Proof-of-stake (PoS) blockchains are fast becoming the backbone of commerce and development in the crypto ecosystem. With blockchain software architecture ranging from the versatility of the Cosmos Hub to the meticulous design of the Substrate SDK, PoS technology will be fundamental to realizing our vision of a multichain future.
As a refresher, “staking” refers to the mechanism for securing the network via “nodes” or software that validates transactions and adds them to the chain. Validators are just one player in this game of virtual incentives – delegators who “lock up” their tokens to vote for validators and help secure the chain are an equally important class of participants in securing the chain. Each blockchain has its own peculiar rules regarding cooldown periods, rewards distribution timing, epoch lengths, etc., but delegators always play a key role in these distinct miniature transactional ecosystems.
Although delegators can technically stake and unstake as they please, the reality (and the data supporting it) isn’t as black and white. This article will dive into the recurring nature of staking revenue and share data that Figment has been collecting and analyzing around this topic. We’re not the only ones either – even Coinbase classifies its staking revenue under the “Subscription and Services Revenue” line item, further indicating the sticky nature of blockchain rewards.
Several considerations would push staking revenue towards the recurring side from a delegator’s perspective. The validator needs to have a history of little to no downtime, no double signing events, and secure infrastructure in order to gain trust from delegators.
With new chains and upgrades, running a validator is also technically complex and always changing, so delegators have to choose the right validator based on their historical qualifications.
Figment exemplifies all of these qualities and more – we have deeply embedded protocol teams and governance experts that further contribute to healthy, secure protocols. Customers value and trust Figment because of this, and our data backs up this claim. Our average monthly churn rate for 2021 was 3.18%, implying an average customer lifetime of over 2.62 years. A monthly breakdown of our churn rates is below:
We can also splice our churn data into quarterly segments, versus looking at a monthly view (which naturally introduces more volatility). Our average quarterly churn landed at 10.50% with an implied average customer lifetime of 2.38 years. We take any token outflows during the quarter divided by assets under stake at the beginning to calculate these figures. This reduces monthly noise and reflects the longer term staking horizons of our institutional customers.
In the staking world, the basic formula for churn is dividing any tokens that unstaked for the period by the tokens present at the beginning. Here at Figment, we refer to the tokens under management as our “Assets under Stake” or number of tokens staked * price.
With over three years of data and a growing institutional customer base, we’ve seen that our delegators tend to add more tokens over time with us, rather than undelegating every few months and switching providers. As a result, the customer churn in staking is vastly lower than your average annual churn of 15% – 20% for a traditional SaaS company. Given the scaling effects of validator services (cloud costs usually don’t scale linearly with increases in delegations), this lower churn rate only supercharges validator margins.
Especially for institutional customers, the revenue becomes explicitly more recurring than with normal “retail” delegators. Figment offers staking prime agreements that create a contractual relationship between Figment and our large delegators. As mentioned above, we offer cutting-edge research into the protocols we support, and Prime of detailed customer reporting for tax & compliance purposes, sales support, insights into airdrops and more. Our due diligence process is thorough enough to guarantee that the networks we support typically have consistent yields, dedicated developer teams and sound tokenomics. All of these factors – combined with the high switching costs of moving large amounts of stake (i.e time, risk of mishandling tokens, validator performance) – result in Figment being well-positioned to have predictable and stable revenue streams from the protocols we support for years to come.
Overall, the data supports staking revenue as ARR versus MRR. Although delegators aren’t prepaying in fiat, most protocols support instantaneous on-chain fee splits between delegators and validators. This means we get the benefits of ARR while receiving our revenue at the exact moment our performance obligation is fulfilled. Staking is sticky, and as we’ve seen, staking growth and usage is here to stay. Since validators are providing a valued, steady service to customers, the validator business model starts to look similar to traditional SaaS companies where customers pay on an annual basis and ARR is based on signed annual contract value.
We’ll leave you with a Tweet from Gary Tan, Founder of Initialized Capital and Forbes Midas List Top 100 VC, about Coinbase, one of the most respected players in the cryptocurrency industry:
