Limiting Staking: Rocket Pool Good 👍, SEC Bad 👎

Tara Annison
5 min readFeb 13

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Towards the end of last week the news broke that Kraken was shutting down its staking-as-a-service business and paying a $30million fine to the SEC. Coinbase’s CEO Brian Armstrong took to Twitter to outline his position:

“We will keep fighting for economic freedom (our mission at Coinbase). Some days being the most trusted brand in crypto means protecting our customers from government overreach.”

and earlier in the day he had raised concerns about rumours that the SEC was looking to clamp down entirely on US citizen’s ability to take part in protocol staking.

Staking is a fundamental part of Proof of Stake blockchains like Ethereum which require validators to lock up a stake (‘behavioural bond’) of 32ETH in order to be ‘randomly’ selected to validate and process transactions. They are rewarded for this essential role in the running of the network.

There are currently 517,062 Ethereum validators, spread across the world geographically and distributed between individual validators running as rigs in homes, huge server farms for staking businesses and even companies who help you become a validator if you don’t want the full maintenance burden and/or have the full 32ETH.

Some of these firms offer staking-as-a-service, where you can stake the full 32ETH and use your own staking credentials but leave the hardware part of things to a 3rd party. Other options include pooled staking services like Lido and Rocket Pool where you can contribute as little as 0.01ETH to have a share of a full validator.

They also offer a concept called ‘liquid staking’ — more info on my previous piece here:

💰 ⛏️ What is Superfluid Staking? 💰 ⛏️

where in return for locking up your ether with them, you receive a representative token that can be traded and used in various DeFi services. Finally there is/was (😢) the option to stake via a centralised exchange, like Coinbase and Kraken, in a similarly pooled manner that reduces the 32ETH barrier to entry and enables it as a route via UX-friendly interfaces and industry-known blue chip firms.

Having multiple staking routes as well as staking-service companies helps decentralise staking, and therefore the running of the blockchain. It also reduces the barriers to entry for wanna-be protocol supporters and therefore ensures that there are more people/entities as well as economic value securing the network.

When we explore how the current 16545831ETH (~$25billion) is staked for Ethereum we can see that whilst there are a few players with a notable share, there’s a good number of entities and the biggest individual slice of the pie is unknown e.g entities who are not revealing themselves.

https://beaconcha.in/pools

So what does this mean?

Kraken exiting of the staking world will remove their 6.95% share of the decentralised pie and if fellow exchanges Coinbase and Binance are forced to follow suit then this will remove a further 16.7%. Users who were staking with them may decide to re-allocate their ether to other staking services or decide to instead use this ether to buy jpegs, hodl, or get involved in DeFi, rather than using it to help secure the network. However it’s worth noting that whilst the SEC may ‘ban’ staking, users are unable to withdraw their ether from their staking option until the Shanghai upgrade which is soft slated in March. This is therefore a good (but frustrating example) of regulators making enforcement action without fully assessing the technical feasibility of it 🙄.

Once withdrawals are enabled, if users of centralised staking services decide to re-allocate their ether to another staking option then they may look to use pooled staking via the industry leaders Lido and Rocket Pool. However there has also recently been some staking limiting drama in this world too!

Back in June 2022 holders of the Lido governance token, LDO, were asked to vote on whether the service should self-limit and therefore cap the total size of the staking pie they could represent. Whilst this may seem like an obvious bad business decision, after all if someone is willing to pay you to stake on your behalf and you have the ability to do so, why would you say no?! However, with a bigger slice of the staking pie comes increased risks of centralisation with the potential for censorship, in its many forms. As such, at a philosophical/moral/network-beneficial level it’s accepted that more entities with a smaller slice of the pie is preferred over fewer with a large chunk.

However LDO holders voting overwhelmingly against (99.81% of the vote) self limiting their potential slice of the pie.

https://snapshot.org/#/lido-snapshot.eth/proposal/0x10abedcc563b66b1adee60825e78c387105110fa4a1e7354ab57bc9cc1e675c2

The is starkly contrasted with the recent vote by the Rocket Pool community on the same question and which saw 99.54% of votes in favour of self limiting the size of Rocket Pools staking share.

https://vote.rocketpool.net/#/proposal/0x9e093dea49dee9d1b3e43dbb6e0d8735149c5fde6ef703620970129b81d0f7f8

This has led some in the community to accuse Lido of being too profit motivated and not ecosystem aligned enough to prioritise decentralisation as a guiding value.

It’s therefore clear that staking is a hot button topic for the industry and the concept of limiting staking can be seen as both anti and pro the philosophy of crypto, depending on the context!

Originally published at https://www.linkedin.com.

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