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Proof of Stake Alliance Updates Best Practice Staking Principles

The non-profit organisation released its updated staking principles to bolster consumer protection and encourage responsible innovation in the staking domain. The initiative received backing from 18 industry players.

Major blockchain firms endorse new principles

The Proof of Stake Alliance (POSA) has updated its staking principles to align the crypto staking industry around best practices, emphasizing consumer protection and responsible innovation. The principles address the evolving nature of the staking space, marked by the growth of Proof of Stake (PoS) blockchains, which now include 19 of the top 20 smart contract platforms and represent a market cap of over $250 billion. In PoS, validators stake their tokens to secure the network and validate transactions, differentiating it from activities like yield farming and lending, which do not concern blockchain security.

Proof of Stake is a consensus mechanism used by certain blockchains to validate transactions and secure their networks. Unlike Proof of Work (PoW), which requires substantial computational power to mine blocks (as seen in Bitcoin's blockchain), PoS relies on validators who stake their crypto as a form of security. These validators are then chosen to create new blocks and validate transactions based on the amount of cryptocurrency they have staked.

These new principles have been endorsed by 18 industry participants, including prominent entities like Ava Labs, Blockdaemon, Coinbase, Lido, Polychain, Paradigm, Rocketpool, and Swell.

The updated principles focus on three main areas:

  • "Principle I: Service providers should communicate clearly to ensure that users have all the information necessary to make informed decisions."
    • Service providers must disclose all relevant information, including risks and legal rights, to stakers.
    • They should use accurate terminology, avoid "interest" or "dividend," and refrain from investment advice.
    • Providers should not market the ability to earn "enhanced" rewards beyond what the protocol natively offers.
    • A transparent fee schedule should be provided detailing the portion of user rewards received as service fees.
  • "Principle II: Users should control whether and how much of their assets to stake."
    • Users must opt-in to staking services, with providers requiring affirmative action or consent.
    • Providers should focus on maintaining access to the protocol and emphasize that staked assets and rewards remain the property of the user.
  • "Principle III: Service providers should have explicitly delineated responsibilities."
    • Providers should not manage or control liquidity for users, allowing users to determine the amount of their tokens which are staked.
    • Providers should not guarantee the amount of rewards earned, making it clear that the protocol determines rewards and can vary.

These principles aim to guide the industry towards responsible growth and clarify the role and responsibilities of service providers in the staking ecosystem. They reflect the need for updated best practices in light of rapid advancements in the staking space, ensuring clarity, user autonomy, and transparency in service provider responsibilities.

The Proof of Stake Alliance (POSA) is an advocacy organization representing the interests of the Proof of Stake (PoS) blockchain industry. Its members include companies and organizations involved in the business of staking on blockchains such as Ethereum. POSA focuses on promoting and implementing best practices in the staking space, particularly regarding consumer protection and responsible innovation.

POSA founder, Evan Weiss, emphasized the importance of the updated staking principles for self-regulation in the rapidly evolving and highly scrutinized proof of stake ecosystem. He highlighted the updated principles' role in fostering clarity and responsibility, building trust, informing regulations, and showcasing the technology's potential.

These revised principles were tailored to align with the U.S. Securities and Exchange Commission's (SEC) investor protection objectives, emphasizing clear communication, user control over assets, and well-defined service provider responsibilities. This update is a proactive measure to enhance trust among stakeholders and address regulatory risks.

The need for self-regulation

2020 marked a pivotal time for the Proof of Stake Alliance (POSA) with the release of its inaugural staking principles, setting a standard for technical service providers in the nascent crypto-staking realm.

These guidelines underscored the necessity for transparency, advising against offering investment advice, promising certain staking rewards, or claiming undue influence over network protocols.

The regulatory landscape took a sharp turn in February 2023 with the SEC's significant enforcement action against Kraken, which was accused of operating an unregistered staking service and insufficiently disclosing associated risks. This incident, resulting in Kraken's termination of its staking services and a $30 million fine, underscored the urgent need for regulatory compliance within the staking industry.

The transition to PoS not only enhanced Ethereum's operational efficiency but also drew the gaze of U.S. federal regulators, stirring a debate about the nature of staking and its classification under securities law.

The aftermath of the FTX collapse further intensified this scrutiny, especially targeting staking-as-a-service (StaaS) offerings. High-profile enforcement actions against platforms like Kraken and Coinbase underscored a growing regulatory focus, challenging the industry to clarify the technical essence of staking, distinct from traditional financial services.

The evolution of POSA's staking principles from 2020 to 2023 reflects the dynamic journey of the staking industry itself. The future of staking, and by extension, the broader PoS-based blockchain networks, hinges on the industry's ability to effectively communicate these distinctions to regulators and lawmakers. A unified approach towards setting clear industry standards and educating key stakeholders is crucial. Such collaborative efforts are vital not only for dispelling prevalent misconceptions but also for ensuring the long-term growth and stability of PoS ecosystems in an environment marked by regulatory uncertainties.