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

      The report was sponsored by StaFi Protocol.

      Stakewithus is providing secure blockchain infrastructure across leading Proof-of-Stake protocols.

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

      A: The current stake weighted governance system is a time-consuming process that is designed to align interest between decision makers and token holders. As such, I do not think that non-protocol related activities should be governed via the stake weighted system.

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

      A: There are recent attempts to skew the distribution of rewards (including airdrops) to incentivise stakers to stake with smaller players. Perhaps a similar concept on skewing governance voting power itself can be explored. Personally, I think staking derivatives, together with a functional, cross-chain DeFi market to rival that of a CEX would help encourage further decentralization as trading, yielding and farming can all take place without prejudice to smaller operators.

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

      A: Centralization of staking power and the competition for productive staking assets (LP vs. stake).

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

      A: Services associated with vanilla staking products have not much differentiation at all on the fundamental level. Ultimately it depends on the user group you want to attract. I find that crypto-natives/power users tend to support teams that are putting in deep effort working on protocol level stuff, while the normal retail users just want an intuitive and easy way to get access to yields on the offerings.

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

      A: We have been building unagii.com, a yielding platform that combines both DeFi yields (stables, ETH and WBTC) together with staking yields. We want to make the yielding experience aggregated and easy for newcomers.

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

      A: Hands down Terra Money with its algorithmic stablecoin (UST) design that is closely tied to LUNA burning/minting. And all the associated applications with their own token issuance which also ties back to UST utility. And the fact that the network has 0 inflation, but still manages to generate sufficient incentives for LUNA holders to remain staked for network security.

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

      A: The performance of the overall crypto market. While we are highly positive that the overall crypto market will continue to grow, it is routine for the market to normalize after an extended bull run.  Staking returns are denominated in native tokens but operating costs for staking companies are denominated in USD. Staking companies should always have a healthy treasury (they can be farming it using Unagii’s USDC vault) in the event of market drawdown to tide through the lows. While the quality of projects launching recently are of much higher calibre compared to 2017/2018, we still think there exists a valuation bubble that can be easily burst due to a highly reflexive market.

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

      A: To provide value to the network by building out critical tools and/or applications for the network.

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

      A: Decentralization is a spectrum. As long as it is provably hard to coordinate attacks, and the end users are comfortable enough to use the network and trust that validators are malicious, then it works.

      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: Find a specific niche that bigger players are not working on – for example, providing ecosystem updates, building simple FE tools, informetric websites, etc.

      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: The key criterias are the team, the technology stack it is using, foundation support and the tokenomics behind the staking token. To align incentives, we also prefer to have skin in the game by participating in the protocol’s investment round.

      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: Service providers will eventually be able to use some sort of tools/products to perform simple tracking on their user’s address and crowd source data to assign some sort of identity to the user. However, I do not think that much can be done to circumvent the permissionless nature of staking, unless the whole underlying protocol revamps itself for the sake of regulation, which would be very bad for the staking space IMHO.

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

      A: I fully agree with the thesis. Having a single staking derivative solution will not fragment liquidity across supported assets, which allows it to be able to compete better with CEXs.

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

      A: 85% – 90%.

      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: As block proposers have the final authority to order transactions in their proposed blocks, MEV issues will continue to exist even as we move forward into a PoS world. This means that the largest validators could potentially start monetizing their ability to order transactions, which could lead to unfair economical gains on other user’s transactions. There are no good solutions to avoid MEV if the economic incentives to re-order transactions in proposed blocks are large enough. The only advantage for PoS networks on MEV is that it is a lot harder for collusion to happen to re-org a number of blocks. There are some talks about separating transaction inclusion from transaction ordering, but I think that overcomplicates the issue and makes it even easier for MEV to take place.

      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: Celestia (prev. Lazyledger) – a data availability layer.

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

      A: None, because finding the perfect tokenomics is an iterative process, and will be adjusted time and time again to suit the market.

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

      A: Definitely Ethereum with the amount of dev mind share, innovation and high value applications launched on it.

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

      A: Participation is very incentive driven within the crypto markets. Perhaps some % use of the community fund can be used to award stakers who voted. Or some disincentive could happen to stakers who do not vote.

      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: Yes, the competition for liquidity between staking and DeFi is real. DeFi yields are usually highly speculative and match or beat staking yields of matured POS networks. This means stakers are economically incentivised to unstake staking assets and use it in DeFi instead, which weakens network security. We will need superfluid staking deris to allow for assets to be used as staking tokens and for DeFi at the same time.

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

      A: I think it is a good tokenomic design to always try to incentivise stakers to remain staked to prevent staked ratio from becoming overly volatile (which impacts network security). A lockup period helps to serve that purpose.

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

      A: >90% of all networks by market capitalization will be running on PoS, and Tendermint will be the leading BFT engine for new networks.

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

      A: The ability to finally perform two-ways transactions between ETH 1.0 and ETH 2.0. The most concerning issue is with Ethereum’s State bloat.

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

      A: I believe there will still be niche PoW chains specifically for privacy chains. There won’t be many though, because hash rates aggregates to the highest value chain.

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

      A: 90%.

      About The Author

      Staking Rewards Research

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