What Is Stopping Institutions From Taking the Path to Liquid Staking by@mashacryptoprlab

What Is Stopping Institutions From Taking the Path to Liquid Staking

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One of the biggest innovations in the crypto space is staking. While the yields in DeFi are impressive, staking offers a level of certainty that DeFi doesn't have. Despite the advantages, certain institutions are still against it. Liquid staking essentially brings the derivative market to crypto, allowing institutions more flexibility to use their assets without having them locked up. The argument of many institutions is that staking is merely a way to lock up enormous amounts of capital without commensurate returns. But that's not the only reason why executives like Coinabase fear institutional staking might not be a thing for a while yet.

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One of the biggest innovations in the crypto space is staking. While the yields in DeFi are impressive, staking offers a level of certainty that DeFi doesn't have. Despite the advantages, certain institutions are still against it.

According to the CFO of Coinbase, Alesia Haas, institutional staking is still in its infancy. And it's difficult to argue with her. While Coinbase has rolled out its institutional staking option, Haas argued that the service will not be a force in the market until a truly liquid staking option is available.

Liquid staking essentially brings the derivative market to crypto, allowing institutions more flexibility to use their assets without having them locked up. They get the staking rewards and more. Otherwise, they won’t be allowed to innovate and they cannot use capital the way they are used to in the legacy financial markets.

Despite the potential of staking and liquid staking, the question remains as to why certain institutions are against such new technologies

The Argument Against Institutional Staking

The argument of many institutions is that a is merely a way to lock up enormous amounts of capital without commensurate returns. They believe that it's the equivalent of a global institution putting all its money in a locked savings account.

But that's not the only reason why executives like Haas fear that institutional staking might not be a thing for a while yet. There are several reasons why institutions are, generally speaking, wary of staking.

One huge obstacle that institutional staking faces are the general incoherence of network staking economies. While this is also an issue with DeFi, DeFi makes up for it with higher returns. For example, networks like Graph take away about 0.5% of your principal right away. In addition to that, the staked asset is subject to a lot of forces outside the market, since it's essentially in the power of a third actor.

Validators, for one, may suffer a loss of their staked assets if they demonstrate malicious behavior. While that may look like a great policy on its own, it also means that the staking service is at liberty to determine what malicious behavior is. The problems with such powers are immediately obvious.

But in the end, the biggest reason why institutions are wary of staking is the fact it doesn't allow them to react to the market as they should. It essentially makes them powerless as to the future of their assets. The volatility of the market means that institutions, by default, will always want to exercise options on their assets. Staking stops them from doing that.

If, for instance, the price of a particular asset plummets by 50%, as it has done for several tokens these past few months, institutions will be powerless against it. While staking may yield them 10% or 11% on that asset, they've still made a huge loss — especially if it's an asset they don't have great faith in. Anyway, you cut it, it's obvious that institutions have no incentive to stake coins.

Basic staking does not allow institutions enough incentives to fully engage the market.

The Solution Of Liquid Staking

However, like many things in the crypto-verse, this doesn't have to be true for long. The obstacle to institutional staking can be explained in one simple sentence; institutions want to control their assets, and staking takes that away. In fact, there are several reports that prove this.

There's a way to stake that allows institutions to gain security, and also reap the benefits of ownership and flexibility - that's precisely what liquid staking does.

As Haas argued, liquid staking solves all the problems that institutions have with stakings. It gives them the benefits of staking yields, and also allows them the freedom of trading with their assets. It's like having your cake and eating it.

With liquid staking, institutions can stake their assets and still have access to it in terms of derivative tokens that can be used in DeFi. Through this, institutions can have the guarantees that staking offers while retaining the capacity to do whatever they want to their assets.

Interestingly, freeing up assets isn't the only benefit of liquid staking. It also allows institutions to yield stack, which means institutions can earn rewards from staking as well as other DeFi activities. Importantly, yield stacking with derivative tokens means that even if a DeFi project fails, the base yield of investors will still be protected since their assets are still staked.

And lastly, and perhaps most importantly, liquid staking makes the network stronger. Web3 Financial Institutions, like it or not, depend on a strong and vibrant Web3 economy. There's no resilient Web3 economy without strong networks, and staking reinforces the strength of any network. By incentivizing more staking, and removing the barriers stopping large financial institutions from staking, liquid staking reinforces networks in the crypto-verse. Ergo, making the world of Web3 even stronger.

Is Liquid Staking The Future?

Liquid staking is an exciting idea and it could be the future of staking. However, it's a protocol that's still in its infancy. Despite these, there are a few liquid staking services attempting to break the barriers of liquid staking for institutions.

Will they succeed? It's too early to tell. According to Filipe Gonçalves, head of DeFi at Ankr with prior experience in UBS, Credit Suisse, and BNP Paribas, it's an idea too good to pass up on. The benefits are myriad and it opens a whole new world - for those institutions that are bold enough to take the plunge. The industry as a whole has always been quite conservative. Companies like Ankr are aiming to bring Web3 and DeFi to the masses, by making staking and liquid staking as simple as possible.

Over the next few months or even years, we are bound to see more companies give liquid staking a go. Some initiatives will fail, but the odds are some will be successful. And these successful ones might just be the ones to create the future of staking.

Masha Prusso HackerNoon profile picture
by Masha Prusso @mashacryptoprlab.Entrepreneur. Attorney. Athlete. I write about innovations in blockchain and crypto space. Passionate about DeFi.
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