This seemingly unfavorable regulation may have major benefits, according to Ethereum experts and blockchain analysts, such as helping to decentralize the Ethereum network and forcing service providers to clarify how they make a profit for retail investors. The settlement forced Kraken to stop offering staking services to US customers. Previously, the service allowed retail investors to stake an amount of cryptocurrency on blockchains in exchange for profits.
The Kraken-SEC deal could mark the end of a growing class of staking-as-a-service products, which allow users to stake with lower up-front costs or technical know-how than typically required. About $25 billion in Ether (ETH) is currently staked on Ethereum, with 18% of those held by Coinbase and Kraken – the two biggest platforms that own staking services.
The Kraken settlement may have decentralization to the staking landscape at large. “Decentralized” staking services like Lido and Rocket Pool are wondering if the SEC’s viewpoint on staking might actually benefit them in the long run.
Staking platform as a service
Staking Ethereum requires a minimum of 32 ETH (~$50,000). Staking without an intermediary means setting up a computer to act as a node on the Ethereum network – a complex task that can result in financial penalties if done improperly. The hurdles have given way to exchanges like Kraken and Coinbase helping retail investors staking – primarily as a way to earn interest.
The commissioner of the SEC, Hester Peirce, noted in a fiery dissent to the agency’s crackdown on Kraken, “staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis does not cut it.”
In legal filings, the SEC said it took particular issue with the mechanism by which Kraken calculated the yields it paid to users: “The defendants determine these returns, not the underlying blockchain protocols, and the returns are not necessarily dependent on actual returns that Kraken receives from staking,” the commission wrote.
Coinbase insists that its own service is different. “True on-chain staking services like ours are fundamentally different,” Coinbase’s chief legal officer Paul Grewal argued on Twitter. According to Grewal, Coinbase differs from Kraken in that it directly ties user payouts to the rewards earned via staking.
Last week, analysts at Coinbase acknowledged in a report that developments around Kraken will likely affect the “pace of staking growth going forward.”
Decentralized staking service
Immediately after the SEC ruling, investors seemed to think it was good news for “decentralized” staking platforms. The native LDO token of the Lido protocol, the biggest decentralized staking service, rapidly increased by 10% following last week’s news of Kraken. Lido and similar protocols remove access barriers to staking, similar to centralized services, but they run their operations entirely on smart contracts.
Lex Sokolin, crypto economist at Ethereum research and development firm ConsenSys, said:
“There’s not a crypto exchange management team that’s working on your behalf pooling your money,”
It is the key difference – the lack of a centralized company or management team – that decentralized services hope to make them less subject to scrutiny by regulators.
“My hope is that you’re going to get a very different substantive view on the Lidos of the world, but I do think it’s very much an open question, and it’s a legal one and a difficult one,” Sokolin said.
Lido currently accounts for 29% of all staked ETH. If the centralized staking-as-a-service model disappears entirely, it wouldn’t be surprising that Lido’s footprint is getting even bigger.
Some members of the Ethereum community shared that this crackdown could help transfer control of the network (and other blockchains) to a larger group of people. According to Jaydeep Korde, founder of Launchnodes, staking services like Kraken undermine the goal of creating a “decentralized” financial system of cryptocurrencies. Korde shared:
“Having new intermediaries who, through a magic black box, give you an interest rate doesn’t strike me as being that different to what we have right now.”
According to Korde, Kraken news could eventually spur those with 32 ETH to move to stake alone, where they choose to run their own nodes instead of handing control over to a third party.
“I think this is good for decentralization,” said Ben Edgington, a product manager at Ethereum research and development firm ConsenSys. On a proof-of-stake network like Ethereum, one’s stake equates to their power over the network; if one party accounts for enough of Ethereum’s stake (around 50-60%), they can theoretically slow it down or block certain kinds of transactions. “In terms of the protocol and the health of the protocol, having a large centralized entity controlling a lot of the stake is not ideal,” said Edgington.
In contrast to Ethereum’s proof-of-work system, where several large mining corporations have accumulated an amount of influence over the network, Ethereum’s new PoS model is said to make it harder for the network to centralize. Edgington emphasized:
“It’s always been our aim that Ethereum is an army of tens of thousands of solo node operators, not three or four large data centers.”
The growth of staking platforms as a service (among other factors) risks jeopardizing this goal. Still, the SEC’s settlement with Kraken could make it harder for Ethereum’s PoS system to monopolize.
(Reference: CoinDesk)