This interview was done as part of the 2021 Staking Ecosystem Report by Staking Rewards.

      The report was sponsored by StaFi Protocol.

      Chorus One is a community of ambitious, self-reflective people building core infrastructure for blockchain protocols.

      Q: Do you think proof-of-stake based governance systems can be applied outside of protocol governance and grants? And how?

      A: I do believe at some point they could be expanded, but at this point blockchain governance systems are still in their nascency and there should be more innovation in this area. There are a lot of problems including voter apathy, high barriers to entry to get involved and to have an impact, etc. I think a lot more experimentation and analysis in protocol and DAO governance designs is needed to see what is working. I do think the crypto space should take lessons from other governance systems, i.e. corporate governance and/or nation-state governance; after all these issues are not new to crypto.

      Q: How do we ensure and incentivize further decentralization within the staking ecosystem?

      A: There are a couple of things that can help, mostly education, making it easier to participate or run your own node, and supporting those that want to and do (e.g. with foundation delegation programs). Overall, I do not think there is a silver bullet though. In the end, the staking ecosystem follows similar patterns to other industries, and there are economies of scale somewhere. I’d argue that if lots of people run their own nodes, but they are all run on AWS with the same configurations or by a Node-as-a-Service provider, the network is actually worse off than if there are only a handful of dedicated node operators with diverse setups. Protocol designers and token holders should be aware that a) this is a tradeoff and b) that there is a quite limited set of capable node operators.

      Q: What are the biggest challenges for Proof of Stake and Staking, that we still have to overcome or may still face?

      A: I think the biggest challenges will be to bring staking mainstream at a scale that allows the entire financial and other coordination systems to run on Proof-of-Stake networks. The main issues to me include welcoming non-industry insiders into the space and getting past regulatory hurdles. I do think that it is clear that most technical problems like scalability are basically solved as platforms and the space at large is maturing.

      Q: What do you consider to be the most important aspects to attract users to your staking service offering?

      A: Overall I think the most important aspect is to create trust and build a brand that our delegators can rely on for their staking needs. This includes, among many other things, reliable node operation for a strong portfolio of staking networks, clear communication, and support for the network ecosystems we operate in various ways (e.g. by building tools and protocols, participating in governance, publishing research and content, etc.).

      Q: Besides validating blockchain networks, what are you mainly focusing your business operations on?

      A: We are focusing on developing protocols and tools that advance the Proof-of-Stake ecosystem. The two main areas for us here are liquid staking and interoperability.

      Concretely, we are currently working on making Celo IBC compatible with support by the Interchain and Celo foundations. In addition, we are operating infrastructure focused on cross-chain communication and exploring other models of how we could contribute to improve connectivity between disparate blockchain ecosystems we are a part of.

      We are also building Lido for Solana, which will enable Solana stakers to earn SOL staking rewards without giving up liquidity through the stSOL token. In addition, stSOL will be usable as collateral and we hope it will play a significant role in the emerging Solana DeFi ecosystem.

      Q: What is the biggest business risk for you? Are you worried about any developments in the industry?

      A: Biggest risk is compromised key material or other attacks or mistakes that may cause us to be slashed. Other than that, I think unfavorable regulation is still a risk for staking providers, but also the industry at large.

      Q: What do you think are the most important functions of Network Validators, besides running secure and performant infrastructure that validates the blockchain?

      A: Being one of the core participants that understands network dynamics and is able to transfer and apply knowledge from other network ecosystems or other expertise, ultimately helping the network to grow and succeed.

      Q: How decentralized should a blockchain be?  Is there a sweet spot tradeoff between decentralization and performance?

      A: On a high-level, I think some degree of censorship resistance (i.e. it is hard for enough people to coordinate to have an impact on the operation of a network). What that exactly means is hard to judge, but I tend to believe that we

      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 for sure. I believe the main opportunity lies in bridging staking and decentralized finance through liquid staking protocols, which make staking off exchange more attractive and which are able to support multiple independent staking providers. There might be centralization on that “stake pool” level, but I tend to believe it is better than the alternative of having large custodial entities controlling the majority of the network.

      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: We have a quite standardized due diligence process that takes into account core protocol design, go-to-market strategy, economics of node operation, team, technical factors (e.g. complexity of running a node) into account.

      In general, having a clear picture of what the network is able to offer to node operators is very valuable (e.g. delegation programs). Other than that, I’d say following industry best practices (e.g. regarding how to do releases), listening to feedback, and generally communicating well will help node operators become excited about a project.

      Q: What are your thoughts on the permissionless nature of staking from a legal standpoint? (due to no sign-up, or verification process, delegators cannot be explicitly forced to agree to the terms of service)

      A: I think the act of signing the staking transaction is a very clear commitment of the token holder to take on the risks of staking. Potentially wallets should highlight risks and terms more clearly.

      Q: There is a winner-takes-all sentiment emerging around staking derivatives. What do you think about this thesis?

      A: It’s likely that only a handful of staking derivatives will manage to get meaningful liquidity and integrations so I do agree with this thesis. The more widely a staking derivative is integrated, the more useful it is, the more others want to use and integrate it etc., so there are clearly network effects here.

      Q: How much percentage of your revenue comes from network incentives commission rates?

      A: Most of it in some shape or form. We do some software development for which we have in part received grants and also strategically invest our funds and use our treasury to be able to grow our team.

      Q: What are the core value propositions of liquid staking solutions, besides liquidity?

      A: Improved UX and the ability to use staking tokens as collateral in decentralized finance, which enables liquid staking tokens to become a building block for an unlimited amount of applications.

      Q: What are the biggest challenges for liquid staking solutions? Is there a risk of centralization?

      A: The biggest challenge in my view is building a good validator set/model for keeping onboarded validators aligned with the liquid staking solution and the network at large.

      Q: An increasing portion of miner income on the current Proof-of-Work Ethereum comes from ordering transactions (often referred to as Miner Extractable Value). It is likely to assume that this will also continue into the Proof-of-Stake world. How do you think this will impact the staking market? Do you think the existence of MEV bears risks for the network? Do you think this can be mitigated?

      A: MEV may increase centralization as larger players will likely be able to do a better job here, increasing the APY for delegators and thus differentiating. Overall, I do think MEV can be a risk to the network as it may lead to instability or if it means extracting value from users. I think the dynamics in proof-of-stake are more favorable than in proof-of-work, since staking providers can be held accountable better. That is because token holders can remove their delegations if they are not happy with how a validator engages with MEV, which is not possible in the proof-of-work world.

      Quickfire Round:

      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: I am currently most excited about the Cosmos ecosystem now that IBC is starting to be adopted and showing some signs of product market fit after the Osmosis launch. There’s also a variety of interesting projects upcoming here including e.g. Agoric, Sommelier, Celestia and others.

      Q: Which network or protocol in the current market has the most future-proof token economics? Why?

      A: It seems to me that most Proof-of-Stake blockchains are converging to similar models. Stake delegation, deflationary fee designs (e.g. EIP-1559), state rent, and similar features are implemented or planned to be implemented in most noteworthy layer-1 networks. I think NEAR can be highlighted as one of the best documented and, in my view, comprehensive token economic designs overall.

      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: The Graph protocol has many different roles and integrates staking in interesting ways to create a marketplace for indexing and querying valuable blockchain data. It also enables nodes to differentiate by optimizing their operations, which can lead to higher APYs for delegators. It’s still quite early and it is a very complex design, but it’s definitely one of the most intriguing protocols that have launched recently.

      Q: Which protocol has the best approach towards governance? And why?

      A: I think many protocols have good elements, but overall we are still very early and there is a lot of room for growth in this area. In my opinion, we haven’t seen that much innovation in the past few years since initially projects like Cosmos and Tezos came out with their governance designs. I am seeing more innovation in the DeFi ecosystem. One thing that I find exciting are “continuous” governance mechanisms like Curve’s gauge weighting for incentives as they can be quite straightforward and don’t require such a strong understanding of particular issues, but of course they are not suitable for every decision. I also believe delegated voting is a decent solution to avoid voter apathy.

      In general, a larger trend appears to be to minimize governance, which seems to be a good idea, but I am of the opinion that in many systems there inevitably needs to be some form of governance, so it makes sense to try and optimize those protocols.

      Q: Which network or protocol in the market has so far proven to have the best “product-market-fit”? And why?

      A: Overall I think the product-market-fit for a decentralized application platform is the strongest and most proven at this stage. Outside of that it’s probably decentralized exchange and other decentralized financial protocols followed by NFTs.

      Q: What could be done to increase overall awareness and participation in protocol governance?

      A: Currently, there are too many protocols and too few experts understanding the nuances of the protocols leading to core teams and selected voices having a large sway over what is being brought up to governance and how votings turn out. I think educational efforts and advanced governance systems that enable protocols to make better decisions and gather token holder sentiment need to be the focus.

      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: I do not see direct competition here. At the current stage, staking and DeFi attract somewhat different user profiles. I do believe that there will be more and more financial products that help bridge the two worlds and allow users flexibility in how they want to deploy their capital. Tokenizing staking positions appears to be a core building block for this to happen. It is likely that staking will be the backbone of a lot of decentralized finance products in the medium run. I’m excited about further innovation in the liquid staking realm. Examples include two token models where the rewards are separated from the principal or the superfluid staking model introduced by Osmosis (a Cosmos DEX), in which liquidity provider (LP) tokens involving the native OSMO tokens can be staked to generate staking rewards on top of LP rewards (as opposed to deploying a tokenized staking position in a pool).

      Q: Are staking lock-up times of value for protocols? Or unnecessarily overthinking protocol security?

      A: On a high-level, I think it is important to be able to hold validators/other protocol participants accountable for potential attacks on a network, and lockups enable this. At the same time, I think normal end users should have the possibility to exit their positions at any point (potentially at a discount), which is what liquid staking protocols like Lido help to solve. It is important to note that such solutions create different risk dynamics which could become problematic especially if they grow very large.

      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: I think it is extremely important. I believe that Proof-of-Stake-based networks will help make the financial services industry (and others) more energy efficient and ultimately help prevent the devastating effects of climate change.

      Q: What is your vision of the staking economy/industry in 5 years?

      A: I believe the staking industry will continue to flourish. At some point, I see a consolidation of networks and also staking providers coming. Networks that didn’t manage to get traction will become irrelevant and operators that didn’t find a way to differentiate will leave the ecosystem. I hope that it will become easier for smaller holders and enthusiasts to be engaged in the protocols they are invested in, so that we are able to create a diverse and decentralized crypto ecosystem.

      Q: Ethereum 2.0 – What are you most excited about? What are you concerned about?

      A: I am most excited about the largest decentralized finance ecosystem migrating to proof-of-stake and the implications of that for the staking industry. Specifically, I think it will be interesting how the MEV  (miner extractable value) dynamics will develop when validators instead of miners are the block proposers.

      My main concern is the timeline of the merge and the risk that miners could make decisions that impact Ethereum network health and performance as their role diminishes in the protocol.

      Q: With an increasing market-lead for proof-of-stake based networks, is there a future for proof-of-work besides Bitcoin?

      A: At the current stage and in its current form, I don’t think there is.

      Q: What percentage of your revenues comes from delegators who remain anonymous?

      A: Probably more than half, but it is unknown. We are not actively profiling our users and know only bigger partners and whoever actively shares information with us.

      About The Author

      Staking Rewards Research

      is a team of analysts dedicated to analyzing the economics, profitability, risks, and yield potential of various cryptocurrencies.