What will the staking landscape look like as the SEC steps up its crackdown?

Last week, a surprising agreement between the U.S. Securities and Exchange Commission (SEC) and leading cryptocurrency exchange Kraken raised questions about the future of staking on blockchains such as ethereum.

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Ethereum experts and blockchain analysts say such seemingly unfavorable regulation in the U.S. could have major benefits, such as helping to decentralize the ethereum network and forcing service providers to clarify how they profit for retail investors. The settlement forced Kraken to stop offering staking services to U.S. clients. Previously, the service allowed retail investors to stake a certain amount of cryptocurrency on the blockchain in exchange for a profit.

The Kraken-SEC deal could signal the end of a growing number of staking products-as-a-service, allowing users to stake with lower upfront costs or technical knowledge than typically required. . About $25 billion in Ether (ETH) is currently collateralized on Ethereum, with 18% of that ETH held by Coinbase and Kraken, the two largest platforms with staking services.

The Kraken protocol could potentially decentralize the entire equity universe. “Decentralized” staking services like Lido and Rocket Pool wonder if the SEC’s stance on this is actually going to be in their favor in the long run.

Staking Platform as a Service

Staking Ethereum requires at least 32 ETH (~$50,000). Staking without a middleman means setting up a computer to act as a node on the Ethereum network—a complex task that can lead to financial penalties if done incorrectly. Those hurdles have given way to exchanges like Kraken and Coinbase helping retail investors stake — primarily as a way to earn interest.

SEC Commissioner Hester Peirce strongly opposes Kraken crackdown and heterogeneous staking services. In a regulatory filing, the SEC said there were specific issues with Kraken’s mechanism for calculating profits paid to users:

“Defendants determined this profit for themselves, not from the underlying blockchain protocol, and the profit is not necessarily dependent on Kraken’s actual profit from the staking.”

When it comes to measuring, Coinbase insists that their service is different. Coinbase Chief Legal Officer Paul Grewal tweeted:

“True blockchain staking services like ours are fundamentally different. Coinbase differs from Kraken in that it directly links user payments to rewards earned through staking.”

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While Coinbase CEO Brian Armstrong believes he’s ready to take on the SEC if they pursue Coinbase’s staking product as they did with Kraken, it remains unclear what will happen next.

Last week, analysts at Coinbase acknowledged in a note that developments surrounding Kraken could affect “the growth rate of the stake in the future.”

Decentralized pledge service

Immediately after the SEC’s ruling, investors seemed to think it was good news for “decentralized” staking platforms. The native LDO token of the Lido protocol, the largest decentralized staking service, jumped 10% after the Kraken news broke last week. Lido and similar protocols remove access barriers to staking, similar to centralized services, but they run entirely on smart contracts.

Lex Sokolin, a crypto economist at ethereum research and development firm ConsenSys, said:

“There is no cryptocurrency exchange management team collecting your tokens on your behalf.”

This is the key difference – lacking a centralized company or management team – that decentralized services hope will reduce their exposure to regulatory scrutiny.

“I hope you all have a very different substantive view of the Lime of the World, but I really think it’s an open question, and it’s a legitimate and difficult question,” Sokorin said.

Lido currently accounts for 29% of all staked ETH (competing services, like Rocket Pool, are much smaller). If the centralized staking-as-a-service model disappears entirely, it shouldn’t be surprising that Lido’s footprint is growing.

Some members of the ethereum community believe the crackdown could help shift control of the network (and other blockchains) to more people. According to Launchnodes founder Jaydeep Korde, staking services like Kraken defeat the goal of creating a “decentralized” cryptocurrency financial system. Corder shared:

“Having new intermediaries that give you a rate through a magic black box doesn’t strike me as any different than we do now.”

According to Korde, Kraken’s news could ultimately spur those with 32 ETH to move to solo staking, opting to run their own nodes rather than hand over control to a third party.

Ben Edgington, product manager at ethereum research and development firm ConsenSys, said:

“I think it’s good for decentralization. On a PoS network like Ethereum, one’s stake is equal to their power on the network; They can slow down or block certain types of transactions. Having one large centralized entity that controls a majority is not ideal when it comes to protocols and protocol health.”

Several large mining companies have amassed disproportionate influence on the network compared to Ethereum’s PoW proof-of-work system, and Ethereum’s new PoS model is said to make it harder to centralize the network. Eddington emphasized:

“Our goal is to turn Ethereum into an army of tens of thousands of single node operators, not three or four big data centers.”

The growth of staking platforms-as-a-service (among other factors) threatens to jeopardize that goal, but the SEC’s deal with Kraken could make it harder for Ethereum’s PoS system to monopolize.

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According to CoinDesk

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