Gensler's Comments May Challenge Ethereum's Proof-Of-Stake System

September 21, 2021 11:30 AM
Crypto Story of the Day

Crypto Story of the Day




Results in the Top 10 were mixed this morning. SEC Chairman Gary Gensler will speak live with the Washington Post at 12 p.m. EST today about the crypto space.

Crypto Story of the Day

Last week, SEC Chairman Gary Gensler told crypto news outlet The Block that staking via third parties may qualify as a securities contract. The comments may challenge key concepts related to Ethereum’s proof-of-stake (PoS) system.

Speaking to The Block following last week’s hearing before the U.S. Senate, Gary Gensler made comments regarding potential securities laws’ implications of staking. Gensler was specifically referring to staking-as-a-service via exchanges or other platforms such as Celsius, Bitcoin Suisse, Lido, or Staked

The Chairman, who hasn’t previously remarked on staking, explained that users who engage in staking no longer own their tokens: “You've transferred ownership to the platform. All you have is a counterparty risk.” In return for transferring ownership, platforms provide “a four percent or seven percent return.” According to Gensler, “[t]hat takes on all the indicia of what Congress is trying to protect under the securities laws.”

Broadly speaking, staking— implemented in PoS networks— involves locking tokens in a contract which then allows those holders to process transactions and other activities on the network and earn fees in return. These users are generally known as validators.

In regard to Ethereum, in order to become a validator, users must stake a minimum of 32 ETH, just under USD 100,o00 based on current prices. If a user doesn’t have 32 ETH, they may become part of a staking pool. Both options, however, require extensive technical expertise and knowledge related to highly niche aspects of the Ethereum blockchain and the maintenance of sophisticated software. 

As a result, a number of crypto businesses— such as Kraken, Coinbase, Bitfinex, and Binance— offer Ethereum staking for largely retail users who own too small a quantity of ETH or lack the technical expertise. These services serve to facilitate broad participation in staking. 

According to Ethereum staking data site, staking service providers Kraken, Binance, Huobi, Staked, Bitcoin Suisse, and Lido make up roughly 35% of current Ethereum PoS validators. To date, 7.29 million ETH, or USD 24.11 billion, has been committed to staking on the network. 

PoS protocols have been criticized due to the benefit afforded to large token holders. For example, considering the existence of pre-mined tokens often allocated to project founders, incumbent actors may hold outsized sway over networks via staking— Vitalik Buterin is known to hold billions of USD worth of ETH. 

The concentration of staking may also lead to specific actors processing high proportions of a network’s transactions, which conceivably raises concerns over potential censorship. 

In this context, the ability for largely retail actors to participate in staking via intermediaries may counteract some of the aforementioned concerns. Gensler’s comments, however, suggest that providing services that allow broad participation in Ethereum staking may face legal complexities and challenges.

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