After many changes in the cryptocurrency market, Coinbase has become one of the biggest exchanges for trading crypto, as well as a go to exchange for people that want to have fiat currency options. At last valuation, it is an $8 billion business.
CEO Brian Armstrong said that Coinbase has created a profit for three years running. But the bsuiness model is precarious because Coinbase is built around the fees that users pay for trading, and these remain closely tied to the rollicking price of bitcoin, and to a lesser extent, some of the more than two dozen other tokens it supports.
Coinbase will start to offer a new service, called “staking”. It is expected to convince users to stick around even when prices aren’t spiking, and incentivize leaving tokens with the exchange. With the new system, Coinbase will pay interest in Tezos tokens for particular cryptocurrencies that are held in a Coinbase account.
Low Risk Returns at Coinbase
The returns on staked tokens are roughly 5% per year to start, and come in the form of tokens that Coinbase receives for participating in the network that keeps the Tezos blockchain secure. Similar to how new Bitcoin is distributed based on how much computing power is contributed to the network, Tezos doles out new coins based on how many coins each participant has “staked.”
Tezos should listed on the exchange this August, and it will be one of Coinbase’s newest additions.
Despite the recent break for the better, Tezos had a difficult start. By selling a token without a network in place, it raised $232 million, but the project descended into chaos over a management dispute.
Brian Brooks, Coinbase’s chief legal officer, says the SEC became comfortable with the arrangement because of the unique structure of the Tezos staking process. Coinbase stakes coins itself using funds from its custody business, which gives the company some skin in the game.
Coinbase says this arrangement will protect customers from the potential risks of staking. Compared with a coin that is stored offline, staked coins are harder (or nearly impossible) to trade quickly during price swings, and more vulnerable to hacks, as they would not be held in cold storage.
Staking Model Could Spread to Other Tokens
Coinbase also added that it will consider staking for other tokens, especially as other networks, including Ethereum, adopt similar security models. The company has other investments outside of trading, including an expanding crypto custody business for larger institutions to park their coins safely.
The company has also invested in efforts like Coinbase Commerce, which enables partner merchants to accept cryptocurrency. It has also joined the Libra Association, an offshoot of Facebook, that hopes to enable global crypto payments.
Coinbase has stumbled in trying to get other ventures off the ground. Last spring, the company came to close its office in Chicago, the central hub of an effort to get into high-frequency crypto trading.
Coinbase COO Emilie Choi, says the company is focused on making sure the core product works and remains secure, which is vital to Coinbase staying relevant in an increasingly competitive market environment.