Biggest Crypto Stakes Warn of DeFi Challenges After SEC’s Kraken Crack Down

by Arthur · February 12, 2023

(Bloomberg) — One of the people behind Lido Finance, the largest DeFi cryptocurrency staking application, warned that service providers like Lido face a new set of implications in the wake of the U.S. Securities and Exchange Commission’s crackdown on the sector.

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“I’ve gotten a lot more questions about ‘does this affect Lido, what are your thoughts on this?'” said Jacob Blish, head of business development at the Decentralized Autonomous Organization, or DAO, which manages Lido Finance. “I personally think this is a net benefit for off-chain, permissionless liquid staking or staking providers, but it really depends on what the final solution is.”

Lido Finance has more than 4.8 million Ether staked on the platform, worth around $7.2 billion, according to data from blockchain data firm Nansen. On Thursday, Kraken entered into a settlement with the SEC over allegations that the exchange’s betting service was an illegal sale of securities.

DeFi apps allow people to trade, lend and borrow without intermediaries and often anonymously using automated protocols. Many in the DeFi community argue that the autonomous aspect pushes the apps outside the guidelines of regulators since no individual directly benefits.

If U.S. regulators ultimately conclude that no U.S. person can interact with any betting services at all, then “we have another problem,” Blish added.

Staking involves earning rewards by unlocking coins to help order transactions on various blockchains such as Ethereum. Coinbase Global Inc., Kraken, Binance and other centralized exchanges have bet on products to diversify revenue. Lido Finance was launched in December 2020. Its investors include Andreessen Horowitz and Coinbase Ventures.

“The most disappointing thing is that we as an industry are constantly asked for transparency, but then as an American citizen I get no transparency and how [regulator’s] the decision-making process is underway,” Blish said.

Staking services provided by both centralized and decentralized platforms allow users to stake coins without setting up special computing equipment or having a minimum amount of 32 Ether. The value of staked assets was estimated at $42 billion by the end of 2022, based on a report by Staked and Kraken.

According to Blish, unlike centralized platforms like Kraken, Lido acts as a “plumber” function to provide staking services.

“It’s a piece of software,” Blish said. “A user either says that I choose to engage with the service offered, or I don’t. And the user has full control.” He clarified that at the moment, withdrawals of Ether tokens are still not enabled yet on the Ethereum blockchain, but once the withdrawals are enabled, users have full control over their money.

The management of Lido is administered by Lido DAO. Members of the DAO determine key parameters of the Lido protocol through voting. The codes that run Lido’s project are open source and publicly available on the blockchain. Blish, who is based in New York, said that contributors to the DAO like himself are based around the world.

“The biggest risk I personally see as a US-based person is if they come down and say you can no longer interact with or contribute to these kinds of protocols,” Blish said. “So as a contributor to DAO, does that mean I can’t work at Lido anymore? Shall I go and do something else?”