Crowdfund Insider recently connected with Mike Taormina, Alluvial’s Co-Founder Chief Operating Officer. As COO of Alluvial, he works with industry professionals to build Liquid Collective, an enterprise-grade liquid staking standard.
Alluvial is the software development company supporting the implementation of the Liquid Collective protocol. Alluvial is focused on the overall growth and maturity of the ecosystem by bringing in more institutional participants to participate in proof of stake blockchains, combining institutions’ technical and security requirements with the web3 ethos of community-driven collaboration.
Liquid Collective is the secure liquid staking standard: a protocol with multi-chain capabilities, built and run by a collective of leading web3 teams. Developed in collaboration with a diverse group of industry leaders, Liquid Collective is designed to meet the need for an enterprise-grade decentralized liquid staking standard that can be widely adopted, increasing liquidity and composability for the web3 economy.
This soon-to-launch protocol is stewarded by an independent industry consortium, which includes The Liquid Foundation, Alluvial, Coinbase Cloud, Figment, Kiln, Kraken, Staked, and other web3 industry participants, and will be governed in a decentralized manner by a broad and dispersed community of industry participants. Liquid Collective relies on working with experts and the best teams in web3 to provide enterprise-grade liquid staking services, including Halborn, Spearbit, Nexus Mutual, Rated, Tenderly, and more.
Traditional staking methods come with several tradeoffs, as stakers must weigh the opportunity cost of locking up their tokens to stake on a given network. Current decentralized liquid staking offerings do not meet the needs of institutions and enterprises, and lack transparency around validator counterparties. At the same time, centralized liquid staking offerings are non-interoperable and increase fragmentation in the market.
Liquid Collective solves these needs. Liquid Staking is a technological solution that solves for the tradeoffs of traditional staking methods such as liquidity and capital efficiency, and unlike existing liquid staking solutions, Liquid Collective meets the security & compliance needs of institutional clients, paving the way for greater participation in staking.
Our conversation with Mike Taormina is shared below.
Crowdfund Insider: We are in a bear market. Why is liquid staking performing well in such conditions?
Mike Taormina: Bear markets tend to focus users’ interest on actual value. It’s no surprise that liquid staking is doing relatively well in this bear market, as securing the Ethereum network and receiving networks rewards is of foundational importance.
Simply put, liquid staking solves a real problem: when you lock tokens to participate in the security of the network, those tokens are illiquid. We will witness an increased demand for innovations that solve user problems like this, even in bear markets.
It’s often said that bear markets are for builders, and we agree. We see liquid staking as a new composable primitive, meaning that other projects will build innovative new use cases on top of liquid staking protocols for the betterment of the end-user experience. Liquid staking, particularly, is a foundational activity that helps secure the blockchain. This explains why, in such downtimes, there is more of a focus on technology that matters.
Crowdfund Insider: Why is the momentum for liquid staking platforms rising? What changes have contributed to this growth in the last year?
Mike Taormina: The unlock after the Shanghai upgrade will be an incredibly important event. The upgrade removes a lingering risk for participating in liquid staking. With that being said, liquid staking provides liquidity where regular staking on Ethereum cannot.
However, the price of that liquidity has been subject to the whims of the secondary market. Liquid staking receipt tokens, which are effectively documents of title for staked ether and any accrued network rewards, tend to trade at a discount to their underlying value in the secondary markets.
The main reason for this is the perceived risk that Ethereum may not upgrade to allow for withdrawals and stake remains locked up in network deposit contracts. Following the upgrade, this will no longer be a concern. Once withdrawals are enabled, a holder of a receipt token should finally be able to fully redeem the receipt token for the underlying staked ETH and staking rewards.
We’re seeing users take advantage of this perceived arbitrage opportunity by purchasing liquid staking receipt tokens trading at a discount to their underlying value. As the timing for the Shanghai upgrade nears, we’d expect that this secondary market discount should continue to close.
Crowdfund Insider: How do you believe March’s Shanghai upgrade for Ethereum will impact liquid staking?
Mike Taormina: The Shanghai upgrade reduces the risk of staking, which benefits liquid staking. If we travel back to January 2022, Ethereum’s transition to a proof-of-stake blockchain – the “Merge” – hadn’t yet occurred, and there was no definitive timeline for when withdrawals would be enabled. At that time, to participate in staking, users were locking up funds for an indefinite period. For some, that unknown timeline served as a barrier to entry.
The uncertainty around the timing of withdrawals being enabled on Ethereum is believed to be the primary reason why the staking rate (the % of a network’s tokens that are staked) has remained at only 13-14% for Ethereum, while other proof-of-stake networks have a significantly higher staking rate between 60-80%.
Following the March upgrade, users will have more confidence in liquid staking tokens to enable participation in Ethereum staking, which should usher in a new cohort of enterprise and mainstream users.
Crowdfund Insider: Do you believe liquid staking will continue to grow at a consistent pace? What challenges still need to be overcome in order to maintain this growth?
Mike Taormina: We expect staking in general to see a significant tailwind following the Shanghai upgrade. Only 13-14% of the Ethereum network is staked today, while other proof-of-stake blockchains have staking rates between 60-80%.
Once withdrawals are enabled, there will still be a waiting period to unstake ether – the so-called “unbonding” time. As a result, liquid staking will continue to provide a means to quickly enter or exit a staking position with a single token purchase or sale.
Additionally, we believe that a standard like Liquid Collective will help onboard an entirely new cohort of users to liquid staking, increasing liquidity and composability for the entire Web3 economy. In turn, we hope that this will increase the adoption of liquid staking worldwide.