This interview was done as part of the 2021 Staking Ecosystem Report by Staking Rewards.
The report was sponsored by StaFi Protocol.
Bitcoin Suisse: Buy, sell and earn crypto assets with a regulated Swiss company. The bank guarantee by a state-backed Swiss Cantonal Bank and our audited cold storage solution are some of the reasons why our clients trust us with over CHF 5 billion in cryptocurrencies.
Q: Do you think proof-of-stake based governance systems can be applied outside of protocol governance and grants? And how?
A: Proof-of-stake based governance systems has a name: plutocracy. The term itself was coined hundreds of years ago,but the idea is much older. Basically, it means that power is distributed according to wealth – exactly like PoS.
Like other political systems, it has its pros and cons, and like the design of the token economics, the importance is to actively be aware of the trade-offs and to embrace the downsides it ultimately comes along with.
Q: How do we ensure and incentivize further decentralization within the staking ecosystem?
A: Token economics design play a key part. Currently many protocols have been designed in a way that it is cumbersome to stake by yourself, and easy to delegate to another validator or simply hand over your tokens to a professional custody service that is providing staking-as-a-service.
Both ways are disincentivizing decentralization; hence the industry needs to be aware of this and work in the other direction. Few a trying and even fewer are succeeding in this. Despite that, it is still more decentralized than the current mining landscape, where economies of scale play too important a part.
Another way to ensure decentralization in decision-making is by encouraging users to perform governance actions – and this can easily be done through centralized service providers.
Q: What are the biggest challenges for Proof of Stake and Staking, that we still have to overcome or may still face?
A: One of the major challenges is simply explaining it. For bitcoin, most users don’t have to worry about how mining works – as they won’t participate in the mining process. But staking works especially well when the overlap between stakers and users of the blockchain is high – and this is only achievable if people understand what staking is, why they should/should not stake, what the risks associated with staking are etc. This is a difficult challenge, and it takes time. Education is key.
Q: What do you consider to be the most important aspects to attract users to your staking service offering?
A: There are two factors that everyone looks at, which are easy to use for comparison and rankings: (1) the rewards earned, and (2) the fee paid to the service provider. These are the most important aspects to attract users, but other factors should be considered as well: asset security, transparency, slashing protection, governance opportunities and many more.
Q: How can smaller Staking-as-a-Service companies differentiate themselves from larger players such as exchanges providing staking services? Is there a danger of centralization?
A: The “easy” answer would be to look at the answer to question 4 above, see what the larger companies are not doing – and start doing it. But that is easier said than done.
The largest staking-as-a-service providers are offering staking for only a few, but large protocols. The best way to differentiate is to offer staking services for the ones that they do not include in their offering. At some point, time will catch up – but that is a luxury problem as a service provider, because that means that the tokens they had offered for staking were the “right” ones.
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?
A: For me, it is not one particular project that I am most excited about, but there are many very interesting projects to watch. The projects that people should pay attention to are all the application projects on existing layer 1 protocols. All those teams who are building on Ethereum, Polkadot, Kusama, Tezos etc. The success of these protocols will help shape the future of layer 1 protocol dominance landscape – and that’s what’s really interesting.
Q: Which network or protocol in the market do you think has the most future-proof token economics? And why?
A: Only the future will truly tell, since attacks, congestion and other dynamics will test the robustness of each protocol. It is obvious that many have borrowed elements from the other, which tells me that they will also be adopting each other’s models – this is when flaws might come to light in the future.
Ethereum 2 has created a very sophisticated token economics, which theoretically seems to be the most future-proof model. At the same time, it carries a high complexity and is hard to explain to both staking operations and end-users of staking services.
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: If it is not a layer 1 proof-of-stake, then are we really discussing the same thing? A proof-of-stake layer 2 mechanism will always be at the mercy of its layer 1 mechanism; hence I find it most important to discuss pros and cons of those. There are many examples and use cases of staking-like mechanisms both in AMM’s and oracles, but for me – that is another topic.
Q: Which protocol has the best approach towards governance? And why?
A: The question anticipates that there is a “best” approach. Governance is like crypto-democracy, and every model has its upsides and downsides. There is no “objectively” best. There are thoughtful approaches and careful considerations of the trade-offs made in each model, and some protocols are definitely better than others to embrace these trade-offs and be open about it, so that applications, businesses and end-users are not left dissatisfied in the long run.
Q: Which network or protocol in the market has so far proven to have the best “product-market-fit”? And why?
A: Bitcoin, without a doubt. If it were not for bitcoin, blockchain as an applicable concept would not have existed, and the crypto industry as we know it today would not either.
Q: What could be done to increase overall awareness and participation in protocol governance?
A: One could definitely be inspired by Maker here. The MakerDAO is not even a layer 1 protocol, but still has a governance model with widespread adoption.
The key here is a sleek user interface. MakerDAO has built an application layer which is easy to use with a Metamask integration, providing very good sourcing for the user to understand what is being voted on.
Dash was in principle a pioneer in this regard with their 10% marketing allocation of newly minted token supply, but Maker has shown how to increase overall awareness and participation.
Q: Do you see staking yields competing with DeFi yields? What are the implications of this on network security? How to balance these?
A: They should not compete. DeFi yields carries additional risk to staking and therefore as a rule should always result in higher returns. If for some reason (e.g.market demand) they are not, then the blockchain must amend its token economics to accommodate DeFi yields.
Q: Are Staking Lock-Up times any good for protocols? Or unnecessarily overthinking protocol security?
A: Regarding the second part of your question, it is the opposite. Staking lock-up times is a simplification of protocol security. It is easier to understand, but less dynamic. If a black swan event occurs on a protocol with a pre-defined lock-up time, it all comes down to whether the blockchain can solve the problem before the end of the lock-up.
The only major layer 1 blockchain that is implementing dynamic lock-up periods is Ethereum 2, but the protocol is still far from enabling transferability, thus we have not seen it in action yet.
Q: We have seen a lot of talk about PoW’s energy consumption in recent months. How important is energy efficiency for PoS’ case when it comes to long-term adoption?
A: Energy efficiency plays a big role in the wider context, as it has been on the world agenda for a long time in terms of politics – and the importance will only increase.
On the other hand I see security, decentralization and scaling as much more important topics for PoS’ case than energy efficiency. To the underlying raison d’être it does not matter how “eco-friendly” a protocol is, if it doesn’t scale or is insecure.
Q: What is your vision of the staking economy/industry in 5 years?
A: We will see a lot of changes and modifications to the token economic models as they are not widely tested against mass usage yet. I foresee lots of changes, learnings, and increased engagement in the blockchain ecosystem from stakers.
Q: Ethereum 2.0 – What are you most excited about? What are you concerned about?
A: The same point actually answers both questions: transitioning from two blockchains to one. My concern is that the transitioning from Ethereum 1 to a shard in Ethereum 2 will not go as smooth as hoped and planned. My excitement is about everything that will come post-transitioning, where all the fruits of the Ethereum 2 design are ready to be harvested.
Q: With an increasing market-lead for proof-of-stake based networks. Is there a future for proof-of-work besides Bitcoin?
A: Certainly. Proof-of-work still has the longest track-record of a working blockchain model and blockchain security is not to be underestimated.