[Daily] The noise around staking

Good morning! Welcome to The Daily Moon. It’s a brand new week. Over the weekend France’s top modern art museum announced that it will be hosting a permanent exhibit of art on the intersection of blockchain. Essentially, it will be hosting NFTs including CryptoPunks. If you’re Paris, you may want to swing by.

Moving on, we talk about the debate around crypto staking, and PayPal's changed its mind.

As of Sunday, 4PM IST

The markets were cautious. Bitcoin remained below $22,000 and Ethereum was at $1,530 levels. Nasdaq fell on uncertain economic outlook. Back home, Sensex and Nifty ended lower on weak global cues.

Are Your Staked Assets At Risk?

Just when you thought that the FTX mayhem had settled down, there’s something else to worry about. Crypto staking is under the US SEC’s radar. Crypto firms, customers, and developers—everyone’s on edge.

Things got a little heated on Thursday after the SEC ordered a crypto company to end its staking service for US customers. All customer rewards (except Ether that’s locked till the Shanghai upgrade) were paid out on the same day. There are murmurs of an outright ban as well.

Now if you take a step back and think about the consequences, it’s a bummer. A potential SEC ban will kill staking-as-a-service in the US. The other alternative is moving unstaked assets to a DeFi platform.

Staking 101Before we get to the debate around rewards for crypto stake, it’s important to understand what staking is. In crypto, there are proof-of-work (PoW) tokens and proof-of-stake (PoS) tokens. PoW is where computers are used to solve a mathematical problem and mint crypto. PoS is where crypto is staked to validate a transaction and add a new block. PoS tokens support staking.

Staking is similar to banking. You deposit some money in a bank, which uses your money to lend to other customers. In return, you earn an interest rate. Similarly, in crypto, the tokens that you stake or deposit are used to support transactions on the blockchain network.

Ethereum’s shift to proof-of-stake in 2022 was the talk of the town for a while. But the actual switch started more than a decade ago. In 2012, Sunny King and Scott Nadal (not their real names) launched a PoS token called Peercoin. The premise was simple: stake some tokens and get rewards.

Soon after, Solana and a few other tokens joined the list. And staking got popular. Then came DeFi where customers got flexibility. It added something called liquid staking where customers got a staked equivalent of the token. So if you deposited 10 ETH, you’d get 10 staked Ether plus earn rewards on the sidelines.

All of this brought more users to staking. Crypto companies launched staking services where you were able to earn annual interest on staked assets. About $42 billion worth crypto has been staked, with $3 billion in rewards attached to these assets.

FYI So far, it’s just crypto companies’ staking products that are under scrutiny. This means that if you are an independent validator on Ethereum or staked directly on a DeFi app, your rewards haven’t been snatched away. Yet.

What is the furore then?If the SEC believes a product to be harmful to customer interests, it can force the company selling it to stop sales. That’s applicable to all companies operating within the US, including crypto firms.

But decentralised protocols within the crypto ecosystem aren’t regulated by the SEC.

That’s why DeFi protocol Lido Finance gained when the ban rumours surfaced. Having said that, SEC chief Gary Gensler had earlier cautioned against all types of staking in general. So we cannot be too certain of the future.

On the SEC’s wishlist is either:

• Companies stop offering crypto staking products

Or

• Offer staking products approved under securities law.

But SEC-regulated crypto staking will be against the spirit of decentralisation. So the crypto industry doesn’t want that to happen.

For now, it’s a state of flux. If one crypto company is barred from offering staking products, other licensed entities may also have to hit pause. At least, there’s Lido to fall back on.

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PayPal Pauses Its Stablecoin Experiment

PayPal was preparing to unveil a stablecoin in the next few weeks but that won’t be happening anytime soon. The payments giant, was going to launch a stablecoin, which would be backed by the dollar, has put its experiments on pause because, well, regulators.

The SEC again?No, not the SEC but the New York State Department. You see, PayPal has partnered with a company that runs another token. This company is under investigation by the New York state. This has caused all plans to be put on hold. Two reasons:

1. You don't want to annoy regulators now, especially around crypto.

2. PayPal is a listed company, any investigation will have a direct impact on its share price.

It won’t end hereIt is unlikely that PayPal’s dalliances with crypto will end here. It has a “bitlicense”, which allows it to operate crypto solutions. There’s more to come.

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