Understanding the different types of Web 3 staking
Protocol, Land, Liquidity, Yield farming
Every company in the Web3 space that is providing US customers with staking services is potentially under scrutiny by the Securities and Exchange Commission (SEC).
Last week Kraken has agreed to pay $30 million fine for its crypto staking-as-a-service platform because Kraken’s website offered a 20% yield on its staking service without highlighting, on the website, the “risks” investors take on when staking their tokens.
Gary Gensler said the action “should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.”
Coinbase staking services are currently under investigation. The concern is that the SEC could want to prohibit all staking products in the U.S. This would have a massive implication for the blockchain protocols using Proof of Stake (PoS) consensus where staking (lock up or “stake”) in exchange for yield, is the primary way to verify transactions and secure the network.
From a regulations standpoint, it is not clear how to treat the reward from protocol staking, whether as income, or capital gain.
Staking comes from PoS — proof of staking consensus mechanism, the consensus mechanism so far most adopted by the majority of the blockchains. The consensus is the way to agree on which will be the next block linked to the blockchain. Consensus can be seen as blockchain’s Operating System.
Protocol Staking is when you hold a specific blockchain token and instead of lives it in a wallet, you locked it up to participate and secure the network, putting value at risk. When you protocol stake, you are running the protocol, running a node, securing the protocol, processing transactions, and holding tokens.
In bitcoin consensus mechanism Proof of Work (PoW), there are miners and bitcoin holders. In proof of stake, the token holders that stake, are also miners. They have to participate in the consensus running a node, which means running the protocol, in order to earn some tokens on-chain, as a form of a reward for the work done. Protocol Staking is not passive interest, because you are doing the work to run the protocol through running a node, like validating others’ transactions, securing the protocol…
Stacking Lend — Liquidity- Yeal
Lend and Liquidity Staking, along with Yeal Farming, are different forms of staking, such as passive income [1].
Lend Staking: similar to a bank where they will lend out your tokens for a return. If those platforms are decentralized you are the owner of your tokens until you own your private key, otherwise, in a centralized platform, the key, so the tokens, are managed by 3rd parties.
Liquidity Staking: many automated market maker (AMM) platforms allow users to provide their tokens as liquidity, and in return, receive rewards. Lending platforms like Aave are decentralized and offer users a non-custodial way to participate (stake) as depositors or borrowers, in other words, you still control the keys to your assets. Centralized lending platforms, like Celsuis, on the other hand, offer a similar depositor and borrower reward structure, but they own the keys to your assets.
Staking even includes services like automated market maker protocols such as Uniswap, Sushiswap, and Curve. Within these AMMs, users can stake, or lock tokens, to provide liquidity to trading pairs, and in return, earn trading fees on the platform.
Yield farming is a way to earn passive income staking tokens. Users move their assets around, between different high-yield marketplaces and staking protocols to attempt to maximize their returns.
[1] Staking
https://www.figment.io/resources/misconceptions-about-staking-protocol-staking-vs-liquidity-lending
