SEC vs Projects Staking: A new opportunity to test DVT?
Recently, the US regulatory body — The Securities and Exchange Commission (SEC), set off alarm bells against some of the flagship Ethereum-focused staking projects — Lido and Rocket Pool.
In an unexpected event against Consensys involving staking programs, the ongoing SEC case has opened up a fascinating opportunity to explore the potential of Distributed Validator Technology (DVT). This case, which focuses on regulatory scrutiny of staking projects, could become a pivotal moment for the broader adoption and understanding of DVT within the blockchain community.
Understanding the landscape
The SEC has intensified its focus on staking programs offered on MetaMask through third parties, such as Lido and Rocket Pool, in a new chapter of lawsuits against Consensys, examining their compliance with existing securities laws.
This time, the regulator noted that both entities’ derivative liquid tokens (stETH and rETH) apply to be categorized as securities because they function similarly to investment contracts.
This SEC flagging against Lido and Rocket Pool’s staking programs could mean facing significant hurdles in registering and complying with securities regulations, a bureaucratic red tape that could cost a lot of time and money for both projects.
Suppose the SEC proves that stakers contributing their ETH to a pool with the expectation of making a profit based on the efforts of the program’s administrators is sufficient grounds to get categorized as investment contracts. In that case, the SEC’s lawsuit may negatively affect the rest of the protocols that make a living in the industry.
“Since at least January 2023, Consensys has offered and sold tens of thousands of unregistered securities on behalf of liquid participation program providers Lido and Rocket Pool,” stated SEC
The demand has generated confusion in the market, and analysts believe that it has fueled the market with fear, leading to a decline in user participation and a drop in the value of tokens for both staking protocols.
Data from Santiment revealed that network growth associated with stETH and rETH dropped significantly in the days following the announcement, suggesting that the number of new addresses interested in both staking tokens decreased fundamentally following the announcement.
Inclusively, the price of the LDO (LIDO) token fell by 18.17% in the last 24 hours following the announcement.
Importantly, this is not the first time the regulator has taken action against ETH staking programs, given that in February 2023, the SEC deemed Kraken’s staking program as an investment program, which led the exchange to reach a $30 million settlement with the regulator.
This settlement included the cessation of the program’s operations and payment in restitution, late payment interest, and civil penalties.
Due to the historical and current facts about ETH staking programs by the regulator from SafeStake, we consider it convenient to reinforce the basic principles of decentralization and resistance to censorship that can drive protocols based on distributed validator technology (DVT) that allow the ecosystem to resist this kind of threatening actions.
What is DVT?
To recap, Distributed Validator Technology (DVT) is an innovative approach that improves the security and reliability of blockchain networks by distributing the role of a validator across multiple nodes, mitigating the risks associated with single points of failure by improving the overall resilience of the network.
Why try DVT now?
All of the problems we have explored over the past year and a half with ETH-focused staking programs have one thing in common: reliance on a few players who control the majority of (ETH) staked capital.
Centralized liquid staking protocols and pools such as Lido and Rocket Pool pose serious centralization and censorship risks, not to mention that many of these centralized companies host cloud servers in companies exposed to unforgiving regulatory policy vulnerabilities due to their location (Coinbase, Consensys, and others).
Avoiding a concentration of ETH in a single validator by decentralizing and distributing operations and activities among multiple operators instead of just one is part of the basic principles of DVT technology, which SafeStake has as a fundamental architecture in its protocol.
The ability of this technology to distribute validation responsibilities can significantly reduce the risk of malicious attacks and operational failures, making it an attractive option for projects seeking to strengthen their defenses.
As we have mentioned in our previous articles, by using DVT and allowing stakers with as little as 4 ETH to participate in the execution of validators on ETH, protocols like SafeStake drive a significant base of validators and operators, allowing for better diversity and decentralization, strengthening the security of Ethereum.
Promoting greater decentralization by ensuring that no single entity controls the validation process aligns with the fundamental principles of blockchain technology, thus possibly helping projects build more resilient networks that are less susceptible to manipulation.
In addition, DVT allows circumventing single points of failure in the transaction chain where validators only receive transactions from Flashbots relays, avoiding points of failure related to censorship by agencies such as SEC/OFAC that drive compliance with ambiguous regulatory measures.
Of course, as these regulations take shape, integrating DVT could help projects demonstrate improved safety and compliance, potentially alleviating regulatory concerns.
Looking Forward
The outcome of the SEC v. Consensys and ETH Staking Programs case will undoubtedly have far-reaching implications for the DeFi space. Regardless of the legal outcome, the case underscores the need for innovative solutions like DVT to address evolving challenges in the blockchain industry.
As projects navigate the regulatory landscape, embracing technologies that improve security, compliance, and decentralization will be crucial for sustainable growth.
There is no doubt that the SEC’s latest lawsuit presents a unique opportunity to test and showcase the benefits of Distributed Validator Technology in various centralized staking programs, a fact that Lido seems to have taken to heart lately.
By leveraging DVT, these staking projects can strengthen their networks and position themselves favorably in an increasingly regulated environment, helping to avoid putting a strain on an industry that, in recent years, has actively positioned itself as a favorite destination for investors, especially in the United States.
From SafeStake, we will continue to drive decentralization and resilience of Ethereum as our main long-term goals, aligned with the vision of our protocol in its next mainnet scheduled in the middle of this year, driven by the use of cutting-edge technologies, such as the use of DVT.
About SafeStake
SafeStake is a pioneering technology company focused on revolutionizing Ethereum staking. With its cutting-edge, decentralized Distributed Validator Technology (DVT), SafeStake provides an ultra-secure, fault-tolerant environment for Ethereum validators, maximizing staking rewards and minimizing penalties. SafeStake is committed to driving the growth, innovation, and decentralization of the Ethereum network while ensuring the security and prosperity of its participants.
