I have stated previously that my favorite class at Babson was CSCA: Competitive Structure, Competitive Analysis. The late (great) professor Lawless challenged us to think big picture about the strategic and long term choices competitors make. To me strategic decision-making for companies is like the Beta part of public market investing….be correct with your allocation to sectors of the market, and the fundamental research “alpha” of small difference in marginal P&L of Coke vs Pepsi meant little.
I was attracted to the industry of Staking after 3.5 years at Circle. I joined Circle in Jan 2021 as their first business development executive focused on the capital markets use cases of their stablecoin, USDC. I wanted to get closer to the actual functioning of blockchains as my time at Circle was coming to an end. As I did some research, the industry of staking was what caught my attention. While initially attracted to distributed ledgers and the idea of networks of servers being run by pseudonymous operators, I recognized that within financial services there would be need for the specialized services of staking the hundreds of billions dollars of proof-of-stake tokens held by institutional asset managers. And that is a large-scale opportunity.
I joined Kiln, a French company that was growing market share quickly in the staking services industry. An early entrant to staking, Kiln had a strong revenue base and the technical capabilities. They were consistently the best performing ETH staking service provider. And they had branched off and were very competitive in staking the other major PoS tokens. I joined as VP, Americas with a mandate to expand Kilns services in the US.
Providing staking services requires technical knowhow to run the machines (or vet and oversee the data center and hardware providers to do so), and blockchain engineers to build, run and update the specialized software that runs on the servers for each blockchain project. At this time there is no regulations or rules for compliance or reliability. So building a repuation of excellence is critically important; Kiln had that.
Companies offering staking services face a number of threats, which, combined, will cause the industry of staking services to be quickly absorbed by other service providers; the long-term outlook for independent staking service providers is poor.
While a unique set of services at this early time period in the use of PoS blockchains, Staking service providers have little moat and face even greater pricing pressure than other parts of the blockchain asset management value chain. Most blockchains are designed so as not to have staking penalties; why would they make it hard to maintain their network?!?! So low-cost operators are springing up quickly and offering 90% of the service and capabilities and reliability for half the price of the higher-reliability service providers.
The next strategic challenge the staking industry faces is from other service providers to asset management companies. If you are an existing custodian, who uses custody as a loss-leader, offering staking services is a riskless way to generate margin on thos same assets you are custodying. Staking is a 24/7/365 revenue generator with no market risk. That is more appealing to a custody CEO than adding a trading desk.
Finally, the Bitwise acquisition of Attestant in November 2024 will act as a blueprint for other asset managers. Bringing the staking services in-house adds a large margin to their businesses and does not require additional marketing spend. The Asset Managers are already competing in a very competitive field to land new AUM. When looking at some ETF revenue numbers, Bitwise charges 10bps on their Ethereum ETF; thats a tight margin. Knowing staking for ETF assets is would be approved in the US if Trump won the election, their purchase of Attestant is so smart. The staking services companies were pitching Bitwise with a service fee of 7-10 bps of the staking rewards. Lets do the math:
$1 million worth of ETH gets staked and returns the ETH average of 3% per annum. Thats $30,000 in staking rewards (assumes ETH price does not move). Paying 10bps service fee to an external staking service provider would cost BitWise $30 in costs and offset any additional revenues generated by the staking service.
So the staking industry is facing unbridled competition as every blockchain coder thinks to themselves, I run my own nodes, why don’t I just start offering that as a service. And the staking service providers are not as critical as some of the other asset servicing companies like professional asset manager and custodians (and prime brokers, lenders, etc).
Final thoughts: I can see the need for institutional holders of PoS assets needing the technical expertise of some blockchain coders in-house if they decide to execute their own staking services. But those firms already have a strong DevOps groups and teams, and its not like Fidelity or Blackrock are rushing to add the 43rd PoS blockchain that is going to launch this year. They are focused on ETH and Solana is making in-roads. No one at Blackrock is building on Berachain.
CONMODUM 