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Proof of Stake Alliance updates recommendations for staking providers

November 9, 2023 Coin Telegraph

AVA Labs

The POSA updated its staking principles to say that providers should communicate clearly and not control the amount of liquidity a user must provide.

The Proof of Stake Alliance (POSA), a nonprofit organization that represents firms in the crypto staking industry, published an updated version of its “staking principles” on Nov. 9.

*Previous version of the POSA staking principles. Source: POSA*

POSA represents 15 different firms in the staking industry, including Alluvial, Ava Labs, Blockdaemon, Coinbase, Credibly Neutral, Figment, Infstones, Kiln, Lido Protocol, Luganodes, Methodic, Obol, Polychain, Paradigm, and Staking Rewards.

The staking principles were first published in 2020. According to the blog post that announced them, they are meant to be “a set of industry-driven solutions” that providers can implement to address the concerns of regulators and encourage responsible practices in the industry.

The old version of the principles says staking providers should not give investment advice, guarantee the amount of staking rewards that can be obtained, or imply that they have control over a protocol in their marketing materials. Instead, they should advertise that their products provide access to a protocol and allow users to enhance security. In addition, the principles state that staking providers should use non-financial terminology such as “staking reward” in their marketing materials instead of financial terms like “interest.”

The Nov. 9 announcement says three new principles will be added. First, staking providers will be encouraged to provide “clear communication […] to ensure users have all the information necessary to make informed decisions.” Second, users should be able to decide how much of their assets they want to stake, as this will promote “user ownership of staked assets." Third, staking providers should have “explicitly delineated responsibilities” and “should not manage or control liquidity for users.”

The crypto staking industry has been criticized by some regulators, who claim it’s a cover for issuing unregistered securities. Kraken’s staking service was shut down by the United States Securities and Exchange Commission on Feb. 9, and the exchange was ordered to pay $30 million in damages for allegedly violating securities laws. However, other staking providers have claimed that their services are not securities. For example, POSA member Coinbase argued that its service is “fundamentally different” from Kraken’s and does not violate securities laws.

Rise of Ethereum staking came at cost of higher centralization: JPMorgan

October 6, 2023 Coin Telegraph

Coin Telegraph

Ethereum co-founder Vitalik Buterin previously admitted that centralization is one of Ethereum’s main challenges, which could take 20 years to solve.

The rise of Ethereum staking since major network upgrades, Merge and Shanghai, has come at the cost of higher centralization and lower staking yields, a new report by JPMorgan said.

JPMorgan’s analysts led by senior managing director Nikolaos Panigirtzoglou issued a new investor note on Oct. 5, warning about the risks stemming from Ethereum's growing centralization.

*Market share of top five liquid staking providers. Source: JPMorgan*

Top five liquid staking providers — including Lido, Coinbase, Figment, Binance and Kraken — control more than 50% of staking on the Ethereum network, JPMorgan analysts noted in the report, adding that Lido alone accounts for almost one-third.

The analysts mentioned that the crypto community has seen the decentralized liquid staking platform Lido as a better alternative to centralized staking platforms, associated with centralized exchanges like Coinbase or Binance. However, in practice “even decentralized liquid staking platforms involve a high degree of centralization,” JPMorgan’s report said, adding that a single Lido node operator accounts for more than 7,000 validator sets, or 230,000 ETH.

These node operators get selected by Lido’s decentralized autonomous organization (DAO), which is controlled by few wallets addresses, “making Lido’s platform rather centralized in its decision making,” the analysts wrote. The report mentioned a case when Lido’s DAO rejected a proposal to cap the staking share at 22% of Ethereum’s overall staking to avoid centralization.

“Lido didn't participate in the initiatives as its DAO rejected the proposal by an overwhelming majority of 99%,” JPMorgan analysts wrote, adding:

“Needless to say that centralization by any entity or protocol creates risks to the Ethereum network as a concentrated number of liquidity providers or node operators could act as a single point of failure or become targets for attacks or collude to create an oligopoly [...]”

Apart from higher centralization, post-Merge Ethereum is also associated with an overall staking yield decline, JPMorgan noted. The standard block rewards declined from 4.3% before the Shanghai upgrade to 3.5% currently, the analysts wrote. The total staking yield has declined from 7.3% before the Shanghai upgrade to around 5.5% currently, the report added.

JPMorgan analysts aren’t the only Ethereum observers that have noticed a significant increase in centralization of the network following the Merge upgrade. Executed on Sept. 15, 2022, the Merge has been seen as a major impediment to Ethereum's decentralization and a major reason for dropping yields.

you are the yield pic.twitter.com/ONJT6QmDch
— Pledditor (@Pledditor) October 5, 2023

Ethereum co-founder Vitalik Buterin has admitted that node centralization is one of Ethereum’s main challenges. In September 2023, he said that finding a perfect solution to handle this problem may take another 20 years.

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