What Ethereum Staking Means After the Kraken Crackdown

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The outcome of Kraken’s settlement with the Securities and Exchange Commission will have a significant impact on the cryptocurrency market.

The SEC stated on Thursday afternoon that cryptocurrency exchange Kraken has agreed to pay a $30 million punishment for failing to register the offering and sale of its program for staking digital assets. The SEC reportedly wants to end cryptocurrency staking for retail customers in the United States, Coinbase CEO Brian Armstrong said just the day prior.

On the surface, it appears that this should have been bad news for all cryptocurrency staking providers. But the news didn’t exactly land like that. According to CoinGecko, the governance tokens for Lido and Rocket Pool, two of the biggest pooled staking platforms, increased by as much as 11% in the previous day.

It’s an indication that the market believes Kraken, Coinbase, and other centralized exchanges that act as staking intermediates should be concerned, but not the rest of the sector. According to GeckoTerminal, selling volume of Coinbase Wrapped Staked ETH (cbETH) has exceeded buying volume by a ratio of over 3:1 during the past day.

On proof-of-stake networks like Ethereum, staked assets support network operation. They demonstrate the stakes validators have in the game because their hardware processes new transactions and saves data. Validators are rewarded for their participation in networks, but they risk losing some of their staked assets if they become inactive or do other crimes.

Profits that can be made through staking on Ethereum

For the majority of retail-level investors, it is difficult to become an independent Ethereum validator, which is currently the largest proof of stake network. To do it, a user would require 32 ETH, or about $48,000 at the time of writing. Users who have smaller amounts of ETH to stake instead employ pooled staking services and staking-as-a-service providers.

These are offered in two flavors: plain and liquid staking. With the latter, customers are intended to receive the best of both worlds. For their ETH deposits, they receive a portion of the validator incentives in addition to a token that can be exchanged or used as collateral and is redeemable for the staked assets.

Of the $47 billion in assets in the DeFi ecosystem, the 65 liquid-staking protocols tracked by DeFi Llama account for $12 billion, or 26% of the total. This places them in third place, behind lending ($13 billion) and decentralized exchanges ($19 billion), or DEXes.

Ethereum makes up more than $11 billion of the assets in liquid-staking protocols. And Lido is by far the most popular of the 16 protocols that offer ETH staking. Of the money deposited, it accounted for $8 billion, or 75% of the total.

It appears that oversimplifying staking to make it less daunting for retail clients was at least a portion of the issue the SEC had with Kraken’s program. The fact that Kraken chose to set the returns that its customers would receive, as opposed to the variable rate of rewards decided by the protocol, is criticized in one portion of the SEC’s complaint.

The commission stated:

Defendants determine these returns, not the underlying blockchain protocols, and the returns are not always reliant on the actual profits that Kraken obtains through staking.

Staking on other platforms

According to Alex Mogul, senior director of staking and infrastructure at Republic Crypto, Kraken turned into too much of an intermediary as a result. She remarked that:

Depositing to Kraken and letting it handle the arithmetic is by far easier than trying to switch networks and then pressing the transact button to delegate stake. It is quite difficult.

Coinbase has asserted that its staking scheme differs from Kraken’s. According to Paul Grewal, chief legal officer at Coinbase:

Staking on Coinbase is still possible, and staked assets are still eligible for protocol awards. The fact that Kraken was basically offering a yield product is evident from today’s announcement. The staking services offered by Coinbase are fundamentally different and are not securities. For instance, the rewards for our customers are determined by the awards provided by the protocol and the commissions we publish.

Mogul, who oversees Republic Crypto’s Runtime staking-as-a-service division, expressed her optimism that software, such as better designed wallets, would eventually replace any staking options gaps left by centralized exchanges.

She added that:

I still believe that complexity can be abstracted in software solutions without compromising asset custody.

The Kraken settlement will drive companies toward decentralized alternatives, according to Jaydeep Korde, co-founder and CEO of Launchnodes, who represents the other end of the investment spectrum.

For organizations or wealthy people who have the 32 ETH necessary to run their own node but don’t want to handle the technology themselves, his company offers non-custodial staking alternatives. The infrastructure needed to run a validator is owned by the user, but Launchnodes takes care of all maintenance.

He explained:

By operating your staking operations on equipment you own, it avoids needing to trust compliant, regulated or non-regulated crypto enterprises that are seemingly growing larger governance and operational flaws.

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