Insights from the Staking Summit 2022
Staking discussions and insights siloed across ecosystems slow down overall progress for the $300bn+ staking industry. With a mission to nurture knowledge sharing and progress in the Staking ecosystem, Staking Rewards hosted the first-ever Staking Summit during Lisbon’s Blockchain Month. Watch the full recording here if you missed the live in-person event.
Over 550 attendees, speakers, and sponsors attended the Summit representing staking providers, infrastructure providers, investors, regulatory institutions, and other relevant industries. Cross-pollination of ideas, insights, and discussions on the staking ecosystem flowed through the entirety of the event. Due to popular demand, we’ve already started planning the next Summit! Join us in 2023 on November 10 and 11 in Lisbon, Portugal. For now, enjoy reading the six key takeaways from this year’s Staking Summit.
How will Liquid Staking Influence the Validator Business?
Panelists: Filipe Goncalves - Ankr; Mara Schmiedt - Alluvial; Nico Vergauwen - Tenderize; Claudio Cossio - Meta Pool
Host: Isidoros Passadis - Lido Finance
Liquid staking has been a hot topic in the validator community. As new Liquid Staking Protocols (LSPs) have launched across several networks, questions remain on how these LSPs affect traditional validator businesses.
If LSPs succeed and attract large amounts of TVL, traditional validator businesses benefit. An LSP delegates stake to a set of validators that it selects. If the LSP grows, the validators supporting the protocol will receive more staked value as well. In addition, LSPs give smaller validators a fighting chance to survive because validators get allocated stake from the LSP without having to attract delegators themselves.
What are institutions looking for in LSPs?
An LSP needs to provide a superb experience for users. As institutions start to dip their toes in Liquid Staking, a few milestones need to be addressed:
Performance standards and obligations must be clearly stated in the validator set.
Considerations around mitigating correlated failures, including regional diversification or client-based diversification (This is paramount for institutions).
Regulatory clarity is required to attract more institutional users.
Is there a power struggle between Validators and LSPs?
Currently, LSPs use validators to provide staking services, but validators are not yet putting capital into LSPs themselves. Although cooperation exists, potential power struggles remain. For example, future power struggles could arise if validators buy significant portions of LSP governance token and create a monopoly whereby validators delegate stake based on their best interests. However, this is unlikely to happen as the cost of doing so outweighs the benefits.
Validator Pricing Strategies
Panelists: Jun Soo Kim - Ex-Stakefish; Juri Maibaum - Frens Validator; Florian Liss - Staking Facilities
Host: Allan Wojnowski- Staking Rewards
When stakeholders delegate funds to staking providers for node-running services, a percentage of rewards go to providers via commission rates. Instead of looking at the commission rate shown, our panelists believe it’s better to calculate the network reward rate at the time of calculation * commission rate.
Even though larger providers tend to attract institutional and whale delegators, the delegating power is still mainly in token holder hands. Additionally, delegators are prone to go for lower commissions, but we have also seen premium staking providers charging higher % of commission fees to justify their better security and node-running infrastructure.
At the Staking Summit 2022, our panelists shared insights on three controversial pricing strategies:
0% commission rate: a way of underpricing services to compete with other providers in the beginning. At some point, these providers need to increase the commission rate to sustain the business. This strategy could harm the overall market as it brings to light new and usually smaller validators who are not institutionally funded.
Minimum commission rate: certain networks and foundations require a minimum commission rate for validators. For example, Osmosis requires a 5% minimum commission rate. This not only lowers the transparency of how competitive commission rates should be but also puts small providers at a disadvantage against large providers.
100% commission rate: Various reasons can explain this strategy: 1) the validator may want to prevent its own pool from getting diluted from all the other pools staking on the same network; 2) the validator may try to avoid certain delegators as they do not want to hold custody of their funds due to legal reasons; 3) could also be the case that the validator tries to “cheat” some delegators who perceive commission rates as their own rewards.
In general, UX and education are two key areas of improvement for all staking providers. Our VPP product aims to bridge the educational gap, by providing a set of clear criteria to help delegators make better decisions in selecting secure and reliable providers.
MEV - The Final Frontier of Staking Economics?
KeyNote: Felix Lutsch – Chorus One
New Token issuance (inflation) has historically driven growth across crypto networks. For example consider the impact of such inflation on delegator rewards via PoS protocols, and bootstrapping liquidity via yield farming. Although not sustainable, such protocol design works well in bootstrapping capital and providing a temporary solution while the network scales.
Blockchain network fees typically stem from on-chain transactions and interactions. As a network scales, fees are expected to compensate network participants and reduce the need for dilution to pay validators for securing a network. However, improved scalability and the impact of high fees on users have raised questions about token issuance as a strategy in general. If networks can scale enough to serve all their user needs, do blockchains have to keep block space artificially scarce to create a sustainable business model?
Enter MEV, a relatively new strategy and revenue source for participants. MEV enables block proposers to profit when optimizing the ordering of transactions and prioritizing ones with higher fees. Current solutions for MEV span across three parts highlighted below.
But how many networks incorporate MEV rewards into their staking economics? Currently in practice, most networks still rely on token issuance to pay for network security.
MEV becomes more relevant for established ecosystems with deep liquidity and high on-chain activity. As the market leader, Ethereum has demonstrated how MEV can be incorporated into Staking Economics and has created a new narrative around sustainable tokenomics. Could MEV be the final frontier for staking economics that maintains sustainable networks?
How to Get Staking Ready for Institutional Adoption?
Panelists: Dr. Andreas Dittrich - Finoa Consensus Services GmbH, Aliya Das Gupta - Sygnum, Philipp Pieper - Swarm, Laszlo Szabo - Kilin Finance
Host: Jim McDonald – Attestant
Our panel speakers shared several thinking models that may help encourage institutional adoption:
Make it easy to use – Institutions want to implement staking strategies without the complexity of learning what a wallet is, or what the staking process is. Although custodial staking is a good strategy as custodians can take care of the delegation and staking process, it may cause centralization. To cope with that, encouraging institutions to spread their stakes over multiple providers or even run their own nodes is a possible way out.
Meet institutions where they are – Institutions are used to their working environments and tools, and it will make it easier for them to onboard if staking providers are willing to adapt to the way they work.
Liquidity – The Merge serves as motivation as it signals a lower risk of staking ETH and moves the withdrawal date closer. Additionally, institutions are interested in liquid staking protocols, which are great for liquidity and composability of earning both staking yield and other DeFi yields.
Deal with crypto volatility – To better cope with the volatility of underlying assets, we may refer to how things are done in the traditional financial world, where there is a much higher standard of measuring volatilities than in the current staking industry. Otherwise, we may have to rely on a set of unlicensed players that try to scope it out, which does not really work for many institutions.
Understand institutions better – We need to understand that institutions are very diverse in terms of risk profiles, compliance requirements, and abilities. For instance, some financial institutions are not even close to running their own nodes or participating in liquid staking due to their mandates.
Improve regulatory certainty – More certainty on staking regulations can make more institutions rest assured, pushing forward the adoption.
Regulation for Validators in the US
Keynote: Allison Mangiero – Executive Director at Proof-of-Stake Alliance (POSA)
While staking has not been the direct focus of many laws and regulations, there is ongoing confusion and misconceptions about staking, which have an impact on regulation. This is why we need to align on industry principles and focus on educating lawmakers and regulators to foster thriving proof-of-stake ecosystems.
Our speakers covered three main ongoing confusions about staking:
Staking v.s. Lending: Gary Gensler stated in Sep 2022 that offering staking services to its customers “looks very similar — with some changes of labeling — to lending.” We need to educate lawmakers about how to distinguish staking from crypto lending by focusing more on securing the protocol and providing access to the protocol.
Taxation of staking rewards: IRS has never issued any guidance on tax staking rewards. Arguably, staking rewards generated from validating and securing the network should be treated as “creative property”, which should not be taxed until the time of sale.
The potential impact of the OFAC/Tornado Cash sanctions: “Base layer” participants, such as validators, builders, pool operators, relays, searchers, and sequencers, may misinterpret it as requiring the censorship of blocks involving sanctioned addresses. This could result in the network becoming censored by default but this does not have to be the case.
In general, industry players should work together to foster thriving PoS ecosystems by
Emphasizing network security,
Highlighting access to protocols by staking, and
Using less financial terminologies and jargons.
Staking at a Glance
🔔 Announcing the SR Rating for Verified Providers
The SR Rating is being developed as part of the Staking Rewards’ Verification Program for Staking Providers. The aim of making the rating public is to increase the transparency behind the verification process and to further differentiate the Verified Providers based on our assessment of their operations.
🔔 Announcing the Value-Added Rating for Verified Providers
The Value-Added Rating provides a reference point for the level at which the Staking Provider is contributing to the overall ecosystem and community development. The Value-Added Rating references an aspect that goes beyond the main purpose of contributing to the network security. Thus not being considered for the verification of Staking Providers.
🔔 How to stake JUNO to earn 39.85%
This tutorial will show you where you can buy $JUNO and how to stake your tokens on the Juno network.
🔔 Interview with Casper – The Future Proof Blockchain
We took some time to interview the Casper Network team to get an inside scoop into what they have been working on and how they are accelerating enterprise adoption of blockchain technology.
🔔 Interview with Stacks – Smart Contracts for Bitcoin
Introducing Summit Fireside Chats
Summit Fireside Chats is a new series where we interview validators, protocols, users and community members that attended the #StakingSummit. We discuss staking innovations, trends and banter about the market!
🔔 Validator Commissions with Frens
Staking Mondays Episodes
🔔 Discussing the Staking Ecosystem
🔔 Validators, RPC Nodes, Solana's Open Source Load Balancer and extrnode Roadmap with Everstake
Global Staking Research
Atom 2.0 rejected
The vote for Proposal 82 (Atom 2.0) vote has been rejected. The proposal called for a number of radical changes including Social Coordination Technology Interchain Security, Liquid Staking, as well as changes to issuance(potentially what caused the contention). The community might relaunch votes on multiple proposals instead of a mega one.
Bahamas regulator defends FTX actions as bankruptcy tensions mount
Court-appointed liquidators for FTX in the Bahamas agreed to transfer the case to Delaware earlier this week. Yet tensions remain between FTX and authorities in the Bahamas, and now the country’s regulator has accused FTX’s new management of making “inaccurate allegations.”
Curve releases whitepaper and official code for its stablecoin
Curve stablecoin will be overcollateralized with crypto assets and will rely on the Lending-Liquidating AMM (LLAMMA) algorithm to manage potential collateralization risks.
veYFI Proposal is live
Yearn community proposes to launch veYFI (vote-escrowed YFI), mainly to replace YFI voting with veYFI voting for all future governance proposals. The proposal is also the first step in the implementation of YIP-65: Evolving YFI Tokenomics.
rETH as new collateral type for DAI
MakerDAO has deployed rETH (RocketPool staked ETH) as a new collateral type to generate DAI. The rETH-A vault has the min. collateral ratio of 170%, a 1.5% stability fee, and a 5m DAI debt ceiling.
Cardano Stabelcoin Djed announced
Co-developed by COTI and IOG (Cardano lead devs), the first algo-stable Djed will be launched on Cardano mainnet in January 2023. Djed will require more than 400% in collateral value to be minted.
Chainlink Staking goes live on 6.12
Chainlink will be available to Early Access users on Dec 6th and General Access will go live on Dec 8th. Users can check eligibility of early access using the staking app.
Liquid Staking Protocol Stride Airdrop
6.3% of $STRD total supply is being airdropped to help decentralize Stride governance.