The Inadequacies of Liquid Staking For Institutions

We have previously touched upon it, but it never hurts to reiterate: liquid staking is presenting itself on the crypto stage as a deus ex-machina solution, and its influence and adoption is only here to stay. 

This is hardly a groundbreaking concept to most crypto users by now, as the market for liquid staking had already grown exponentially by Q2 of 2022, with 33% of all Ethereum tokens stashed away through liquid protocols. 

It has only continued to climb since. By Q3 of the same year, one single company in this space alone controlled over 30% of the entire staking market (whether liquid or in any form). In an interesting but telling turn of events, this was despite this very same company being at the centre of one of the biggest controversies in recent crypto tech history. 

A controversy which precipitated several large-scale exchange and lender collapses and took on connotations serious enough to warrant many to call for the ‘death of crypto’. 

The fact that such large growth is matched by an equally disproportionate record of bad practice, lack of security and, sometimes, human evaluation errors is certainly puzzling but can be explained by a simple notion. The technology devised by these troubled corporations is so valuable and innovative that investors and institutions aren’t easily scared away – they instead remain hopefully in wait for a 2.0 phase of development which will iron these offerings out. 

Corporate Hope Ahead


The confidence isn’t beyond all doubt, of course. 

The very same top executives of firms planning to tackle the shortcomings of this new protocol are cautious and keen to highlight how liquid staking needs tailoring before it can work for institutional clients, due to the demands for compliance and security stemming from corporate needs. 

This tailoring is likely to be put forward in the form of many small adjustments and increasingly ‘traditional’ security measures such as comprehensive audits, development of tightly controlled environments, lending and liquidity limitations, as well as extensive know-your-customer (KYC) protocols. 

Not all the positive evolutions likely to generate more faith amongst institutional investors are not necessarily going to be derived from proactive proprietary development, but rather by generic and organic improvements of the chains used for staking. 

Future Ethereum liquid staking solutions will be designed entirely as post-merge tools, thus being natively free from many of the issues plaguing the network pre-merge. 

Of course, as with any form of staking protocol, there will also be the organic self-improvement produced by a wider network of participants to the Proof of Stake version of Ethereum, which is widely adopted but relatively in the very early stages of its tech maturity. 

There is also a definite understanding across the different players (and often competitors) that while a race to market dominance is definitely on, there are also many advantages to be gained by agreeing on cross-platform and cross-chain shared protocols. 

An Attempt At Unity 

In a move similar to what happened in the early 2000s with the selection and development of Blu-Ray Disc as the widely accepted emerging high-definition disc tech, the industry is increasingly getting behind Alluvial

The ‘enterprise-grade liquid staking standard’ already works across Ethereum, Polkadot and Avalanche chains, and is making many ‘big’ friends in the crypto world. 

Kraken, Coinbase, Figment and Acala have all already struck partnerships of some form with Alluvial, and it’s hard to imagine this is where the race will end. 

They are working to decrease the technological, demographic and ideological gap that they have spotted between dangerously centralised protocols and inaccessible, unreliable public liquidity pools – a mission which would produce a model hitting the sweet spot between making the most of this new tech for institutions while reducing liabilities as much as possible. 

As the end result, Alluvial aims at taking a neutral, unbiased stance as a sort of governance tool for the entire industry: turning their management model into a DAO ‘with broad industry participation’ – though the details of that will heavily depend on the evolution of the market until such a change is made. 

Their goal to unite a market born out of a desire for decentralisation and independence might be ambitious, but it’s hard to deny that their idea is right: the way forward for marrying institutions with liquid staking is to provide clarity and protection from security breaches. 

A Potential To Unlock

Ultimately, the public perception of crypto is moving increasingly towards that of a fintech innovation to improve existing processes and paradigms. This is something that’s putting even more of an emphasis on developing future blockchains with institutional functions and needs in mind. 

Based on the points raised here, it’s hard to deny that liquid staking development directly addresses a former gap in the market which is, however, closing at increasing speed.

Both for clients and service providers, it’s high time to set a foot through the door – and projects like Alluvial will ensure this can happen with the confidence that a safe but forward-looking space for this type of solution already exists.

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