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

      The report was sponsored by StaFi Protocol.

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

      A: No, Proof of Stake based governance has still a long way to go before we can call it functioning. I don’t think we have a golden standard in the ecosystem yet.

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

      A: We need to first define what decentralization is or at least define decentralization milestones within each protocol. Without this common agreement on decentralization goals, we risk creating faulty incentivization mechanisms.

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

      A: 1. Proof of Stake still requires fine tuning on its economics. Most key inputs were determined ad hoc since there wasn’t a ton of data to work with. Now that Proof of Stake has been running on different networks for years, the time is ripe to reform staking economics.

      2. Staking on Proof of Stake protocols is extremely difficult. The user experience is a few fold worse than DeFi. This will lead users to stick with centralized exchanges to conduct their staking needs.

      3. Proof of Stake is extremely different (both on technicals and economics) across networks. This creates a barrier to new developers and stakers.

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

      A: First, a long standing reputation with a consistent track record. Users need to recognize our brand and understand that we deliver top validator performance. Second, philosophical alignment. We want to be the go-to choice for users who recognize us as a long-term contributor to this ecosystem. We are in it for the long run!

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

      A: Other than validating, we’re focused on building tools and products that are important to protocol ecosystems.

      Q: Which protocol has the most sophisticated token economic staking incentives design? And Why?

      A: For staking economics, each protocol has its pros and cons. Generally, I think the following are some good standards to implement:

      • There must be a cap to how much rewards are provided to each validator. This disincentivizes lazy delegation to the biggest validator.
      • Rewards must be manually withdrawn and should not be dropped directly to stakers’ address. This helps with tax realization as well as incentivizing stakers to be more actively engaged in staking strategies.
      • There shouldn’t be a high self-bond requirement for validators. Self-bond requirements make it impossible for small validators to grow and compete.
      • Staking reward rate should dynamically adjust with the staking ratio.

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

      A: The biggest risk is how regulators will categorize validators. If we’re considered equivalent to financial institutions, this would be catastrophic news to validators as well as Proof of Stake networks.

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

      A: 1. Ecosystem contributions: Validators need to assess different avenues to expand the protocol ecosystem. This could mean either the technical community or the general community.

      2. Governance: At least for now, validators are closely intertwined with protocol governance. Validators need to be able to closely vet each proposal and make sure productive governance decisions are carried out.

      3. Protocol improvements: Validators are closest to the protocol team and codebase. They should help improve the protocol code as well as build essential tools that add value to the protocol.

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

      A: A blockchain must strive for maximum decentralization. It’s okay to make some compromises in the beginning in order to stabilize the network. However, there should be constant progress being made towards decentralization over each quarter.

      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: Exchanges will take a big share of staking, but will always have an upper bound since they cannot deliver the most efficient staking reward rates. Therefore, I don’t perceive exchanges as a long-term threat to the health of Proof of Stake.

      Competition with exchanges should not be the focus of smaller staking-as-a-service companies. Their main focus should be on building their reputation and carving out a share of the staking market on a single protocol. This should help propel them towards expanding into other protocols and accelerating their growth.

      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: Is the protocol bringing something new to the ecosystem with their own network? It’s getting harder and harder to make a case for maintaining an independent blockchain, so the narrative/reasoning and technical credentials must be sound.

      The protocol team can show actual adoption of their network. Specifically, I am referring to these sort of metrics: transactions per day, active addresses per day, contracts deployed per day, usage of dapps or contracts deployed, showcase of products deployed on chain, TVL, GitHub commits from community, hackathon participation.

      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: It’s potentially a huge problem from a legal standpoint. Due to how staking looks like fixed income in some sense, this could invite regulators to consider validators closer to financial entities than miners. If this occurs, then there would be no way for validators to stay compliant without becoming a fully licensed custodian and guarding delegator access (which again, may technically be impossible to enforce).

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

      A: No, it won’t be a winner-take-all. It will look largely like the centralized stablecoin markets today, where there may be a market leader (USDT), but many will slowly find their footing and challenge that position (USDC, BUSD).

      The only reason why Lido is capturing most of the market today is because they understand the entire staking stack. No other staking derivative projects come close. There will be a challenger in the future that will have as much knowledge on staking as Lido does today (the only moat is integration with other projects in the ecosystem, but as we’ve seen in DeFi, with proper incentivization, this can be easily challenged).

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

      A: 100%. We are focused entirely on earning our revenues from the commissions we charge on delegators.

      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: 100% MEV will be of huge interest in the Proof of Stake world as well. Validators will need to adopt and integrate MEV in their stack just like miners are doing today.

      If not tackled in a transparent way, MEV certainly could bear risks. However, I don’t believe it’s an existential risk for the network. MEV will be mitigated through solutions like Flashbots. Additionally, DApps are already experimenting on methods to mitigate MEV natively on their products.

      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: Most of the protocols I was excited about have launched in the past 1-2 years. Thanks to the influx of new money in the ecosystem, it’s very difficult to find a protocol that has been underrepresented. I’m certain there will be new protocols that arise from this bull run that will excite me in a year from now.

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

      A: None. Protocol token economics have still yet to be figured out. Most of the key parameters have remained sticky from when they were first determined and have not gone through any robust reform.

      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 definitely leads in sophisticated staking design. It carefully integrates various stakeholders (Indexers, Delegators, Curators) to signal with their staked tokens and incentivize healthy network behaviors. There are still parts of their tokenomics that have not yet been fully activated, but promising signs are already present.

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

      A: Polkadot has a nice approach to governance with committees that can take care of enacting certain proposals (i.e. technical upgrades) that do not require the entire community to vote on. However, it is complex and therefore could hinder newcomers.

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

      A: The Graph, Chainlink, Polygon are three that have the most real usage and have proven their place in the ecosystem.

      The Graph and Chainlink have become a necessity for most decentralized applications at this point, especially in DeFi land. Polygon has proven that it’s not enough to simply build a protocol. Their team has worked tirelessly to onboard developers and application teams, and are a living testament that business development is another piece of the puzzle to gaining developer adoption.

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

      A: We need better standards on how governance proposals are submitted along with an aggregator of governance proposals. This is being done to some extent in DeFi land through Snapshot and an equivalent product will be required for protocols.

      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: Only to some extent. Yes, the yields could be considered comparable, but the risk profiles on these two yields are extremely different. In the long run, I don’t believe anyone will view staking and DeFi yields as interchangeable and will choose one that better suits their risk appetite. Additionally, with the introduction of staking derivatives, there will be plenty of opportunities for people to double dip on both staking rewards and DeFi yields.

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

      A: Staking lock-up is not a bug, it’s a core part of consensus security. In both Casper and Tendermint papers (which are arguably the most tested and used consensus mechanisms), considerations for lock-up periods are made to address potential attack vectors.

      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: For the long-term, energy efficiency is not an important factor for Proof of Stake. Proof of Work vs Proof of Stake will not be the main deciding factor of why one blockchain is more adopted than another. Long-term adoption will primarily rely on the tools, applications and user friendly interfaces built on each blockchain.

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

      A: Roughly half of the market capitalization of cryptocurrencies will be for protocols that include staking and roughly another 80% of that will actually be staked. So, for example, as of today, total market cap is $1.4T. I expect $700B will be running on Proof of Stake or include staking mechanisms and $560B to be actively staked. Additionally, staking will be used as a benchmark rate for decentralized applications.

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

      A: With regards to staking volume, no other protocol will come close to Ethereum 2.0 in 1-2 years. Therefore, I’m excited to see what other stacks will be built around Ethereum’s staking ecosystem. We’ll be able to see how well DeFi and Proof of Stake staking mix together.

      I’m mostly concerned about network stability after the Merge. While Ethereum 2.0 has been extremely stable so far, there’s no telling what other unforeseen bugs await us in the future. Any critical bugs after the Merge would be far reaching since the entire Ethereum ecosystem will rely on it.

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

      A: It’s extremely difficult to bootstrap sufficient hashrate for new Proof of Work blockchains, hence why there is a migration towards using Proof of Stake. I think it’ll be very unlikely we’ll see another major Proof of Work blockchain.

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

      A: Roughly 70%-80% of our stakers are anonymous delegators.

      About The Author

      Staking Rewards Research

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