Laszlo Szabo (Kiln): "We're going to offer all the varieties of rewards that blockchains can generate

Who are your staking offerings aimed at?

We mainly work with exchanges, digital asset custody services, wallets and tomorrow probably fintechs and banks. Thanks to Kiln, our customers are able to offer staking services to individuals and institutions. We operate on a white label basis for them. We are the world leader among independent staking providers (outside exchanges, editor's note).

‍What sets Kiln apart in the staking landscape?

Mainly our on-chain products. We have been present on Ledger Live for over a year and absolutely everything happens on the blockchain. Users retain control of their funds at all times. We also offer pooling, which allows users to stash funds with no minimum deposit. And always totally on-chain, when many competitors rely on centralised services.

‍Do you see any appetite from institutional players?

This market is slower to get off the ground but there is already a great deal of maturity among pure players (crypto funds, specialist asset managers, etc.). I think that the traditional financial players will arrive at a later stage.

‍Which non-crypto players do you think are the most mature?

We are working, for example, with the Japanese group SBI, which manufactures electronic chips. After working in mining for years, they are now interested in staking. We could also mention Nomura, another Japanese bank. However, the other major international banks are not yet ready. We are in discussions with them, but it's still early days. For those that have identified staking as a central element of their strategy, it will take one or two years to implement.

‍Would staking be of interest to ETF issuers?

In the same way that stablecoin issuers invest their dollar reserves in US Treasury bonds, ETF issuers could use part of their ether reserves in staking to reap the rewards. I think this mechanism will be at the heart of their business model (see Chapter 7).

‍Do you trade with US companies that have launched Bitcoin ETFs and are planning to launch Ethereum ETHs?

Yes, about 90% of them. We are convinced that they will all use staking on digital assets that allow it. But the regulatory issue is still a bit complicated in the US as we have seen with Kraken and Coinbase where staking offers have been the subject of questions or prosecution by the regulator.

‍Kraken was forced to stop its staking service in the US, what was the problem?

The SEC found that there was a decorrelation between the reward level of actual staking and that offered to Kraken users. In addition, the assets were immediately liquid whereas a lock-up period is normally required. Generally speaking, the US regulator felt that Kraken was not transparent enough about what they were doing with their customers' funds. In my view, a custodian should be able to explain everything it does and how returns are calculated. This is why we believe that the future of staking will be on-chain so that funds can be audited in real time.

‍You have exchanges among your clients, what do you offer them to comply?

In order to stake 100% of their reserves and maintain optimal liquidity, the obvious solution is liquid staking (see chapter 5). However, this can pose a problem for these companies because liquid staking as it is designed today mixes the funds of users from different jurisdictions. In a Lido pool, you can find American, Chinese, Swiss, etc. funds. We have therefore created an NFT validator, which is a tokenisation of the representation of a validator. This gives a product a nationality and makes it compatible with the rules of a jurisdiction.

‍Could you launch your own liquid staking token?

We already offer a white label solution for exchanges that want to launch their own liquid staking token. However, we have no plans to launch our own. Admittedly, part of our business is also conducted directly, but I think we will need to be regulated to launch our own token. In the short and medium term, this is not part of our strategy.

‍Is regulation more flexible in Europe?

Staking is not yet covered by European texts, but the Swiss regulator (Finma, editor's note) is probably the one with the most detailed understanding of the subject. It has come to the conclusion that a player offering staking to institutional investors does not need to have a banking licence and therefore does not need to be subject to the Basel III rules, which impose high capital ratios. This was a very important point that threatened the business model for this activity. On the other hand, the Finma considers that those who offer pooling services to private individuals require a banking licence. We feel that this is a balanced view. And when everything happens on-chain, we think there is no need for a banking licence because the regulator has real-time visibility of what is happening and the user retains control of his funds.

‍Are you in discussions with the AMF and the BaFin (the German regulator, editor's note)?

At all. Things are starting to move with BaFin under the impetus of its new head, who was previously at Finma. In France, we hope that the AMF will soon provide a clear framework and set the pace in Europe.

‍Can we really say that staking is risk-free?

Nothing is risk-free, but the risk of staking is much lower than what you find in decentralised finance (DeFi). Here the risk is mainly slashing, but the biggest event of its kind cost 'only' $700,000. That's a handsome sum, to be sure, but it's a lot less than the various hacks that have taken place in DeFi in recent years.

‍The rewards of staking have tended to fall under the effect of its democratisation, so how do you maintain its attractiveness?

I think that the composability of staking must be essential, hence the relevance of liquid staking (see Chapter 5) which allows you to continue to use your funds while they secure the network. They can be used for lending, liquidity providing, DeFi, etc. Of course this is not without risk, but it allows you to go beyond the simple reward of staking.

‍There has been a lot of talk about the phenomenon of "restaking" in recent weeks, what is it?

It can be seen as horizontal liquid staking. Restaking (see Chapter 9) uses funds stored in Ethereum to secure other networks that may need them. In this way, users who have tied up ethers can also help to validate transactions on other blockchains that do not have the ambition to do so themselves. In the end, you can collect the rewards of Ethereum and other blockchains at the same time. To date, the EigenLayer protocol appears to be leading the way in this area. We plan to offer it to any of our customers who want it. It's quite revolutionary and all the specialists have identified it as a major innovation.

‍Innovation never stops in this sector...

Yes, and it's not over yet. We're already seeing the emergence of "liquid restaking", which allows restaking tokens to be used in decentralised finance.

‍Isn't there a risk of centralisation around Ethereum, which would ensure the security of all blockchains?

Yes it's a risk and it could have major consequences in the event of a problem on one of the networks. In the event of slashing on a validator (a penalty if the validator does not do its job properly, editor's note), this could have cascading repercussions on all the networks it helps to secure and on Ethereum in the first place.

‍Kiln is currently perceived as a start-up specialising in staking, but do you have other horizons?

We see ourselves as a company that offers all the varieties of rewards generated by blockchains. That's what our customers are asking for. We will soon be offering rewards from stablecoins used in DeFi (Aave, Compound, Morpho, etc.). We are seeing more and more traditional fintechs launching stablecoin products on a very large scale. But that's not all, we're huge believers in the tokenisation of real-world assets and associated rewards.