This interview was done as part of the 2021 Staking Ecosystem Report by Staking Rewards.
The report was sponsored by StaFi Protocol.
Finoa is a leading European digital asset custodian and interface for institutional investors and corporations.
Q: What do you consider to be the most important aspects to attract users to your staking service offering?
A: It is a combination of our reputation as trusted custodian and the market positioning of our staking offering, including those of our partners. First and foremost, asset security is our highest priority. On the other hand, staking is an exciting and attractive activity that is requested by most of our customer base. We ensure that they are able to stake in a secure environment. We have taken all necessary steps so that they can participate in staking of their preferred assets while minimizing the risk. Finoa only works with validators that have undergone thorough scrutiny and that adhere to the best practices in the industry.
Q: How do we ensure and incentivize further decentralization within the staking ecosystem?
A: PoS protocols should aim for a minimalistic approach with regards to the infrastructure requirements to spin up and maintain validation nodes. Otherwise, the barriers of entry to participate in the critical activities of the protocol will be too high for the wider public. In newer protocols, this could lead to power centralization in the hands of only those that can afford to pay the high infrastructure costs.
Q: What are the biggest challenges for Proof of Stake and Staking, that we still have to overcome or may still face?
A: As mentioned above, PoS protocols are still highly centralized. I believe this is also due to the fact that Proof of Stake protocols are still in an experimental phase. As they move forward and attract more talent and participants, we will start to find out how effective staking can be and the challenges of centralization and stability will continue to unwind as networks grow and participants work together to enable even more user cases.
Q: What is the biggest challenge for your business as a custodian when offering staking solutions?
A: Staking is still a highly innovative service. Thus, regulators are taking all the necessary steps to ensure the service is aligned with local and international laws to protect customers who decide to participate in these activities. As a custodian, we must do our part to educate the public as we cooperate with regulatory agencies so that together we establish a robust framework that will enable these new types of financial services to become widespread while minimizing risks.
Q: Since the overall space is not yet matured, at which point, do you believe governments and central banks should move to regulate the staking space if at all?
A: We are already seeing that move towards regulation. But from what we have experienced, it is a highly complex matter. So a comprehensive regulatory framework will not happen from one day to another and cannot be rushed into widespread enforcement. It is a slow and ongoing process and it will require several iterations before it can benefit all involved parties. There are reasons to remain optimistic. We are involved in an active conversation with regulators and see genuine interest for cooperation to promote the healthy evolution of what seems to be a new financial paradigm..
Q: Do you think proof-of-stake based governance systems can be applied outside of protocol governance and grants? And how?
A: We live in a proof of stake financial system. The governance of traditional banking depends upon the amount of stake that market participants lend to the markets. That way, money flows from the surplus to the deficit via lending and interest rates provided by commercial and corporate banks. Proof of Stake protocols and their governance could be a reflection of that same system in a decentralized digital space.
Q: What is the biggest uncertainty for institutional investors to tap into blockchain staking and lending?
A: There is no standardization in many cases of staking dynamics and DeFi lending related products. I think the staking industry and the DeFi ecosystem have expanded the possibilities of finance to previously untapped potential. Thus, institutions still need some time to get acquainted with different dynamics that dominate the system as well as new concepts and terminology. However, I see their interest as legitimate and with players providing an easier access to it by taking out some of this complexity it might be only a matter of time until they get the hang of it and the system becomes more efficient.
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: Personally, I like projects enabling to rethink use cases in the traditional world and translate these into a tokenized world. Thus, I like the DeFi projects (e.g. Balancer) but also projects like Centrifuge.
Q: Which network or protocol in the market do you think has the most future-proof token economics? And why?
A: Bitcoin. Tried and battle-tested like no other. Also, often competition among newer protocols ends up benefiting the incumbent leader by dividing participants into smaller networks.
Q: Which network or protocol in the market has so far proven to have the best “product-market-fit”? And why?
A: Ethereum has proven a wide variety of use cases and has been the victim of its own success on more than one occasion. Nevertheless, it’s great to see that their community is so active and how its evolution enables ever more interesting use-cases like the entire ecosystem of DeFi apps.
Q: What could be done to increase overall awareness and participation in protocol governance?
A: We are starting to see investors and VC funds becoming increasingly aware of the incentives of being active in the governance of the networks they participate in. They have added key people to their organizations who are only responsible for supervising these matters. The next step could be to use these assets to make an active outreach to the community to spread the awareness to a wider audience.
Q: Do you see staking yields competing with DeFi yields? What are the implications of this on network security? How to balance these?
A: Even though DeFi yields are far more attractive than staking yields, token holders prefer to take advantage of those higher returns. However, higher yields usually imply higher risks. I think the balance is achieved naturally by matching yield types with the spectrum of risk preferences of market participants. The extreme case would be if all token holders of an asset would chase DeFi yields so that the security of the protocol would be in jeopardy due to lack of stake to protect the blockchain.
Q: Are Staking Lock-Up times any good for protocols? Or unnecessarily overthinking protocol security?
A: It remains to be seen. It might seem like overthinking in some cases, but most protocols have expressed the concern regarding bad actors potentially exploiting the network without unbonding periods. So I would assume they have done their homework as the stakes are high.
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: It’s important, but I don’t think it’s a deciding factor. Attacking Bitcoin and other PoW networks via the energy consumption vector has been common throughout the lifespan of the industry. I believe there are other ulterior motives to attack the industry by any means necessary. Should PoS become the dominant standard, I’m pretty confident similar attacks will start to pop up.
Q: What is your vision of the staking economy/industry in 5 years?
A: Very bright. We are excited to see the continuous growth in the space. As custodians, we’ve had a front row seat to witness the exponential growth of the staking economy. Product-market fit is clear. I think the staking industry will still find some bumps ahead, but they are part of a learning process so that in five years the result will be an efficient and robust standard that will enable applications to flourish.
Q: Ethereum 2.0 – What are you most excited about? What are you concerned about?
A: Seeing the day that Ethereum finally is able to move away from PoW is thrilling to anybody who is involved in this space. My concern is to see how the shift affects all other networks that looked to gain an edge in the industry by beating Ethereum to proof of stake
Q: With an increasing market-lead for proof-of-stake based networks. Is there a future for proof-of-work besides Bitcoin?
A: It certainly doesn’t seem that way. I could envision a world where only bitcoin remains as PoW, while all other L1 protocols run on PoS while they find a way to connect and interact with the bitcoin network to attract more value and stability to their networks.