2023’s hardline approach from US regulators may have clients of financial advisors questioning the future of the crypto industry. However, recent actions by the SEC have shut down centralization staking services, but not individual staking and decentralized staking services. That could actually increase decentralization and help restore crypto’s original mission, as Jackson Wood writes today.
In today’s issue, we’ll also share a bit of information on how Ethereum staking actually works.
Running a validator on Ethereum requires more technical knowledge than many cryptocurrency investors have, which led companies to offer “staking-as-a-service” products to retail traders and investors. Kraken, along with other US-based crypto trading platforms, offered their customers the ability to stake Ethereum collectively, in a commingled staking pool, to generate staking rewards.
While many investors appreciated these services, the SEC did not. Earlier this year, Kraken settled with the SEC and agreed to discontinue their “Crypto Asset Staking-As-A-Service” program and to pay a $30 million fine. The SEC argued that this service, offered by Kraken and others, violates modern securities rules and “staking-as-a-service” products are unregulated securities offerings.
While we’ve seen many crypto lending products fail (Gemini Earn, Voyager Digital and Celsius), crypto staking is quite different from lending, which has caused many to push back on the SEC’s claims.
However, while the SEC’s actions have harmed the future of centralized staking services, their rulings will ultimately push cryptocurrency to be more decentralized and distributed.
Companies like Lido and Rocket Pool offer “decentralized” staking services through their platforms. There’s also the option of running an individual node, directly on the Ethereum network – even though this requires significant technical savvy, and if done incorrectly, may result in loss of tokens.
The SEC does not have the ability to prevent users from staking Eth tokens themselves or from using a decentralized staking service. Many cryptocurrency advocates believe that these regulations only strengthen the future of cryptocurrency, by forcing them to adhere to the principles of decentralization and anonymity that they emerged from.
One of the risks with centralized staking services is that one large institution, or a group of two or three, may gain majority power over the network if their service becomes large enough. This would put the network at risk of centralized control and manipulation. The SEC barring firms from pooled staking will force individuals to run their own node, which will increase decentralization and network security.
Put simply, Ethereum staking is the process of locking up an amount of ETH – the native cryptocurrency of the Ethereum blockchain – for a specified period of time in order to contribute to the security of the blockchain and earn network rewards.
People who do this are known as “validators” or “stakers,” and are tasked with processing transactions, storing information and adding blocks to the Ethereum blockchain. As a reward for their active involvement in the network, validators can receive rewards and interest on their staked coins, denominated in ether.
As part of plans to enable a faster and environmentally friendly transaction validation process, Ethereum protocol developers executed a switch from a consensus model known as proof-of-work (PoW) to proof-of-stake (PoS) broadly known as “the Merge“.
One of the main reasons for the consensus switch is to dramatically reduce the energy requirements for validating transactions and issuing new ETH. According to Vitalik Buterin, the change lowered the world’s energy consumption by 0.2%, and reduced Ethereum’s energy use by 99.988%.
Proof-of-stake is a consensus mechanism that requires users to stake an amount of cryptocurrency to become validators. Validators tie up some of their ether, giving them a personal stake in keeping the network running securely, to participate in the process. They receive rewards in ether when they attest to a new block, which means they agree it is accurate, or they “win” a block, meaning they are randomly selected to create the next block.
Oftentimes, a validator in a PoS system will increase the chances of earning rewards on the network by staking more coins. Depending on the PoS system, users may also be able to delegate their stake to another user who can perform the responsibilities of being a validator on their behalf.
Over the past few months, CoinDesk has been developing a reward system for Consensus 2023 attendees to bring long-term value. We’ve partnered with Art Blocks Engine, TokenProof and Passage Protocol to launch the Consensus Multi-Year, Multi-Tiered NFT Ticket, coming on March 2. Learn more.
TerraUSD was a more overt and calculated fraud than was previously known – and Do Kwon is still cashing out.
Disclaimer: The information contained in this newsletter, and any information linked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. You should seek additional information regarding the merits and risks of investing in any cryptocurrency or digital assets.
