EBC22 |The Next Big Business in Crypto is Staking

[Music] so thank you maria i had a look down there it's completely packed so i guess you're doing a very good job we also have ben from pikmin andrew from blockdemon and james from huawei welcome guys on stage and the mic is yours hello i hope you can hear me perfect so welcome to our panel discussion about staking and actually why is it the big new business in the crypto industry uh when i first heard about staking i think it was around 2020 and i thought oh my god the moment when people hear about staking everyone will do it because this is just such an amazing opportunity for passive income and i think this is what happened in the last years and that's why we're here and we're going to talk about why staking is such a big deal so first maybe i can introduce myself shortly my name is maria anova owens i'm based in frankfurt and i'm the ceo and co-founder of equilance which is a web 3 recruitment platform based on diversity that means that we train people from emerging economies in the different blockchain professions and we place them for remote jobs around the world in blockchain companies with me here we have a lot of staking experts and we'll speak about yeah why staking is such a big deal but maybe first before they introduce themselves to put staking into perspective the staking business i got some statistics that i briefly want to talk about the average staking yield increased to 15.4 percent in the end of the first quarter of 2022 the average stake rate is 49.3 in the end of the first quarter of 2022 and as a result the annualized staking rewards hit all-time high just under 15 billion us dollars and this is from a report from stake.com and i think this gives an overview of how big really the staking market is and the staking businesses so in today's panel discussion we will talk about why this is the case we will talk about a very big event that's going to happen in the staking world and this is the merge the transition of ethereum to the proof of stake and we will talk also about house taking is possible for institutional investors and what are the risks so please i would give the world to my colleagues on stage uh introduce yourself and let's start all right i'll go next um i'm andrew director of blockchain engineering at block demon i've been with them since 2018 when we're a very small company looking at um you know blockchain infrastructure at the time we saw staking was a potential um you know shift in the industry from proof of work um so built a platform to do it we have about 50 blockchains on our platform um thousands of nodes all over the world and hundreds of different customers so we'll talk a little bit more about it in a while but uh if you want to talk about staking come find me later on i'll be walking around hi everyone i'm i'm global head of institutional service for away with global uh we're a spot on derivatives exchange it started back in 2013. we do a lot of things in the space so we do anything from spot trading asset management lending staking obviously um yeah and much more awesome yeah thank you so much for having us here today ben spiegelman from figment i lead the corporate development effort at figment similar to block damon we help institutions earn yield on their proof of stake assets and in general be able to access and get more functional value out of web3 based in new york but we're a global company and happy to help our customers all around the world thank you guys so let's kick off the panel with the most important question and this is what is staking and what's the difference between staking lending andrew can you explain this to us yeah so i'm sure everyone's heard of bitcoin and mining um so staking is basically the software equivalent of mining so you know in a blockchain network there's transactions that flow around the the you know the network and the block producers or the validators as they're typically called are responsible for you know building blocks and securing the network and in uh you know reward for doing that is essentially a staking token that is you know given um it's the incentive basically that the the miners or the validators get to produce the blocks so you know there's a shift in the industry to move away from you know uh proof of work mining um obviously ethereum is in that process at the moment which we'll talk about in a few moments um and there's probably hundreds of other blockchains that are adopting proof of stake so you know companies like black demon essentially run infrastructure for people who want to participate in staking so both public infrastructure that people can delegate to with their own assets and generate yields and we also do it for people who want to run dedicated infrastructure so you know these networks run lots and lots of different validators across all the ecosystems and every network is slightly different so you know some networks there's a limited validator set which means people need to you know get the stake required to get into that set of validators and other networks you know like ethereum you need 32 ethereum so they want to have as many validators as possible which basically means that anyone looking to get yield in the industry from the staking incentives can you know spin up a validator um either by themselves or with a company like us and you know they can uh for for the because they're producing blocks and validating the transactions on the network they get that yield that's built into the protocol itself so anyone else want to take a yeah i mean just maybe describing a little bit even further on sort of why staking versus lending and some of like sort of the yield differences there so obviously when you talk about mining right the the goal there is you throw more computer power and we hear about all the energy resources to be able to receive reward for producing the next block in the chain uh with staking it's a little bit different and more people can actually participate in this without having to run hardware so for companies like ours and block damon if you have the assets if you are a token holder even if it's one or two or however small amount of the actual underlying asset that is you can delegate those assets to a firm like ours or block daemon to be able to earn yield on the specific chain and so you delegate the assets that asset is then locked up for a certain period of time where it can't be traded and you're actually helping to participate and approve transactions on the network and as a result are receiving rewards for doing so and so that's really where the yield comes from is being able to participate in approving and approving and these transactions and running governance on the chains incredibly different from lending right everyone in tradfi or financial services knows very clearly what lending is and this is not a lending business it provides a yield similar to it uh but it's very different and has in our opinion a lot less risk um sort of what we've seen over the last couple of months sort of what's shaken out with the lending market where for staking it's really more about the actual yield going down over time potentially but not around actually underlying borrower creditor risk that you have in financial markets thank you there was a very good explanation and because andrea already mentioned it let's talk about the big event i think maybe the biggest of the year and this is the march um ben can you tell us about yeah the march what do you think will be the challenges the challenges for the staking business and the staking industry when the march happens and what is exactly the march yeah so i can talk about it from a business perspective but andrew probably can share a lot more on the on the technical side of things but obviously as he alluded to right bitcoin and ethereum the two largest assets by far in our space have both been proof of work from existence and over the last two years three years something like that ethereum has been in this process moving from proof of work to proof of stake the latest is this is going to be around august this year but uh we'll we'll see what happens when when the date actually comes and so when that does happen when we talk about the next big business and crypto is staking this is going to be a huge event for the space right the next biggest market cap asset behind ethereum is solana at around 15 billion today ethereum's at 150 billion right so it's a much much larger market than all the other proof of stake chains that are out there today and so when it does make this merge and does complete when you're staking your ethereum you'll be able to receive rewards and not only just the rewards that are there today which is around four and a half percent you're going to be able to receive even higher yields because you're going to be able to participate in the actual transactions um on the ethereum network which today are still being run on the proof of work chain versus the proof of stake ethereum that's that's going through the merge today yeah so um just a little bit more kind of color to that um the the miners are essentially getting kicked out by the validators um and with ethereum there's going to be you know in in the mining world um there's tends to be centralization around people who have a lot of capital and a lot of ability to get cheap electricity but in the proof-of-stake world essentially it's software so anyone who can run a server or anyone who can run a validator as they're typically called can and has 32 ethereum can can participate in the network so the idea is is that there'll be a lot more validators running in the network than there would be say miners which means there's a lot more opportunity to people to participate a quick stat that i saw earlier is that there's only around 10 percent of ethereum currently staked which means there's a lot more ethereum that's potentially open to the to participate in the staking world so you know there's um as the merge happens we're going to see probably that increase over time which means you know um there's going to be a lot of work for people like us but also you know anyone who wants to generate yield you know those validators that you're running potentially you're going to get all of the transaction fees as well that the miners typically would have got so it's a side-by-side network at the moment and you know when the merge happens we'll be essentially cutting over to proof-of-stake hopefully everything works but it's going to be an interesting achievement nevertheless to change the engine while the plane's flying thank you now i have the question in my head should i buy ethereum but let's not talk about financial advice and go on with yeah how are actually institutional investors able to participate in staking and can you walk us through the process of staking um yeah maybe james the question for you yeah sure um i mean i think it in general we speak to a lot of institutional investors and it's a lot of education coming into the space especially like when you talk about institutional investors the more traditional folks coming in i think all three of us on this panel can probably agree that it's a lot of kind of walking through people through the process whether it be custody or the actual tech side of things um people can understand in a very simple sense about speculating on whether it be bitcoin ethereum or other coins in the space but coming in and trying to get yield um is a very different thing and people can understand yield and traditional markets as well especially inflation being where it is it's a very attractive proposition to come in and be able to get but i mean you've already touched on some of the figures that we discussed to some people when you're in the crypto space don't even see even possible i know from personal experience trying to tell people that you can get kind of i know one of the topics that people bring up this this conference will probably be the celsius and the c5 lending side of things all going down but in general i think we all know the staking of what we're talking about is a very different thing so um yeah i can speak from experience that we have to kind of educate a lot of investors about kind of how staking works what kind of assurances we can provide um so yeah i mean we provide a platform similar to obviously block team and themselves to uh to come on to away being be able to stake your assets um whether it be institutional retail or any of the above but yeah a lot of we're doing what we're doing at the moment whether it be speaking to traditional firms or crypto natives is is kind of educating them on how they can participate understanding the risks and and all the different things they can do in the space basically to generate that yield but that in general it is possible to to get yields above kind of five percent without massive risks as long as you can understand the space so yeah i think what we do for the main part at the moment is with a lot of crypto native firms that probably understand the space a bit better and understand the yields and are more comfortable putting big size in um but i think over the next one to three years we'll probably start to see more traditional financial institutions participate because a lot of these guys yeah to to to be frank them getting 10 plus yield seems pretty insane when you look at where fixed income is where inflation is it seems almost like a scam and and then you add the word crypto into that as well like people start to go away i mean like this doesn't seem like it's right so yeah i think there's a lot of education that we'll we'll continue to over the next one to three years or so and i think we'll see the big guys come into the space and whether it be banks i think we're already seeing as i said the crypto native side they're heavily involved in the staking space maybe a few family offices private banks are willing to take the risk um but i think we're really speaking some kind of actual like banks like big real big banks um that are looking at this stuff but just need the understanding and and probably the infrastructure that all three of us provide to um give them the response they need to to generate these yields that they're looking to to get in space and i'm very interested in the process of staking so what happens now if i'm an institutional investor and i want to stake do i delegate my coins where does the custody happen so can you tell me maybe more about this process or any of you guys can you explain the process yeah i'm happy to take that um so i think the the first thought is obviously before you can say you have to own the assets right so you have to go to actually purchase those assets and so whether you're doing that through an exchange or through a broker or whoever that may be you need to obviously own the underlying asset and then um firms like us and block daman similarly right we we help exchanges uh and custodians and others be able to actually provide staking yields directly to their customers um and so you can sort of access it in sort of one of two ways one you could be a direct customer of figment come directly to our platform through our ui and be able to actually stake your tokens directly with figment or you can go through one of our channel partners so that could be large custodians or exchanges where you are staking on their platform but you're actually delegating those assets to figment and one key thing to note which i think is really important and always comes up in crypto is sort of the custody and sort of who owns your keys uh and so with staking both for us uh and others in the space it's primarily a non-custodial model so we don't actually hold your keys or manage the assets on your behalf you do that either on your ledger device who's a partner of ours or another custodian in the space to be able to actually hold those assets and then you're actually just directing the uh the approving of the staking transactions to our validator nodes but you still manage all the withdrawal keys and all the keys through either your custodian your ledger or however else you're managing the the custody on your side yeah i think um it's super important to stress the non-custodial aspect so you know one of the things for us is you know we're we don't want to hold your funds but we want to run the infrastructure to support these networks so building integrations into custodians is kind of the next iteration of where this industry is going so we're starting to see a lot of you know staking's really only a couple of years old and you know as a lot of institutions that come into this space you know they're they're looking for you know um compliant companies who who don't custody assets um and also the custodians are onboarding as many protocols as they can so together we're working to kind of build integrations to all these different systems to allow people to basically you know look after their own funds make the onboarding process as smooth as it can be because you know staking isn't going to go away the networks aren't going to go away proof of stake isn't going to go away so you know having those deep integrations into all of the other channel partners that are available in custodians is super important as more assets and more protocols come online and you know not being a non-custodial business it's it's kind of our mission i guess is to to make that process as simple as possible for both institutions retail and you know any individual who wants to run staking infrastructure and who are the institutions that want to participate in staking can you give us an overview of basically your client base um i'll touch quickly back on that so i said initially like i think crypto i touched quickly on crypto native i think there's kind of two ways you can divide that as much as i say crypto natives are a big part of what's kind of going on in staking right now i think crypto native kind of comes into two different parts of the market you've got crypto native firms who are actually uh ex-traditional financial people that have come into the space and built their own crypto firms and then you've got people who might have just come straight into crypto so those guys currently are more um i think because there's the educational aspect of it and whether it be as you said the custody the tech behind it it's not something that's particularly easy to understand when you're typical people that want to typical guys from traditional markets that want to participate here are the guys that might look at fixed income or any other products like that and try and generate yields in a more traditional sense so um those guys coming into the market i think is the next kind of real push or the next step um and what all three of us probably in this panel are trying to help build and then bring those guys over um so yeah i think currently it's more of the quick donated folks that understand the space also have um amassed fairly big sums in the past few years whether it be from compounding or doing very well let's be honest like it's the crypto space is growing so quickly that um yeah those who had a small amount of assets a few years back are now quite a significant participator in staking or whatever else may be in the space even c4 lending but um i won't go too much into that so yeah i think mainly the crypto native guys are the ones who are involved so far but yeah i think family offices private banks um ultra high net worths even some hedge funds that are participating in the space currently doing a bit of trading are all the ones who are kind of just starting to kind of dip their toes in and get more involved in staking um i can tell from your nod there you're probably speaking to a few the same fans last but um and then the the big guys that are coming in as well like credit for like credit firms big banks um i think that's the real next push or that's the real um next change in the space of really those guys understanding the space and those are obviously the guys that can put not just a kind of 10 or 20 million dollar ticket but a hell of a lot more than that once they understand the custody and the tech behind it and uh yeah i'm confident that change is happening within yeah the next six months because we're speaking to a lot of the big banks and a lot of firms which are yeah different to what i just said there in terms of the crypt donate that they're not a crypto native they're still understanding this space and then they're serious kind of traditional financial players that are now kind of together with the fact that crypto is going to be around they understand staking they understand it's a real product we can make some serious yield and um yeah they're just looking to find out where the infrastructure is what the custody looks like and if it's safe for them to actually participate yeah just another kind of set of customers we have would be say people who need infrastructure so if you look at crypto exchanges a lot of these guys are holding assets they're custodying themselves but they're not infrastructure companies they're trading houses or they offer you know services but as there's all these yields available um you know it makes sense for them to outsource their infrastructure to companies like us who can you know run infrastructure on their behalf so they can focus on actually offering yield and building services for their clients rather than having to build a block demon internally which you know is difficult business um so you have seen a lot of consolidation in the industry where exchanges have looked at the landscape and actually acquired companies who offer these types of services and we also see you know um other clients like neo banks or or crypto uh foundations as well who actually have assets and they need to stake them um we also see you know a lot of the interest from the big banks they're still very tentative about what this actually looks like um and i think there's a lot of education still required in the space i mean i think like i said earlier as we make these integrations into all these different custodial platforms i think a lot of people will start to see that you know staking is a primitive of blockchain technology and if we can build the layers on top of it to make it easier for everyone i think we're going to see a lot more customers not just from the financial world but also you know other um different companies who potentially have a who want to participate in securing a lot of these blockchain networks and what are the restrictions for these institutional investors or institutions to start staking or to get involved in staking yeah i can talk talk about this a tiny bit so i guess first and foremost is like the regulatory piece which at any crypto conference you go to you probably hear four different panels about regulation and whether these assets are securities or commodities and obviously crypto being a global world making sure all the regulators are on the same page so i think the biggest blocker is like clarity on what these assets actually are so that banks and other regulated institutions feel comfortable holding those assets so that's like obviously first and foremost we have to be able to buy these things uh and then i think one of the other big challenges in crypto right now which is sort of still making its way up is sort of the user experience right um and so being able to actually stake your tokens in a very easy and seamless way is pretty critical um and so one of the things that figment's obviously doing is is working with all of the channel partners that hopefully you guys are using today copper fire blocks ledger bitco a lot of these big names so you can just have one central place to be able to buy trade and stake your assets with sort of simple one-click button and being able to have a full dashboard across all of your assets and then longer tail right hopefully that comes not just to crypto firms but also to traditional finance companies as well right we're starting to see more players come into the space fidelity bank of new york a lot of these are sort of leading the way in terms of being able to custody and trade crypto assets and so when that does happen it won't just be able to do all that just with your cryptocurrencies but also with your traditional assets right alongside of that and so that's really the ultimate goal right you want to be able to have one universal platform that's seamless versus 20 different apps five wallets you know things get confusing and lost you don't know where you are and so i think it's really the regulatory clarity and then the user experience being more streamlined i think the way i see it right now is it can be staking can almost be maybe three or four um different steps down the line for i'm going to speak like about that kind of more financial institutions that like are adopting it right now i think the first step is kind of financial institutions come in maybe a trade a cash settled derivative and that's easy to understand because they don't cross over their regulatory um purges or anything like that and then once i get to the point where they can actually get approved to hold spot and then the custody comes in and then they have to have the conversation in terms of can we go and stake this with the with the compliance guys understand what it looks like and actually run it through like most of these firms are coming to the space have huge whether it be compliance teams legal teams and and risk teams as well so the work i look at is the kind of third or fourth step down that line and as much as we can sit here and say we're educating the guy these guys these guys have to go back to their own firms and then educate their own firms because they they're not they might not be crypto firms so as much as we can be the educators them they need to go back and explain these steps and explain what earth staking is to their to their risk team and how they're going to make this yield and if it's safe where they can put the custody so um yeah the regulatory side of it so it's a big hurdle and sometimes it's even just the team within that um company understanding whether it fits their risk appetite um so yeah yeah i think another part as well um is you know there's a steady education piece and when we talk about education we need to explain to people like about unbonding periods so you know when you delegate your assets um there's typically an unbonding period which means the assets are locked for a period of time with ethereum it's locked until the merge happens and then withdrawals happen who knows when that could be sometime this year hopefully but with other protocols you might have a 20-day 30-day unbonding period the reason for that is is because you don't want to fly a capital out of the network in you know volatile times um so essentially it keeps assets locked to the validators which means the networks are going to be secure so trying to explain this to um you know an institution or or a bank that you can't just get instant liquidity on your assets is is also a challenge and sometimes that affects people you know like they're like okay well how how are we going to exit our position if x y and z happens um so you know you see a lot of innovation in this space surrounding this so you see platforms that are building liquid staking solutions and block demon lockdemand is currently working on something uh you know for ethereum um and there's other platforms out there that are basically allowing you to get some sort of early liquidity while the bonding period is still in place so yeah i think that educational part is also kind of a bottleneck maybe right now because um i was at a conference a month ago in monaco where a lot of institutional investors were asking about how to invest in blockchain what's taking but with some you have to start with a really basic level um and some are more advanced in their knowledge but like maybe streamlining this educational part um is one of the hardest things in the beginning before you actually start with a technical part yeah i think in short it just takes time i don't think it's like as much it could be a bottleneck like no one can turn around and just say right sure let's do this like especially the bigger guys that are thinking about doing this in size at the other day education just takes time and i think especially over the past five six years um most people that looked at crypto were thinking it was a scam or didn't really understand the space and now we're sitting here and i don't think anyone in this room would disagree with me in the sense when i say that everyone thinks crypto is going to be around for a very incredibly long time if not infinite time yeah well it's true though five years ago if we sit in this room there might have been some people around saying you know will it be around next year will it not and i think we can all sit here and agree on that now um death or therefore people need to learn about it and that as i said will just take time and then yeah yeah and let's now talk about the risks what are the risks when um an institutional investor stakes yeah so go ahead andre um so i guess the first risk is you know the protocol has this uh feature built in called slashing and essentially what that means is if someone is trying to like spoof the protocol or to do something you know um bad to try and you know game the system the protocol has a input feature that can basically slash some of the deposit or the delegation that is on a validator so that's the first initial risk especially if you outsource to a provider you know you want to make sure that they have mechanisms in place that can prevent double signing which is essentially running two nodes that potentially have a different view of the world to try and you know exploit some transactions um so you know a lot of providers have you know especially people i blocked him and we have slashing insurance in case you know we we accidentally break something in our platform thankfully our infrastructure is quite uh well battle hardened um but that is one of the biggest risks out there obviously i spoke a little bit about the bonding periods there could be a very volatile period in the market and someone's you know assets are essentially tied up which means they can't exit their position and that is one of the risks i guess you know if you want to secure these networks um so yeah yeah i would just add a little bit on onto that just to kind of put perspective and maybe some some ease around the the risks it's so different than lending what's going on in celsius right in the four years that figment's been running infrastructure we've never been slashed once right and we're running billions of dollars of assets for 200 plus customers and never once have we had a principal loss for any of our customers and so that's a pretty long track record on some of this infrastructure so really really different on sort of what that is and again right similarly we have insurance coverage and all these things to make customers feel comfortable with being able to stake their assets that are there and so very very different in terms of risk parameters sort of what else is out there in the market so i think the risks are not clear for so many participants and maybe this should be also part of the education that we spoke about so important yeah and one other thing just to mention on that right if we were to go away right if figment were to be uh go bankrupt tomorrow or something of that nature happen right you could just redelegate your assets to block damon or to somebody else right to be able to do that right so it's not we don't again we don't control your keys we don't control your crypto right so if you know we were to go away in that scenario you could just repoint them and start earning yields somewhere else so it's again a very very different sort of risk profile in terms of the service provider you're working with and you can work with multiple service providers sort of in to make yourself more comfortable which i think we see a lot of large institutions doing they want to have multiple custodians multiple trading partners redundancy in the market and so that's sort of something that i think we'll start to see over time and that's a good thing for our space and decentralization is really key to the market specifically on proof of stake change just another sort of tidbit here around competition and sort of risk no single provider can be a validator for more than a third of the network or they can rewrite the chain this is similar for bitcoin networks for 51 of the network um and so we don't want to see one or two providers out there like just us and block daemon we want to see a bunch of other firms coming in and helping provide resiliency and redundancy to the network and so this is a pretty uh unique thing because if you think about financial markets right it's goldman and morgan or bank of america and jp right it's like very very competitive but over time right we spread the assets and the risk across the space yeah and if we you know if the we don't all participate and be good custodians of the networks they won't succeed so you know if someone is too dominant that's a bad thing for everyone um so yeah competition and you know diversity is definitely encouraged in the space because we're all going to absolutely change the world if we get it get together you know so yeah provider diversification to lower the risk perfect so thank you guys uh yeah our time is up thank you for listening uh and thank you for participating in this panel thank you for having us [Applause]