This interview was done as part of the 2021 Staking Ecosystem Report by Staking Rewards.
The report was sponsored by StaFi Protocol.
Chainflow builds and operates highly available, secure and independent Web3 infrastructure for a better future. We’re driven by decentralization, not money.
Q: Do you think proof-of-stake based governance systems can be applied outside of protocol governance and grants? And how?
A: Protocol governance casts a wide net, so most governance system functions fall under that umbrella. I think the governance systems can also be applied to treasury management, broader than that of only grants management.
Q: How do we ensure and incentivize further decentralization within the staking ecosystem?
So when you see a trend toward centralization happening, speak up, call it out, bring attention to it. When you see others do the same, investigate the points and if you agree, support the observation. This goes for decisions, e.g. network proposals, that may increase, rather than decrease the trend toward centralization, too.
Secondly, we need to further educate delegators, particularly new entrants to the crypto community. We need to explain the importance of decentralization to them and help them understand how their choices play an important role in preventing stake centralization.
Delegators do at least a little research. Get to know your chosen validator operator. Or better yet, choose two to three to delegate to. This helps reduce your risk and decentralizes stake. Choose validators whose values align with your own. Hold them accountable for their actions and contributions, or lack thereof, to the communities of the networks they’re operating on. Understand their business model.
Are they pursuing a high-growth, Silicon Valley model that relies on them capturing as much market share as possible? These types of business models are directly at odds with the concept of decentralization in the first place. Instead, choose validators who don’t see the staking economy as a zero-sum game.
Finally, from a more tactical perspective, those building networks block explorers can help too. They can do this by highlighting validator performance, rather than total stake. The single biggest and probably the simplest thing you can do to counter stake centralization is default sort your validator list by performance or even alphabetically. DON’T default sort by stake, with the highest stake at the top of the list. Provide background information on the validator and an area for delegators to review validators.
Q: What are the biggest challenges for Proof of Stake and Staking, that we still have to overcome or may still face?
A: The possibility of a small number of very wealthy entities controlling the space, just like today’s legacy financial industry. This is strongly correlated to the rich-get-richer problem.
Q: What do you consider to be the most important aspects to attract users to your staking service offering?
A: Our independence and commitment to true decentralized values.
Q: Besides validating blockchain networks, what are you mainly focusing your business operations on?
A: Stake decentralization, e.g. advocating for the success of other smaller validator operators. We also build validator monitoring and alerting tools. I help projects build out their governance processes too.
Q: Which protocol has the most sophisticated token economic staking incentives design? And Why?
A: Projects with real world use cases, like Livepeer and The Graph come to mind first. Both reward infrastructure operators for real activity happening on the network, in addition to inflationary rewards. In Livepeer’s case an orchestrator gets rewarded for transcoding video on the network. Graph indexers receive query fees. POKT has an interesting model as well. It pays node operators for relaying queries to non-validating network nodes on a variety of networks.
Q: What is the biggest business risk for you? Are you worried about any developments in the industry?
A: One of the biggest business risks smaller operators face is getting squeezed out by larger operators with greater access to capital. Unfortunately, access to capital is still a competitive advantage in Web3 economies. Staking then rewards access to capital with rapidly compounding rewards.
The resources afforded large capital accumulators then work to secure even more capital. For example, larger operators can deploy large marketing teams, allowing them to dominate conversations in social media channels, chat rooms and panel discussions. Also, some of these large operators are using their capital access in attempts to subtlety control network governance and knowledge dissemination.
My sense is, if left unchecked, these same forces will continue expanding control efforts in the regulator direction. The difficulty here is that these larger operators will lobby for regulation that only they can afford to comply with, squeezing out smaller operators.
Q: What do you think are the most important functions of Network Validators, besides running secure and performant infrastructure that validates the blockchain?
A: Validators need to be active governance participants. We also need to serve a check-and-balance for other key network stakeholders, e.g. the core development team. For example, it’s the validator set’s responsibility to ensure that code pushed to mainnet is stable and secure and tested on a testnet prior to mainnet deployment.
Q: How decentralized should a blockchain be? Is there a sweet spot tradeoff between decentralization and performance?
A: Ideally, a small number of wealthy stakeholders shouldn’t control any aspect of the network, i.e. capital, governance or knowledge. It’s tough to put exact numbers on what control actually equates to, as networks vary in many ways.
Conceptually, the degree of a network’s decentralization should increase as it’s mainnet lifespan increases. Some degree of centralization is required to launch. However, core teams should take real action to begin decentralizing after the first few months of a mainnet’s existence.
If this doesn’t happen, core teams start getting addicted to centralized control. This makes it even harder to decentralize and less likely the network will become “sufficiently decentralized”. A big warning sign is if a network hasn’t taken significant steps to decentralize by its one year mainnet anniversary.
Q: How can smaller Staking-as-a-Service companies differentiate themselves from large players like exchanges providing staking services (e.g. Binance, Kraken, Coinbase)? Is there a danger of centralization?
A: There is currently a big centralization problem on many staking networks. This is showing us the danger is real and happening. Smaller operators need to work together to counter this trend.
Among other efforts, we need to collaborate and work together to educate delegators on the dangers of centralization. We can’t be thinking Silicon Valley, VC-exit, zero-sum economics. There’s enough to go around for everyone, really, as long as we all have reasonable expectations.
Yet the zero-sum mindset still exists. This is especially true among those larger crypto financial institutions being run by serial start-up entrepreneurs and/or those from the legacy financial industry, who see staking as simply another market to dominate and conquer.
Q: Which criteria are you looking at, before you start supporting a project with network validation? What can protocol team’s do to win you as a validator for their network
A: First and foremost we look to see if a project’s walking the decentralized walk and not simply talking the talk. That’s to say we look for values alignment. Only after we decide we align well with a network’s commitment to true decentralization, do we then analyze the network for financial viability. We also prefer to work with teams who communicate clearly, accurately and consistently and that treat validators like equal partners.
Q: There is a winner-takes-all sentiment emerging around staking derivatives. What do you think about this thesis?
A: This narrative could emerge, if the companies and projects building the derivative projects don’t decentralized quickly or are started and run by founders looking at this with a zero-sum mindset.
Q: How much percentage of your revenue comes from network incentives commission rates?
A: In my experience, validator operators receive the majority of their revenue from network commissions. Some then subsize this revenue stream by doing other work through grants or offering third party services to the communities they validate for.
But you can see by the investment in loss leading tools such as block explorers and some wallets, which are meant to help the community and drive delegation to the creator, that most validators rely heavily on network commissions.
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 be?
A: Althea is a real-world use case building physical communication infrastructure, solving a real world problem. Stakebird is a project building decentralized social network tools, also with a real use case and being built by a team with a true open-source and decentralized ethos
The Compound Gateway chain is interesting too and I’m a bit surprised and happy to see the early validator testnets not dominated by the usual larger validator operators. At the same time, they may swoop in after Mainnet launch with dominating stakes, which is another issue.
Q: Which network or protocol in the current market has the most future-proof token economics? Why?
A: I’d say those whose token value is tied to the direct utility they provide to the network. This has to be utility above and beyond simply providing the ability to vote in the network’s governance process.
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: I’d say either Livepeer or The Graph, as they tie token value to utility above and beyond simply providing the ability to vote in the network’s governance process. Note that I don’t particularly see sophisticated having to be directly correlated to complicated.
Q: Which protocol has the best approach towards governance? And why?
A: All networks are in the early days of their evolution. Right now “best” to me means experimenting with processes, while committing to doing so in a decentralized way. Web3 infrastructure projects that seem to be doing that well are POKT, The Graph and Radicle Regen, in its very early days, is making sincere efforts with the right intentions to get their process right from the outset.
Q: Which network or protocol in the market has so far proven to have the best “product-market-fit”? And why?
A: Solana seems to have gained quite a bit of traction, as there seems to be quite a bit of end-user-focused development activity happening on the network.
Q: What could be done to increase overall awareness and participation in protocol governance?
A: Clear, consistent and concise communication, happening in a single, persistent communication channel. Educate governance participants on the importance of participation, how it adds value to the network and the consequences that can occur due to low participation.
Q: Do you see staking yields competing with DeFi yields? What are the implications of this on network security? How can these be balanced?
A: They need to be balanced in such a way that stakeholders aren’t compelled to pile holdings into DeFi projects, while neglecting the underlying valdiator infrastructure, as the valdiator infrastructure provides the secure foundation for the DeFi projects built on top of it.
Q: Are staking lock-up times of value for protocols? Or unnecessarily overthinking protocol security?
A: Delegtion lock-ups are necessary for network security. Zaki Manian explained this in a way that resonated with me in a Tweet exchange a while ago. The way I understand it now is that an effective lock up policy helps ensure a malicious actor can’t game the network and escape before being discovered and penalized for the malicious behavior.
Q: We have seen a lot of talk regarding PoW’s energy consumption in recent months. How important is energy efficiency for PoS’ case when it comes to long-term adoption?
A: Personally, I feel it’s very important. My hope is that neworks will economically align incentives to sustainability over the long term. This way, even those who are only in this for the money will still feel compelled to do the right thing when it comes to environmental sustainability.
Q: What is your vision of the staking economy/industry in 5 years?
A: I think it can go one of two ways. On the hopeful side, it will be a more inclusive, fair and equitable alternative to the current legacy financial system.
On the doomsday side, it will be a recreation of the exclusive, unfair and inequitable economy we have today, with the only difference being the technology that enables it.
Q: Ethereum 2.0 – What are you most excited about? What are you concerned about?
A: I’m most excited about the excitement ETH community members have about actively participating in securing the network through operating validators. It’s much more inclusive than mining. I’m most concerned about stake centralization. ETH2 valiators are relatively simple to run and staking as a service companies are running 100s if not 1000s of validator for large customers, e.g. exchanges.
Q: With an increasing market-lead for proof-of-stake based networks, is there a future for proof-of-work besides Bitcoin?
A: My initial feeling here is no. Comparing the number of PoW vs. PoS networks that have launched over the past two years seems to support this conclusion.