Question about baking rewards

Right now, baking rewards are processed offline by the bakers. Is there any reason for this sort of design? Is it possible to have the baking rewards offered by the protocol itself? Other blockchains offer this capability - examples include: Cosmos, Near, etc.
Rationale: Imagine when we have 100’s of millions of users and addresses in the next few years- the reward transactions would take more blockspace. If there was a way to autocompound rewards it would benefit the network. Is there anything like this planned?

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There is also another good reason to do this and that is regulations. Bakers are actually holding client’s money and this could have a regulatory impact for bakers. We have seen some large bakers close down due to regulatory concerns and if it’s deemed as holding client money then we would be required to register with the FCA - which would mean closure for us.

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Yes. You just need to sit down and code it into Tezos’s protocol.

the reward transactions would take more blockspace

Even if the protocol did this, it would take the same amount of blockspace as it does now because the chain must still include the balance update operations.

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The main benefit is that the transaction fee for rewards distribution can be subsidized by the protocol rather than paid for by the baker/staker. So then APR/APY on rewards would increase without the fee.