The Shanghai upgrade, the Securities and Exchange Commission (SEC) announcement re Kraken being fined $30 Million USD, and having to close all staking operations, and what these mean for Staking as a Service providers, have been on my mind this week. I’ll talk about these things in this update. Secular stagnation is on my mind, too, but that will have to wait for another time.
The Ethereum network is radically changed by the Shanghai upgrade
The Ethereum Shanghai hardfork will unlock validator withdrawals – it will include other stuff, but this new functionality will materially affect the value and utility of the Ethereum network.
The star of Shanghai is EIP-4895, which will free up validators to withdraw the 16 million ETH that they have thus far “staked” to help secure the network.
EIP-4895 is the change that will allow validators to withdraw their staked ETH – something they previously have been unable to do.
Shanghai makes life tough for Staking as a Service providers
A really great newsletter and breakdown from Kuhan Tharmanantha reminds us that Solo stakers used the cli-deposit-tool from the Ethereum Foundation. Institutions or single nodes operators will have used a combination of the BLS key that Ledger enabled on their Nano-X or metamask wallet. Larger institutions used custodians or ran their own infrastructure or software solutions to generate and secure these new keys.
Kuhan points out that “The Shanghai/Capella fork will enable stakers to convert their withdrawal key from Eth2 to Eth1”. This can be done once, and in one direction for the validator, without affecting their active status. The holder of the withdrawal key must sign a simple payload and submit it to the appropriate endpoint of a consensus layer client (Prysmatic, Teku, Nimbus, Lighthouse et al). Kuhan writes, “This is the first and only time, so far, that the protocol has required the BLS12 withdrawal key to actually sign something.”
He also re-iterates the design goals of Ethereum and what ‘good’ looks like. Namely a decentralised database with as widely distributed a network as possible.
Easy withdrawals introduce security concerns
Back to ETH staking withdrawals. The ETH 2 wallet address process is going to be straightforward and simple for Solo stakers running their own validators.
For staking providers, however, it is much harder and creates a number of complex issues around security and usability because of the separation of validator and withdrawal keys.
This is not what SaaS providers need right now, with increased regulatory scrutiny and a big drop in revenue due to their commission being in ETH and ETH having fallen in value. Kuhan knows this because he runs Codefi staking, a Staking as a Service provider. I commend his transparency and desire to educate everyone.
Naughty Kraken and the SEC
Crypto exchange Kraken will “immediately” end its crypto staking-as-a-service platform for U.S. customers and pay $30 million to settle SEC charges that it offered unregistered securities, the U.S. government agency announced on Thursday.
The SEC’s characterization of Kraken’s staking setup highlighted the “risks” investors take on when staking their tokens with “staking-as-a-service” providers, which give them “very little protection,” the SEC said in a statement.
I don’t know if more describing words are needed beyond these announcements and facts. My only value add is that HNI eth holders – those with 32 eth + or business customers in the US and globally – need to start taking back control of their assets and their Ethereum staking infrastructure. Running staking operations on infrastructure you own avoids needing to trust compliant, regulated or non regulated crypto businesses. This week’s news highlights how these “crypto businesses” present their customers with ever bigger governance and operational holes.
The ‘magic piggy banks’ and why investors have to think differently
‘Your nodes on your infrastructure’ is our mantra, but while “I don’t care about that and all this technical sh*t, I just want the financial outcome” was once a popular and broadly acceptable outlook in the staking community, a financial outcome from crypto exchanges now seems like a false promise (albeit with the best of intentions). Further, Staking as a Service providers are going to incur more cost and complexity with the Shanghai upgrade.
So these well-funded magic piggy banks that gave investors returns from staking, with a “I don’t care how they do it” approach don’t look so clever now. Investors are now required to think about contributing to securing the network by becoming Solo stakers – as was always the intention of the Ethereum core dev and client teams, who are now rewarding those taking this approach.
Do the right thing
This is especially important for those investors with 32 ETH or multiples of 32: they are the custodians of making Ethereum strong and safe. It’s time to do the right thing and without equivocation, we want to help. We will give you the technical support to make you a Solo staker and our whole mission is to make solo staking a mass participation activity.