Venture Capitalists ‘Claim’ New Cryptocurrency Technology

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The Nasdaq billboard in Times Square in New York City welcomes Coinbase on April 14, 2021, ahead of its stock market debut.

GABBY JONES / The New York Times Press Service

A number of leading venture capital firms have started investing millions of dollars in early-stage niche technology in the cryptocurrency industry that generates a return for investors and claims to make crypto mining. – more energy efficient currencies.

Traditional mining of cryptocurrencies such as bitcoin involves the use of sophisticated computers to solve complex mathematical puzzles. New bitcoins are brought into circulation when these issues are resolved and bitcoin miners receive a reward in the form of bitcoin tokens. This process is known as proof of work.

The latest development in the crypto industry is called ‘proof of stake’ or ‘staking’. Staking allows an individual or entity to create new digital tokens and verify the legitimacy of cryptocurrency transactions on a blockchain or digital ledger, while being rewarded with additional digital currency – a return on their existing investments for participating in the process.

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Unlike Proof of Work, Proof of Stake does not require massive computer hardware or large facilities that consume an immense amount of electricity. Instead, cryptocurrency developers have developed a way to create digital currency in a more decentralized way, involving more crypto users, but less hardware.

“It’s a new idea that has really gained momentum over the past 12 months,” said Brian Mosoff, CEO of Toronto-based crypto firm Ether Capital. “With proof of stake, you don’t have to go out and make deals with chipmakers halfway around the world. [to power computers]. You don’t need to start a business based on burning an insane amount of electricity. So it’s much more efficient and less intensive than mining bitcoin, ”Mosoff told The Globe and Mail.

Figment, a Toronto-based cryptocurrency firm that provides staking services, recently raised US $ 50 million in a funding round led by New York-based venture capital firms Senator Investment Group and Liberty City Ventures. Galaxy Digital, a digital asset investment bank founded by prominent crypto investor Mike Novogratz, also participated in the round.

A few months earlier, Blockdaemon, another New York-based blockchain company and staking service provider, received US $ 28 million in funding from Greenspring Associates, a venture capital firm that has traditionally invested in biotechnology and healthcare companies. Goldman Sachs was also part of the round table.

Figment essentially operates a staking infrastructure on behalf of clients and generates revenue by charging fees. According to Lorien Gabel, co-founder and CEO of Figment, his company’s first clients were crypto exchanges as well as a handful of venture capital firms. Eventually, traditional asset managers, family offices and consumer brokerage platforms began to inquire about staking and were particularly excited about the energy efficiency of the technology as well as the idea of ​​receiving a return. on their crypto investments.

“Crypto has become quite a speculative asset. What happens with proof of stake is that there is a stream of income or interest provided to token holders who participate in the blockchain validation process, ”Mr. Gabel said.

He used the analogy of a social media platform to explain staking. “When you use Twitter or Facebook, you don’t benefit at all from the ad revenue that the platform receives. Here, as a holder of, say, ether tokens, you can benefit from the income generated while processing crypto transactions. This is the big change that investors need to understand, ”said Gabel.

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There are still only a handful of companies providing staking services, such as New York-based Stake and France-based Stake Capital, in part because the technology is new and complicated. In January, Coinbase, one of the largest cryptocurrency exchanges in the world, bought a small US staking service startup called Bison Trails for US $ 80 million – this purchase would allow Coinbase to participate in the staking and earn a return using existing holdings.

Emil Woods, a Liberty City Ventures partner who has been involved in the crypto industry since 2009, said proof-of-stake technology began to be developed in 2015, but investor sentiment and understanding towards crypto -coins at the time were still low. , and it was far too complex to explain staking to the average investor.

“It wasn’t a good time to pull the trigger. But in 2017, everything changed due to the initial boom in the supply of coins, and people started to understand the difference between bitcoin and blockchain technology, ”he added.

Only certain digital currencies can be wagered. Bitcoin, for example, has yet to be created using Proof of Work technology, but Ether has started a process of migrating from Proof of Work to Proof of participation, a process that insiders refer to as “Ethereum 2.0”. “At present, only US $ 26 billion out of US $ 434 billion of ether has been staked, meaning that existing digital currency investors have plenty of opportunities to get a return on their investment by participating in the process of staking.

“The challenge so far for anyone interested in staking is that there has been very little currency that you can actually bet. Ethereum 2.0 is therefore important, because the market capitalization of this currency is very large, ”said Boris Wertz, founding partner of Vancouver-based venture capital firm Version One Ventures.

Mr Wertz also told The Globe that beyond the ESG advantage of staking over traditional cryptocurrency mining, many holders of crypto assets not only want to hold them passively, but would like to earn a return from them. or a reward.

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“It’s like receiving interest on the money you have in your bank account. I finally see a world where everyone will participate in the staking, as we become more and more comfortable with digital currency, ”he added.

Mr Mosoff calls staking the “birth of a digital link” and believes the ether will be the most lucrative digital currency in the future precisely because of the technology of staking. “If you can generate a return of, say, 5% or 6% on a commodity that you think hedges inflation, it becomes a very attractive asset for investors.”

Muhammad Ali said he dreamed of starting a cryptocurrency business before the Taliban began their sweep across Afghanistan, forcing him on an intimidating journey west through Iran and Turkey, avoiding border guards and security searches as they go. Reuters

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