This interview was done as part of the 2021 Staking Ecosystem Report by Staking Rewards.
The report was sponsored by StaFi Protocol.
Based in San Francisco, Kraken is the world’s largest global digital asset exchange based on euro volume and liquidity.
Q: Do you think proof-of-stake based governance systems can be applied outside of protocol governance and grants? And how?
A: While protocol governance and grants are the primary use-case of proof-of-stake governance systems, they may also be used to create social networks where access and contribution privileges are granted exclusively to stakers. These social networks could empower the community to coordinate wider governance decisions.
Q: How do we ensure and incentivize further decentralization within the staking ecosystem?
A: Decentralization needs to be encouraged on the infrastructure level (i.e. more independently operated validator nodes) and on the user level where the staked funds are distributed heterogeneously. More equitable governance decisions can be made when staked funds are widely distributed. By lowering the barrier-to-entry and making staking as easy as possible in a wide-range of different assets, staking providers like Kraken are making this a reality.
Q: What are the biggest challenges for Proof of Stake and Staking, that we still have to overcome or may still face?
A: While UI/UX can be improved to make staking less initimidating for new users, education remains a key challenge. Industry players have an obligation to ensure that both consumers and institutions understand how the mechanism works and how their yields are generated.
Q: What do you consider to be the most important aspects to attract users to your staking service offering?
A: Kraken’s industry leading security is the single-most important characteristic of our staking service. At Kraken, safeguarding your funds and your privacy is our number one objective. Beyond that, we have a wide and increasing range of staking assets with competitive yields, wrapped in an easy-to-use interface or API for developers. Finally, clients can instantly unstake their assets without having to wait for protocol-imposed lock-up periods.
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 growth of Staking as a Service as a business offering has been dramatic with staking becoming highly profitable recently. The diverse set of assets, staking terms, risk management options and more have created a greater choice and competition in the space.
Smaller SaaS companies can differentiate themselves by being first-to-market offering staking services to new assets at launch. Moreover, smaller staking providers can focus on the user experience and education to attract new users to staking instead of competing directly with larger providers.
We believe that the decentralization of staking will be positively impacted as the education of staking increases alongside the inclusion of staking capabilities in non-custodial cryptocurrency wallets. While there will always be larger staking providers that can offer efficiencies and economies of scale, the barrier to entry for staking will be significantly reduced as staking capabilities are built into non-custodial wallets.
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?
A: Polkadot and Kusama-based parachain networks are an area of intense focus for us most recently and we are watching this space closely to see the opportunity around these native tokens and their staking capabilities. There are some teams that are introducing a new concept called Dapp Staking that look pretty compelling. Kraken is trying to find innovative opportunities to help advance decentralization and introduce our clients to new options.
Q: Which network or protocol in the market do you think has the most future-proof token economics? And why?
A: While nothing is ever fully future-proof, the token economics of several projects, including ETH2 and DOT/KSM, are laying the foundations for a long lasting decentralized ecosystem.
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: Synthetix has one of the more sophisticated non-L1 staking mechanisms, which is fundamentally tied to the core function of the protocol to mint synthetic assets.
Q: Which protocol has the best approach towards governance? And why?
A: The parathread and parachain slot auctions that were recently deployed onKusama, Polkadot’s testnet, demonstrate robust and transparent governance mechanism. . It was fun to watch the various phases of development go through a governance vote and see the results on-chain.
Q: Which network or protocol in the market has so far proven to have the best “product-market-fit”? And why?
A: A clear example of product-market-fit we’ve seen this year is Dapper Labs’ FLOW and the spectacular growth of their inaugural application, NBA Top Shot. FLOW was created to solve the scaling issues that Ethereum encountered in the CryptoKitties mania in 2017. It’s certainly no small feat that Dapper Labs was able to create a viral consumer product, after investing and building their own independent product. By effectively setting the benchmark, NBA Top Shots on FLOW have propelled the still-nascent NFT space to mainstream global attention.
Q: What could be done to increase overall awareness and participation in protocol governance?
A: From Kraken’s perspective we don’t currently provide a means for our clients to participate in governance decisions. They stake their coins through our infrastructure and we generally vote Abstain on any initiatives we’re required to participate in. We do intend to rectify this in the future and give more control to staking clients but we do not have anything official to announce at this time.
Q: Do you see staking yields competing with DeFi yields? What are the implications of this on network security? How to balance these?
A: On the face of it, it looks like staking yields compete with DeFi yields. However, liquid tokens representing staking positions are becoming increasingly common (e.g. Lido, Bifrost). This will allow token holders to stake their assets and still participate in yield-generating DeFi protocols to compound the total rewards they receive.
Q: Are Staking Lock-Up times any good for protocols? Or unnecessarily overthinking protocol security?
A: From a user’s perspective, they can be a frustrating factor to account for when staking/unstaking. One of the key benefits of staking with Kraken is that clients can instantly unstake their assets, irrespective of whether the underlying protocol has lock-up times or not. Going forward, we expect to see new chains adopt protocols that do not require a lock-up period (e.g. Cardano’s Ouroboros, Avalanche) as the security and longevity of these systems are demonstrated.
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: The sustainability of the cryptocurrency industry is increasingly being scrutinised by both governments and the media like never before. The environmental impact of Bitcoin has cast PoS-based protocols favourably as they continue to demonstrate that a decentralised system can be secure without a trade-off in high energy consumption.
While energy consumption is a problem that extends far beyond cryptocurrency mining, it is nonetheless an important issue the industry must address. Ultimately, bitcoin miners are energy agnostic and will opt for the cheapest source of energy so they can ensure future profitability. As the cost of renewables continues to subside, many miners will switch over to green energy. Indeed, this is already happening. A 2020 study from Cambridge University found that approximatel 76% of bitcoin miners already relied on renewable energy.
Q: What is your vision of the staking economy/industry in 5 years?
A: Only a minority of token holders actually participate in cryptocurrency staking. This is something we want to change. Hopefully there will be more users around the world, where assets – if they’re not being traded – are immediately staked. Not only will this help secure the protocols of these assets and further decentralize governance decisions, it will increase opportunities for people to earn passive income on their savings. Our mission at Kraken is to accelerate the adoption of cryptocurrency and the use of staking and DeFi so that everyone has increased opportunities towards financial freedom.
Q: Ethereum 2.0 – What are you most excited about? What are you concerned about?
A: Aside from the scalability and increased transaction throughput, we’re most excited about the explosion of consumer-facing Dapps that can now take advantage of lower-cost transactions. While we remain quietly confident in the transition to ETH 2.0, we are cognisant of the fact that there are now many billions of dollars worth of funds that need to be safely and smoothly transitioned onto the new network.
Q: With an increasing market-lead for proof-of-stake based networks. Is there a future for proof-of-work besides Bitcoin?
A: Because these two consensus mechanisms are so conceptually distinct it is hard to see either one wholly supplanting the other. Networks like Bitcoin and Monero will likely always remain proof of work.