The Next Big Business in Crypto is Staking
A very enlightening discussion took place during the 7th European Blockchain Convention with Andrew Howell, Director Of Blockchain Engineering at Blockdaemon, Ben Spiegelman, Head of Corporate Development at Figment, James Hume, Global Head of Sales at Huobi Global and Maria Eneva-Olms, CEO at Ekolance. The speakers gave an overview of the staking business, explained the Ethereum Merge, its impact on the markets, and analyzed how institutional investors can participate in staking and what are the challenges and risks along the way.
Photo taken by the EBC team during the European Blockchain Convention 2022
What is staking?
Andrew Howell explains that staking serves a similar function to mining. In a blockchain network, the validators are responsible for building blocks and securing the network, and they earn tokens as a reward for their efforts.
Ben Spiegelman adds that in a proof-of-stake network, token holders can delegate their assets to help participate in validating the transactions on the blockchain, earning yields in return. However, when the assets are delegated, they will be locked up for a certain period of time, during which the tokens cannot be traded. He further explains that, unlike proof-of-work systems, the proof-of-stake mechanism eliminates huge energy consumption, and more people have the chance to be selected to add new blocks to the blockchain without the need to run powerful hardware.
“Staking is basically the software equivalent of mining.” Andrew Howell Director of Blockchain Engineering at Blockdaemon.
Ethereum Merge & its challenges
Ben explains the Merge will be an impactful event in the crypto space as Ethereum has a much larger market than all of the proof-of-stake chains we have today. The Merge is expected to take place on September 15th or September 16th, 2022. When The Merge completes, token holders will be able to earn a higher yield as they will be participating in the actual transactions on the Ethereum network, which is still running on the proof-of-work chain at present time.
“Ethereum Merge is the transition in which Ethereum is upgrading the blockchain from a proof-of-work to a proof-of-stake consensus mechanism.”– Ben Spiegelman, Head of Corporate Development at Figment.
Visual of James Hume, Maria Eneva-Olms, Andrew Howell and Ben Spiegelman
“Staking is a very different thing from CeFi lending. We need to educate investors about how staking works and what kind of insurances can be provided.” James Hume, Global Head of Sales at Huobi Global.
Andrew Howell agrees with Ben by indicating that under the proof-of-stake mechanism, anyone with 32 ETHs can become a validator of the Ethereum blockchain, and when the Merge is complete, the validators could potentially get all the transaction fees that the miners would have earned.
James Hume states that even though the crypto native people are the involved participants now, many traditional financial institutions, such as banks and asset managers (the “big guys”) are showing interest in participating in the staking business.
Andrew Howell adds that some neobanks and crypto foundations are also eager to give staking a try.
What are the restrictions for these institutional investors to start staking?
Ben Spiegelman says that the biggest challenges are the clarity of regulations and the user experiences.
Ben is also convinced that it is critical to allow users to have a central platform to buy, trade, and stake assets with a simple click. Moreover, as traditional financial institutions join the staking business, he foresees users would like to trade and stake cryptos and traditional assets on the same platform, so an easy and seamless process is certainly a necessity.
James Hume points out that education will take some time, and after we educate people from the traditional financial industry, they will have to go back and educate their colleagues. These big institutions, normally equipped with huge compliance teams, legal teams, and risk teams, will have to discuss internally to examine whether staking meets their needs.
Andrew Howell adds that it is essential to educate the investors about the unbonding periods, during which they will not have instant liquidity on their assets, which may be a great concern for financial institutions. However, Andrew points out there are companies coming up with liquid staking solutions that will allow investors to have some liquidity during the unbonding period.
“We will need clear regulations about what these crypto-assets actually are so that banks and other regulatory institutions feel comfortable holding them.” Ben Spiegelman, Head of Corporate Development at Figment.
“It is super important to stress the non-custodial aspect. We don’t want to hold your funds, but we run the infrastructure to support those networks. So building integrations into custodians are kind of the next iteration of where this industry is going.” Andrew Howell, Director Of Blockchain Engineering at Blockdaemon
What are the risks when institutional investor stakes?
Andrew Howell explains that the first risk is the built-in mechanism in the protocol called slashing, which means that when transactions in a new block are considered invalid, some staked assets of the validator will be burned by the network. The unbonding period is another risk, as the crypto market is volatile, but investors may not be able to sell their assets instantly.
However, Ben Spiegelman provides the silver lining in the risks. He says that many companies have been working on making customers feel comfortable when staking their assets. He also suggests that investors can work with multiple service providers to feel more secure and comfortable. Staking is the next big business in the crypto market, and large traditional financial institutions are expressing eagerness to participate in the business. We will need clearer regulations, a better user experience on the platforms, and sufficient education to welcome more institutional investors to the staking business.
The speakers also indicate that decentralization is the key to the market, especially on proof-of-stake chains, and competition and diversity are definitely encouraged in the space.
“We don’t want a dominant player in the industry! We can absolutely change the world if we work together.” Andrew Howell, Director Of Blockchain Engineering at Blockdaemon
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Published August 17, 2022, Barcelona