- Institutional clients have varying levels of understanding and sophistication in the crypto space, with some having dedicated teams and others relying on external expertise.
- Top concerns in staking from institutions include tax implications, reporting challenges, diversification, and compliance.
- The tradeoff between liquidity and staking yield is a significant focus for clients, with standardization in the liquid staking space potentially addressing this issue.
- Clients increasingly seek API-first solutions for seamless staking integration into their existing systems.
- Companies in the space support protocol and client development teams through various initiatives such as ecosystem funds, research fellowships, and investment in open-source software and protocol teams.
In a recent panel discussion during the Staking Rewards Institutional Ethereum Staking Forum, industry experts Meltem Demirors from Coinshares, Marcus Maute from Bridgetower Capital, Guillaume Chatain from Coinbase, Michael Gauckler from Bitcoin Suisse, and Jim McDonald from Attestant discussed the current state of understanding and sophistication among institutional clients in the crypto space, as well as the potential risks and non-financial concerns when it comes to institutional staking. In addition, the panel shares insights in how the Shanghai Upgrade will affect institutional staking interest.
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Current State of Understanding and Sophistication
The panelists agreed that there’s a wide range of understanding and sophistication among institutional clients. However, the successful execution of the Ethereum merge has increased certainty and confidence among institutions, thanks to the high-quality code shipped by the Ethereum core developer team.
Marcus Maute noted that, “the market is in a transition period,” with some clients having built internal teams dedicated to crypto while others are still heavily reliant on service Providers. He added that a growing interest in passive investments like index funds could lead to increased engagement in the crypto space.
Guillaume Chatain observed that clients’ understanding “depends on the institution’s size and the investment team’s sophistication.” He noted that larger institutions tend to have dedicated crypto teams and a deeper understanding of the technology, while smaller clients may be less knowledgeable and rely more on external expertise.
Michael Gauckler added that “it’s really a mix” and that some clients are capable of running their own validators and managing cold storage, while others need assistance. He also mentioned that clients with a long-term commitment to the crypto ecosystem are likelier to have developed core competencies in this area.
Jim McDonald emphasized that institutions “are moving from a world where they were passive holders to more active participants.” He noted that as institutional clients’ understanding of crypto grows, so does their interest in more sophisticated strategies and services, such as staking. Mr. McDonald describes the evolution of Ethereum participants best. Ethereum has seen three waves of investors. The first was true believers trusting the genesis despite uncertainties. The second wave brought in investors comfortable with the technology once they saw it working but faced financial uncertainties. The emerging third wave includes institutions that previously could not stake due to compliance and control concerns. Institutions’ concerns about staking include the risk of placing funds into a system with no guaranteed return and the inability to maintain control over those funds according to their balance sheets. With the post-Shanghai upgrade, institutions can finally close the loop, allowing them to stake funds while maintaining full control and satisfying their customers, compliance officers, and internal requirements.
Potential Risks and Non-financial Concerns in Staking
When discussing the most significant institutional risks and concerns in staking, the panelists mentioned several issues:
- Tax implications and complexities: Jim McDonald notes, “There’s a huge amount of complexity when it comes to staking and the tax implications.” He added that tax reporting for staking is more complicated than traditional investments, making it a key concern for many clients.
- Integrating reporting into ERP solutions: Meltem Demirors shared, “I think Excel spreadsheets work to a certain scale, but after that, they get very complex and cumbersome.” She emphasized the need for more streamlined solutions to manage the reporting aspect of staking, as the current methods can be challenging for clients.
- Diversification, geographic concerns, and hosting concerns: Michael Gauckler shared, “They [institutions] want to do what’s right for the network.” Clients with a long-term commitment to the crypto ecosystem are concerned about the network’s health and decentralization and may have strong views on diversification, geography, and hosting regarding staking.
- KYC and broader compliance issues: Marcus Maute cautions, “We have to be very careful with the KYC process and make sure we’re compliant for institutions to adopt.” In addition, clients often express compliance and potential censorship concerns on the base layer of the network.
Tradeoffs Between Liquidity and Yield
As the discussion continued, the panelists touched on the tradeoff between liquidity and yield, a key concern for many clients. Guillaume Chatain mentioned that with the introduction of liquid staking protocols and the ongoing developments around the Ethereum upgrades, there has been increased interest in staking from hedge funds, ETF providers, and fintech companies.
However, he also highlighted the lack of liquidity and the need for standardization in the liquid staking space. “There is an issue that is a lack of liquidity and standards,” said Mr. Chatain. He expressed optimism about the potential for the Liquid Staking Collective to solve this problem and help bring more liquidity to the market.
API First Solutions and Integration
Another essential aspect institutions look for when exploring staking is the availability of API-first solutions to facilitate seamless integration with their existing systems. Guillaume Chatain said clients seek “frictionless integration with the value integrators.” Meltem Demirors agreed, suggesting that a great SDK or developer toolkit for easy staking integration could help bring more Fintechs on board, especially those looking to offer high-yield savings and checking options to their clients.
Supporting Protocol and Client Development Teams
The panelists also addressed how their organizations support protocol devs and client dev teams, given their reliance on open-source software to run their services. Here’s what they shared:
Marcus Maute discussed Bridgetower Capital’s approach, “We have an ecosystem fund…so we are actively investing and supporting teams in multiple areas, including cybersecurity research.”
Guillaume Chatain says on Coinbase, “We’re spending a lot of time, energy, and money supporting the entire infrastructure.” He mentioned Coinbase’s launch of the Base Protocol, an open-source L2 solution built on Optimism, as an example of the company’s commitment to supporting the ecosystem.
Michael Gauckler shares Bitcoin Suisse’s fellowship program, “We have a research fellowship… it went last year to Bitcoin developers.” He emphasized that these small contributions are part of their broader effort to support the growth and adoption of crypto.
Lastly, Jim McDonald from Attestant adds, “We are actively involved in funding projects and initiatives that align with our goals and the ecosystem’s needs. We provide financial support to various protocol and client development teams, recognizing their vital role in maintaining and improving the underlying infrastructure that our services rely on. In addition to funding, we also support these teams with research and development efforts.”
The panel discussion provided valuable insights into the evolving landscape of staking and institutional clients in crypto. The experts highlighted the varying levels of understanding and sophistication among clients and emphasized the need to address key concerns, such as tax implications, reporting challenges, diversification, and compliance. As the industry continues to grow, the focus on liquidity, yield, and API-first solutions for seamless integration will be essential for clients and service providers alike. The panelists also underscored the importance of supporting protocol and client development teams, showcasing their commitment to fostering a healthy and thriving crypto ecosystem. For future conversations like this, check out our Staking Summit 2023.