.
Again, in more mature markets such as bonds, commodities, FX etc. one can generally trade forward, against the prevailing OTC forward curve. Most markets will trade in contango (forward prices higher than spot prices) and I would certainly imagine this to be the case for most early-stage crypto. BP’s and stakers can start to quote forward prices as well, which again becomes a form of speculation or insurance, depending on your particular position. Exchange futures markets are a very simple version of this, with your counterparty typically being the exchange, and not an OTC counterparty. It would be interesting to see a swaps market develop, although that would imply that some recognised party becomes the official spot index price publisher. Perhaps a revenue opportunity for Eden (as a neutral and trusted publisher) in due course?
Either way, there are multiple opportunities for BP’s and stakers to monetise their existing long positions. DeFi / ProFi / NFT’s etc. or whatever the latest fad is supposed to mean nowadays, only seems to be scratching the surface so far. I’m pretty sure that all the complex derivatives we see in the fiat world will also in due course come to the crypto world, and many more besides that.