Crypto staking firms are racing to get ‘liquid staking’ to institutions

$28 billion. That’s how much money people have locked up, or “staked” in ether (ETH) in preparation for the network's planned switch from proof-of-work to proof-of-stake.

Ethereum’s developers hope that the transition, which has already been delayed multiple times, will be completed this year. At that point, the $28 billion in staked ETH will be unlocked and can be unstaked. But until then, it is inaccessible.

Now, some of the biggest crypto staking firms want to help their institutional clients unlock their staked value without actually unlocking the staked tokens. 

Introducing liquid staking

Called liquid staking, the idea is to let investors earn the original staking reward — typically around 4-7% — and also use the same capital to earn additional yield elsewhere. And it’s not just for Ethereum; such a service can work for any proof-of-stake blockchain network.

When someone stakes tokens with a liquid staking provider, they receive an equivalent amount of tokens that they can freely use. If they deposit ETH, they receive “staked ETH tokens,” or stETH. If the person wants to unlock their original tokens, they need to return the stETH back. 

Staked tokens can generate yield even while they are inaccessible, as is the case for Ethereum. But the time it takes to unlock tokens after staking them, known as the “unbonding period,” is a risk for investors, says Clayton Menzel, head of protocols and opportunities at Figment.

The unbonding period for most proof-of-stake blockchains typically takes a week or two. For Ethereum, of course, it has been much longer. In theory, that locked-up value could be put to use.

“We’re giving them a derivative to the asset,” says Menzel. 

The derivative token holds its value because it can be redeemed for the underlying asset. As a result, these tokens can  also be traded on secondary markets  at practically the same value as the underlying asset.

What Figment is building

Figment, which already has $6 billion in assets under management, is building a permissioned liquid staking product designed for institutional clients, in partnership with staking as a service platform Skillz. It hopes to ship the product in Q2 this year.

Retail liquid staking services already exist, with Lido being the most prominent example. Menzel says Figment has been studying the liquid staking market for a year, and decided not to challenge Lido for the retail market. “We don’t want to compete with something we already think is great.” 

Instead, it’s focused on its core institutional business.

Menzel explains that the kinds of firms interested in expanding their staking offering include companies like Fireblocks, Ledger Vault and larger exchanges like Copper, Anchorage and Bitgo. He adds that these firms service a much wider array of institutional and wealthy clients who don’t necessarily want to handle their own funds or interact with DeFi protocols themselves.

“A lot of these hedge funds/family offices are not using a Ledger. They’re using Fireblocks,” he says. “What we’re trying to do is build some whitelisted KYC (know-your-customer) solution that exchange custodians can provide to this institutional-level group.”

Blockdaemon is matching suit

Figment is not the only firm eyeing this particular market. Blockdaemon, which had $5 billion in assets under management as of May 2021, has partnered with liquid staking firm Stakewise to build a competing permissioned platform. That product is slated to go live in the summer.

Stakewise co-founder Kirill Kutakov says that large crypto-native funds are the main customers interested in a liquid staking product. But there are also some large companies in the crypto space that are not heavy DeFi users but have a lot of ETH locked up and see the benefits of liquid staking.

“They want to have liquidity as close to as ‘on demand’ as possible,” says Kutakov. “Some of them are also looking to go further and utilize their staked capital in DeFi protocols.

Blockdaemon is taking a different approach than Figment, which is building its own product from scratch. Instead, Blockdaemon is working with Stakewise, which already offers a permissionless liquid staking platform, to build a permissioned version that will require KYC processes and meet regulatory requirements.

“Technically, Stakewise is going to be forked for the purposes of creating a separate licensed compliant product that is going to be offered under the Blockdaemon umbrella,” says Kutakov. He adds that the branding — whether it’s called Stakewise, or something from Blockdaemon powered by Stakewise, or a totally different name — has not been decided yet.

Stakewise is preparing to deploy a testnet for the permissioned product by the end of this month. It has already booked in an audit for later in spring. “So ideally if everything aligns we would be looking at this summer for the launch," says Kutakov.

While the product will be primarily targeted at institutions, Kutakov speculates that such firms could then make liquid staking available in this format to the general public via retail apps. For example, neobanks could offer liquid staking to their retail audience, with this product operating behind the scenes.

This article has been updated to say that Figment's liquid staking product will now roll out in Q2, since the timeline for the company has changed.