Will the SEC's settlement with Kraken reshape the Ethereum staking landscape?

Original: 《How the SEC Could Reshape Ethereum's Staking Landscape for the Better》

Author: Margaux Nijkerk, Sam Kessler

Translated by: Qianwen, ChainCatcher

Last week, the U.S. Securities and Exchange Commission (SEC) suddenly reached a settlement with Kraken, resulting in the shutdown of its staking services. This sparked discussions about whether "staking" services on blockchains like Ethereum can continue to exist.

Ethereum experts and blockchain analysts say that while this seems like bad news for the crypto industry, it may also drive progress in the industry. For example, it could help decentralize the Ethereum network and force service providers to clarify how they generate returns for retail investors.

The settlement requires Kraken to stop providing "staking services" to U.S. customers. Previously, this service allowed retail investors to "stake" a certain amount of cryptocurrency on the blockchain in exchange for returns.

POS blockchains like Ethereum attract users to stake crypto assets as a form of collateral in exchange for rewards, similar to interest payments. In contrast, POW networks like Bitcoin generate returns through energy-intensive mining.

The settlement between Kraken and the SEC could be bad news for many staking products that allow users to stake with lower upfront costs or technical knowledge than usually required. Currently, there are approximately $25 billion worth of Ether staked on Ethereum, with 18% of the stake held by Coinbase and Kraken—two of the largest platforms providing staking services.

To reach the settlement, Kraken classified its staking products as securities, which could impact the entire staking sector. "Decentralized" staking services like Lido and Rocket Pool are scrambling to understand whether the SEC's stance on staking could ultimately benefit them in the long run. Non-intermediated "solo stakers" also see a glimmer of hope from the SEC's actions, as it could make the network more secure and decentralized.

Staking Service Platforms

Staking on Ethereum requires at least 32 ETH (approximately $50,000). Staking without intermediaries means setting up a computer as a "node" on the Ethereum network—this is a complex task that can lead to significant financial losses if done incorrectly.

These barriers leave room for exchanges like Kraken and Coinbase to assist retail investors in staking—primarily for earning interest. These two platforms pool users' funds together, eliminating the 32 ETH requirement for users and managing the operation of the nodes.

SEC Commissioner Hester Peirce harshly criticized the agency's actions against Kraken in a statement, arguing that "staking services are not uniform, and a one-time enforcement action with a blunt analysis does not solve the problem."

In legal documents, the SEC expressed concerns about Kraken's mechanism for calculating the returns paid to users. The commission wrote: "These returns are determined by the defendant rather than the underlying blockchain protocol, and these returns do not necessarily depend on Kraken's actual earnings from staking."

Coinbase insists that its own service is different. Coinbase's Chief Legal Officer Paul Grewal stated on Twitter: "Our true on-chain staking service is fundamentally different from Kraken's." According to Grewal, the difference lies in the fact that users' rewards are directly tied to the staking rewards earned.

Although Coinbase CEO Brian Armstrong expressed willingness to fight if the SEC treats Coinbase's staking products like it did Kraken's, what will happen next remains unclear.

As CoinDesk reported last week, analysts at Coinbase acknowledged in a report that developments surrounding Kraken are likely to affect the "future growth rate of staking."

Decentralized Staking Services

After the SEC's ruling, investors seem to believe this is a positive development for "decentralized" staking platforms. The LDO token behind the largest decentralized staking service, Lido, temporarily surged 10% following the news surrounding Kraken. Lido and similar protocols do not have the same entry barriers as centralized services and operate entirely on smart contracts.

Lex Sokolin, Chief Economist at Ethereum development company ConsenSys, told CoinDesk, "In this case, there won't be a cryptocurrency exchange management team pooling your funds in your name."

This is the key difference—there is no centralized company or management team—decentralized products hope to face less scrutiny from regulators. Sokolin said, "I hope you have a different view of Lido, but I do think this is a very open question, both a legal issue and a conundrum."

Lido currently holds a 29% share of all staked ETH (with competitors like Rocket Pool holding significantly smaller shares). If the centralized staking service model were to disappear entirely, Lido might capture an even larger share.

Solo Staking

Some members of the Ethereum community believe that the SEC's enforcement actions bring a glimmer of hope, telling CoinDesk that this could help shift control of the network (and other blockchains) to more people.

Jaydeep Korde's company, Launchnodes, has built infrastructure to help holders of 32 ETH set up nodes. According to him, staking services like Kraken undermine the goal of creating a decentralized financial system in cryptocurrency. Korde told CoinDesk, "New intermediaries provide you with interest rates through so-called magic black boxes, which is no different from our current situation."

According to Korde, news about Kraken may ultimately drive those who own 32 ETH to stake independently, choosing to run their own nodes and no longer relinquishing control to third parties.

Ben Edgington, a product manager at ConsenSys, said, "I think this is beneficial for decentralization. In a POS network like Ethereum, an individual's stake corresponds to their power over the network; if one party holds enough stake in Ethereum (around 50-60%), theoretically they could slow down the network or block certain types of transactions. From a protocol and protocol health perspective, it's not ideal for a large centralized entity to control a significant amount of stake."

In the past, Ethereum used a proof-of-work system, where a few large mining pools had influence over the network that ordinary people did not possess. Therefore, Ethereum's new proof-of-stake model should make it harder for the network to become centralized. Edgington said, "Our goal has always been to have Ethereum operated by thousands of individual node operators, rather than controlled by three or four large data centers."

The growth of staking service platforms (and other factors) could jeopardize this goal, but the SEC's settlement with Kraken may help make Ethereum's proof-of-stake system harder to monopolize.