This interview was done as part of the 2021 Staking Ecosystem Report by Staking Rewards.
The report was sponsored by StaFi Protocol.
Stakin is a devoted validation service provider for Proof-of-Stake blockchain networks. Token holders can earn interests on their holdings and shape the future of the networks in which they believe.
Q: Do you think proof-of-stake based governance systems can be applied outside of protocol governance and grants? And how?
A: There are definitely some interesting models around PoS governance systems to explore in the overall organization space, and especially starting with DAOs. Some decentralized organizations, which are not Layer 1 PoS protocols, have already adopted systems that reward token holders for locking up their tokens, and give these stakers right to vote on governance and strategy. We’ve seen DeFi protocols implementing models similar to PoS governance to vote on anything from interest rates, to the issuance/redemption of circulating tokens… We also see some models emerging around decentralized signaling and curation.
Q: How do we ensure and incentivize further decentralization within the staking ecosystem?
A: There are many ways to ensure and incentivize decentralization on Proof-of-Stake networks. On one hand, mechanics and incentives can be coded within the protocol. On the other hand, programs and tools can be set up in order to spread delegations by token holders, and the community can be educated to actually spread its stake as well.
Regarding mechanics and incentives, there are protocols which have already implemented some approaches such as Polkadot with its Nominated Proof-of-Stake inviting nominators to spread their stake across multiple nodes, Cardano using a saturation cap and pledge ratio, or Tezos with their self-bond ratio requirement. All these mitigate stake centralization in some way. Some mechanisms limit the stake allocated to a validator, and some others even create additional risk in case of coordinated misbehaviour when an entity operates multiple validators. There are also some protocols exploring the possibility to increase the yield of delegators when they choose smaller nodes.
However, the whole economics of a PoS network don’t necessarily have to be redesigned to ensure stake decentralization. Some networks, which don’t have a decentralization incentive/penalty system in place, are financing and building tools that help anybody in spreading their stake among different validators. In many networks, the Foundation themselves take a proactive approach towards stake decentralization, with the Solana Foundation Delegation program being a great example of how a network can support smaller validators.
Finally, decentralization also comes down to educating communities. There are more wallets and tools implementing some stake decentralization components on their UX, sometimes reminding users that staking can also be done to smaller nodes, and explaining why they should do so. Other small fixes such as not ranking all the nodes by total stake can also have a large positive impact. We also see interesting projects who chose to airdrop to stakers while excluding exchange addresses, and airdrop to the ones who take part in governance. This creates some nice precedent and helps shape a decentralization culture.
Q: What are the biggest challenges for Proof of Stake and Staking, that we still have to overcome or may still face?
A: There are quite a few challenges ahead for staking, but we are confident that these will be overcome.
- Stake Centralization, how to ensure that stake remains decentralized among a lot of entities, both for governance and security, especially with the growth of custodial staking solutions.
- Governance, and notably how to involve small token holders so that they don’t necessarily delegate their votes to validators.
- Competing DeFi yields, where in some cases staking yields can become less attractive than LP and farming.
Q: What do you consider to be the most important aspects to attract users to your staking service offering?
A: In addition to maintaining a good uptime and infrastructure on each network where Stakin operates, we offer a dedicated customer service to all delegators, no matter their size and stake.
As a multi-asset staking provider operating on multiple networks, we’re able to understand the small differences and specifications of each, which translates into our services to customers.
We frequently guide delegators towards their staking journey and help them navigate the risks, wallets and tools for each network they may have questions about. We’ve also helped some of our delegators to build on some networks, as we can help navigate through grant opportunities and introduce them to key ecosystem participants. For institutional customers, we are also able to build tools and APIs that simplify monitoring and reporting.
As a result, some of our delegators trust Stakin for their delegations on multiple networks.
Q: Besides validating blockchain networks, what are you mainly focusing your business operations on?
A: Stakin is focused on providing Proof-of-Stake staking services. The company operates validator nodes on multiple Mainnet networks as well as Testnets. In addition to staking, the company also explores building Dapps on some networks where we operate. As such, in the past Stakin has launched a noloss staking lottery and a yield farming platform.
Q: What is the biggest business risk for you? Are you worried about any developments in the industry?
A: We’re seeing a growing concentration of stake around custodial platforms and exchanges, which, in some cases, can have a negative impact on the networks. Some players tend to be less involved at the governance level, or less present in case of emergency upgrades.
Q: What do you think are the most important functions of Network Validators, besides running secure and performant infrastructure that validates the blockchain?
A: It really depends on the networks, how the system is designed and the overall culture in the community. Overall validators should go beyond running secure and performant infrastructure, they have to be involved in governance, and they are also very well positioned to help grow the network and ecosystem via marketing/tooling/building. In some networks, validators are mostly focused on infrastructure while in some others they are pro-actively contributing.
Q: How decentralized should a blockchain be? Is there a sweet spot tradeoff between decentralization and performance?
A: The more decentralization the better. However, the blockchain should still be usable. 50+ to hundreds of validators has so far proven to be a resilient enough model in terms of decentralization, but it depends on the Tech and quality of that validator set. As the technology matures, we can expect that many PoS networks will actually feature high TPS, stability and a large set of validator nodes operated by hundreds of different entities.
Q: How can smaller Staking-as-a-Service companies differentiate themselves from large players like exchanges providing staking services (e.g. Binance, Kraken, Coinbase)? Is there a danger of centralization?
A: The clientele of smaller staking providers is very different from the one from Binance, Kraken and Coinbase.
There is a danger of centralization, however, smaller staking companies tend to be focused on non-custodial staking and usually cater to the non-custodial kind of users, the ones who like to keep full ownership of their digital assets.
There are advantages in terms of liquidity and eventually UX when staking on a centralized platform, however the risks are quite different, as ultimately the user is entrusting that platform to store their funds and not get hacked.
I feel like the users of decentralized staking providers typically do not store their funds on such platforms. Taking a fully non-custodial approach is already a big differentiating element.
Q: Which criteria are you looking at, before you start supporting a project with network validation? What can protocol team’s do to win you as a validator for their network
A: We typically look at the technology, team, ecosystem and traction around the project. We like to get involved early in the testnet phases of the network and usually give chances to most networks.
We typically start by exploring the network during such testnet phases, launch nodes, and operate these for a period of time large enough so that we’re finally able to judge if we wish to validate on Mainnet.
Additionally, we also receive inbound demands from our delegators, who contact us in regards to operating on a network of their preference.
Q: What are your thoughts on the permissionless nature of staking from a legal standpoint? (due to no sign-up, or verification process, delegators cannot be explicitly forced to agree to the terms of service)
A: I believe we’re in a similar zone as the DeFi ecosystem on this. We may get some clarity in the next few years as this industry is still nascent and experimental. There may be challenges ahead, and we will probably see different approaches and evolutions.
In some way this question boils down more to compliance than legal. From a legal standpoint, I don’t see anything wrong with anyone being able to stake without asking anyone’s permission.
Q: There is a winner-takes-all sentiment emerging around staking derivatives. What do you think about this thesis?
A: Staking derivatives will be a key component in the future of the staking industry. I believe that as staking derivatives, and liquid staking solutions grow, we will see more alternatives and competing products.
Q: How much percentage of your revenue comes from network incentives commission rates?
A: Most of Stakin revenues comes from charging commission to delegators for staking services.
Q: Which upcoming protocol projects are you most excited about and why? Is there a protocol that no-one is paying attention to but should be?
A: Very excited about Solana and Polygon these days. Great traction and strong ecosystem approach.
Q: Which network or protocol in the current market has the most future-proof token economics? Why?
A: Don’t know what the future will be made of ! The most future-proof is most likely to be the most dynamic in terms of decentralized governance and where the community + network iterate fast enough in case such tokenomics have to evolve.
Q: Which network or protocol has the most sophisticated staking mechanism or staking use case that is not a Proof of Stake Layer 1?
A: Staking is used more and more out of the Layer 1 PoS protocols. Haven’t seen anything super innovative yet but I think it’s great as in general Dapps implementing staking do it to create some kind of lockup incentivizing long-term token holders, and add some decentralized governance to it.
Q: Which protocol has the best approach towards governance? And why?
A: Really like governance on networks such as Cosmos and Terra, where we see a lot of proposals launched by ecosystem participants, community members and other validators. It’s very democratic in some way, not necessarily the Foundation pushing everything there + possibility to ask for grants etc. There’s also a good rhythm in proposals (not too many which would be spammy + hard to DD, and not too slow either which is good for iteration speed, network upgrades etc).
Q: Which network or protocol in the market has so far proven to have the best “product-market-fit”? And why?
A: Ethereum! Oops, it’s still PoW. If not Ethereum then Polygon or Terra or Solana for the Dapps, and Cosmos for the blockchain SDK, which has been adopted by many successful blockchains from Terra to BSC to Cosmos to Polygon to ThorChain…
Terra is cool as they are very successful under the radar with lots of real use case implementation (not necessarily DeFi or blockchain focused) of their stablecoin in South Korea.
Q: What could be done to increase overall awareness and participation in protocol governance?
A: I’m not sure there’s much we can do. It reminds me of how shareholders tend to delegate their votes to Blackrock and Vanguard. Smaller token holders are sometimes not very passionate about governance unfortunately. For validators, most are active, except the usual custodial exchanges…. We need to educate the community on this.
Q: Do you see staking yields competing with DeFi yields? What are the implications of this on network security? How can these be balanced?
A: Yes, I also see some protocols adapting the staking yields to counter attack!
Q: Are staking lock-up times of value for protocols? Or unnecessarily overthinking protocol security?
A: I feel like it’s not all about security on this, some protocols also see it as a way to add more stability to crypto price as stakers are usually locked up and cannot sell without taking the opportunity cost of unlocking their tokens.
Q: We have seen a lot of talk regarding PoW’s energy consumption in recent months. How important is energy efficiency for PoS’ case when it comes to long-term adoption?
A: Energy consumption is solved for most PoS. Most PoS networks are already 100x-1,000x more efficient than PoW.
Q: What is your vision of the staking economy/industry in 5 years?
A: It will be larger than PoW, and derivatives will probably represent an even bigger market than staking itself.
Q: Ethereum 2.0 – What are you most excited about? What are you concerned about?
A: Excited as this will make Ethereum way more efficient, concerned on how long it may take before PoS actually replaces PoW.
Q: With an increasing market-lead for proof-of-stake based networks, is there a future for proof-of-work besides Bitcoin?
Q: What percentage of your revenues comes from delegators who remain anonymous?
A: Probably less than 50% as we have served quite a few identified KYCed B2B customers. Retail is 100% anonymous.