2023-02-14 · timestamps by ADAtainment
UPD 02/14/2023
- A whiteboard reading of the SEC complaint against the Kraken staking program, tallying again and again that Cardano is not affected.
- The case is not about staking itself but about a proprietary custodial product that deviates from the underlying protocols.
- Kraken determined returns, pooled assets, offered instant unstaking, and kept a hidden liquidity reserve, none of which the protocol does.
- Cardano's staking is non custodial, non slashing, and protocol determined, so an operator never controls your funds and cannot destroy your stake.
- The media framing of an SEC crackdown on all staking is wrong, since the complaint targets deviations that create custodial, management, and disclosure risk.
- Regulation exists because at least one actor eventually betrays trust, and blockchain offers a third path: algorithmic regulation that removes the need to trust people.
42 entries
The whiteboard video reads the Kraken SEC settlement straight from the source complaint.
The complaint concerns an illegal unregistered offer and sale of securities, an investment contract advertising returns as high as 21 percent.
Staking involves proof of stake validation where holders of ada, ether, polkadot, or cosmos stake to earn rewards.
The complaint notes stake can be slashed or destroyed, and Cardano is not affected because it is non slashing.
The Kraken staking program pools investor assets for a competitive advantage, offering benefits not available to solo stakers.
Kraken offers instant reward accrual and instant unstaking, whereas Cardano has no bonding or custodial lockup.
Kraken determines the returns, not the protocol, while Cardano's staking certificate makes protocol determined returns transparent.
The program is custodial: investors transfer assets to Kraken, whereas Cardano staking is non custodial and not affected.
Kraken designates some tokens for staking and some as a liquidity reserve, unlike Ethereum bonding, which locks funds like Hotel California.
The claim that pooling increases the likelihood of validation is not quite right: it reduces variance, not the selection probability.
With ada the highest returns come from running a private pool, so handing it to someone else earns less minus a fee.
By April 2022 US investors had over 2.7 billion in the program, and Kraken earned about 147 million net, 45 million from US holders.
More than 135,000 unique US usernames participated with no registration filed with the SEC and no exemption applying.
The missing disclosures include fees that are not transparent, though a regulated entity does disclose its business and financial conditions.
The reserve is a weakness of a custodial, illiquid scheme that must be actively managed for withdrawals, almost like a fractional reserve bank.
The real risk is that slashing on Ethereum could lose user funds, which disclosures would not resolve, and Cardano is not affected.
At page seven the SEC defines crypto assets, blockchains, encumbrances, and ownership via a private key.
There is still no true legal definition of ownership: you own assets on Kraken but do not control the private keys.
The SEC notes validators are compensated by fees or by newly minted coinbase rewards, which may dilute the value of existing tokens.
The SEC describes delegation to nodes acting as staking pools run by node operators, which Cardano calls SPOs.
The complaint ignores proof of work mining pools, relevant because Cardano has a similar but superior model to Ethereum operations.
Cardano distributes rewards to both delegators and node operators automatically, so no trust in the operator is required.
The SEC even references the reward cap, Cardano's K factor, and multipool operators splitting into additional nodes.
The crux is that the program bypasses the Ethereum protocol, creating artificial liquidity through a reserve pool the protocol never provides.
The recurring theme is protocol deviation: no minimums, instant accrual, instant unstaking, and twice weekly payouts the protocol does not guarantee.
In Cardano's model, SPOs and delegators form a non custodial partnership where the operator has no access to funds and delegators can leave anytime.
With Kraken you make no decisions and it controls the money, unlike choosing your own pool partner in Daedalus.
The media frames it as the SEC getting rid of staking, calling all staking securities, which the complaint does not say.
Read carefully, the complaint says Kraken constructed a proprietary in house product, a deviation built on top of the protocols.
The ruling makes no statement against vanilla staking on Cardano, Algorand, Cosmos, or Polkadot, only against the deviations that add risk.
The lesson is to not take media at face value but to pull the source material and ask what the actual case is about.
Securities laws trace to the 1933 act after the 1920s market failures, with a scandal roughly every decade, most recently FTX.
Regulation exists to address information asymmetries, custodial risks, disclosure gaps, agency failures, and perverse incentives.
The point of crypto is to remove those problems, so protocol architects designed ubiquitous transparency and no custodial risk.
Fees are built into the staking certificate rather than left to the operator, and non slashing means a partner can only cost you future rewards.
Insists the video is not anti Kraken, since Kraken is a great organization, but regulators do step in when a company builds a problematic product.
People assume a systematic crackdown like Operation Choke Point 2.0, but this incident is about one centralized product design.
Protocol architects prefer self custody and many small validators, wanting a hundred thousand rather than a thousand.
The probability that at least one actor eventually betrays trust approaches one, as 19th century private currencies going belly up showed.
Blockchain is a third option between unregulated and regulated: algorithmic regulation, where better protocol design needs less human trust.
As staking gains side chains, pub sub, and voting, chimeric assets that are many things at once make the SEC and CFTC somewhat obsolete.
Since one token can be all of Don Tapscott's nine asset types at once, the answer is functional, transaction based regulation baked into the transaction.