By Gaurav Arora
The $30 million fine imposed by the US Securities and Exchange Commission (SEC) on Kraken, a prominent crypto exchange, for staking-as-a-services, has created ripples throughout the industry. The news has sparked a debate among experts, investors, and stakeholders regarding the legality and regulatory framework surrounding crypto staking services. However, the market’s reaction to the announcement seems to suggest a different story. The remarkable surge in the governance tokens of pooled staking services Lido and Rocket Pool by up to 11% indicates that this event could potentially fuel a mass migration of users to the Decentralized Finance (DeFi) ecosystem.
For beginners, staking is a process that involves holding assets on a proof-of-stake network like Ethereum to keep it running. Validators who participate in this process receive rewards for their contribution. However, this option was available to users with significant resources and technical expertise who could stake by themselves.
As the world of crypto continued to evolve, it became increasingly clear that staking could no longer be just a game for the wealthy and technically proficient. The processes must be democratized, opening the door for more people to participate in and benefit from the rewards of this burgeoning industry. In response to this, over the past two years, there has been a surge of services that make staking accessible to a wider audience, regardless of their Ethereum holdings. These offerings include a wide range of services, from centralized exchange-led Staking-as-a-service and pooled staking like Kraken to decentralized alternatives such as Lido, Rocket Pool, and Frax. These enabled retail investors to participate in staking, which was previously only available to standalone validators with a minimum of 32 ETH.
Undoubtedly, the democratization of the staking process within the crypto ecosystem by the exchanges engendered inclusivity. However the recent action of SEC has raised a valid concern that in the process of enabling participation of retail investors, staking exchanges have positioned themselves as intermediaries, leading to returns that are determined by the exchanges themselves rather than the underlying blockchain protocols. Raising the issue about intermediaries, the SEC rightly mentioned that ‘when investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with those platforms, with very little protection’. This might potentially pose a risk to the fundamental tenet of decentralization over the long-term, as operations in the decentralized ecosystem are expected to be conducted exclusively on smart contracts – the self-executing computer programs that reside on blockchains.
As the crypto landscape evolves, it is imperative that we maintain the integrity of the decentralized architecture that underpins it. While staking-as-a-services is enabling wider access to staking, at the same time, we must ensure that we are not inadvertently sacrificing the principles that make this ecosystem so unique and valuable.
A more decentralized approach could offer a solution to this problem, with DeFi platforms filling the gap. Liquid staking, which combines a share of validator rewards and a token redeemable for staked assets, is the third-largest category in the DeFi ecosystem, accounting for $12 billion of the $47 billion worth of assets in DeFi, as per DeFi Llama. The fact that DeFi alternatives offer staking solutions executed by smart contracts, reduce the need to trust intermediaries – a phenomenon that have drawn users towards it.
Another aspect that must be kept in mind that the industry must continue to build Web3 Apps and products that can cater to users who may not be comfortable with handling the technical aspects of staking themselves. By offering a CeFi-like experience, these Web3 Apps must abstract the complexity of the process and make staking easy and convenient for users with little or no prior experience. Moreover, this approach also removes the need to trust exchanges or any third-party intermediaries with their assets, thereby preserving the core tenets of decentralization.
Decentralized staking solutions would not only provide greater security to users but also help promote broader adoption of staking, which is vital to the growth and sustainability of the crypto ecosystem.
As the crypto landscape continues to evolve, it is crucial that we prioritize decentralization and the security of users’ assets. DeFi platforms have the potential to offer a viable alternative to centralized exchanges for staking, providing users with greater control and security over their assets. Building accessible software solutions that abstract the technicalities of staking can help to democratize participation, promote inclusivity, and uphold the core values of the crypto ecosystem.
The author is SVP, DeFi Initiatives, CoinDCX
