Rising Demand for Institutional Staking: A Conversation with Polygon Labs

2023-06-06  •  9 min read

Staking has emerged as a crucial element of the blockchain ecosystem to incentivize securing networks. Institutional participation in staking plays a pivotal role in driving the growth and expansion of this technology. In a recent webinar hosted on our LinkedIn platform, experts from Polygon Labs and Ceffu shed light on the diverse use cases, institutional sentiment, regulatory considerations, and the significance of institutional partners in the staking landscape. We summarize the key takeaways and detailed insights from their conversation in this article.

Key takeaways

  • Staking is gaining significant traction among institutions as they recognize its potential as a long-term investment opportunity and a means to maximize token rewards.

  • Despite risk aversion, institutions are showing interest in diversifying their staking portfolios, incentivizing participation to enhance security and contribute to the blockchain industry.

  • Regulatory risks hinder institutional adoption of staking, but clearer regulations could trigger a surge in institutional capital, leading to substantial industry growth.

  • Education is crucial for wider institutional adoption of staking solutions, which helps to build trust and facilitate entry into the industry. Both Ceffu and Polygon actively educate institutions about the risks and potential of their technology to facilitate a smoother transition into the crypto industry.

  • Ceffu offers the base secure infrastructure for staking by acting as a gateway for institutions to access validators on various networks, including Polygon, which maximizes yield options and flexibility to choose validators based on performance.

  • The development of Polygon’s zkEVM represents a major technical advancement, providing secure block space availability and resonating well with institutional investors. zkEVM is ideal for tokenizing assets and offers secure and timely transaction finalization, making it appealing for financial applications.

  • Staking provides a predictable yield and behaves like a fixed-income asset, attracting institutional investors seeking stability and potential token price appreciation.

Market-wide perspectives on staking reveal growing institutional interest and appetite 

Staking has come a long way by overcoming initial skepticism and maturing into a recognized opportunity for institutions to do more with their assets than to leave them sitting idle in cold storage. With more institutions now viewing crypto assets as a long-term investment opportunity, many are recognizing staking as a valuable choice for maximizing token rewards and participation in the new paradigm of blockchain technology. 

While staking was initially dominated by individual participants, institutions now have the opportunity to actively participate and contribute to the governance and growth of blockchain networks, similar to how token holders engage in voting in decentralized autonomous organizations (DAOs). This increased participation from institutions enhances the security of the ecosystem and fosters the development of valuable public goods.

"If you want to get into the details of institutional staking, it's like an ecosystem that we're all here to grow and expand as rapidly as possible because ultimately it allows us to serve the billion users that Polygon really wants to serve in various capacities." - Colin Butler, Head of Institutional Capital at Polygon Labs

The lack of regulatory clarity hinders large institutions from fully embracing staking

While institutions are preparing for future adoption, they remain cautious due to regulatory risks. With favorable regulations, the potential for extreme demand from institutional investors exists, as they are currently entering the space gradually and quietly. Clearer regulations could trigger a tidal wave of institutional capital, leading to significant growth in the blockchain industry.

Institutions seek professionalized staking products that provide a secure and compliant environment for participation. Platforms like Ceffu’s address these concerns by offering robust and secure infrastructure that allows institutions to stake their assets without requiring deep expertise in running validators. By mitigating regulatory risks and providing user-friendly interfaces, these platforms make staking more accessible and attractive to institutions.

"We have conversations with all the largest institutions in the world and what we see is them really sharpening their knives. They're getting ready, but to some degree they're not willing to underwrite that regulatory risk yet to come in in size. Solutions like Ceffu are really needed in order for them to be able to fully adopt in the long term." - Colin Butler, Head of Institutional Capital at Polygon Labs

Despite general risk aversion, the institutional side of the blockchain space has become less risky in recent years

Institutions, being inherently risk-averse, require secure environments for staking their assets. The market events of the past year from both decentralized and centralized platforms have made institutions cautious about venturing beyond mainstream staking assets. However, there is growing interest among institutions to explore alternative assets and diversify their staking portfolios. Recent advancements like the Ethereum Shapella upgrade have also de-risked staking for institutions by allowing them to participate without concerns about liquidity.

"With Ceffu, we provide them with the base infrastructure that allows them to access those protocols securely with a cold storage component that facilitates their participation in staking." - Athena Yu, Vice President at Ceffu

Ceffu provides the infrastructure necessary for institutions to de-risk their participation and safely stake their assets. Our native staking solution utilizes an open architecture, acting as a gateway for clients to access validators participating in various networks, such as Polygon. Ceffu does not act as an intermediary; instead, clients can directly engage with the Polygon validators according to the protocol rules. This approach provides maximum options and flexibility for clients to choose validators and optimize their investment strategies, which has been an attractive feature among institutions. 

"We're essentially a secure gateway for our clients to access the network so they can stake with any of the available Polygon validators. Many of the clients we speak to love having that flexibility to pick and choose." - Kristine Johnson, Operations Lead at Ceffu

Education is key to facilitating wider institutional adoption of staking solutions

Education plays a crucial role in institutional investors' decision-making process when selecting a custodian like Ceffu for their staking activities. Some traditional finance (TradFi) clients in particular may not fully understand the risks associated with delegating their assets to decentralized finance (DeFi) platforms. This is why educating our clients about the potential factors to consider, such as security, is essential in building trust and facilitating their entry into the industry.

On the protocol side, the Polygon Labs team actively educates institutions about its technology, raising awareness of its potential and encouraging direct deployment of protocols on Polygon's proof-of-stake (PoS) or zkEVM (Zero-Knowledge Ethereum Virtual Machine) chains. Polygon's staking capabilities, liquidity provision in DeFi protocols, and institutional venture capital investments contribute to fostering institutional adoption and strengthening the bridge between the crypto-native community and traditional institutions. By facilitating connections with institutions and gathering feedback, Polygon aligns its development efforts with institutional needs to ensure a smoother transition.

"With the institutional side of the blockchain space becoming more de-risked, it's finally possible for people who have been educated on the technology and who work at large banks or pension funds to try and sell their teams on some of these new digital standards that can make their business more efficient." - Matthew Blumberg, Research Analysts, Institutional Capital at Polygon Labs

The development of zkEVM signals a major technical leap forward in the crypto space

zkEVM represents a major technical advancement as it enables full UVM (Universal Virtual Machine) compatibility on a Layer 2 solution. With Polygon's dedication to scaling Ethereum, zkEVM provides a secure solution for scaling Ethereum while resonating particularly well with institutional investors who prioritize security. The guarantee of secure block space availability at a reasonable cost is crucial for institutions deploying critical business processes on the blockchain. zkEVM’s security guarantees make it an ideal platform for institutions tokenizing various assets, ensuring timely transaction finalization and protection against custodial bridge hacks. 

Additionally, zkEVM’s role in DeFi is expected to grow, while Polygon PoS becomes a suitable choice for smaller-scale, experimental projects. Compared to optimistic rollups, zkEVM offers quicker and fully secure asset bridging, making it an appealing option for financial applications. As institutional interest in staking expands, educational initiatives like those led by Matt from Polygon play a vital role in guiding newcomers through their staking journey. Embracing staking is crucial for institutions to maximize the value they can derive from their holdings, making it an essential component of their investment strategy.

Institutional investors are increasingly recognizing the key advantages of staking as a strategic investment

Staking provides a predictable yield, making it a natural fit for institutional investors seeking a yield-bearing instrument. It behaves more closely to a fixed-income asset, offering a relatively stable underlying value over time. Innovative products are emerging that allow institutions to tranche out staking rewards or capture on-chain yield in off-chain financial products. By allocating a portion of their portfolio to staked assets, institutional investors can maximize their token holdings and benefit from potential token price appreciation.

While risks exist, such as security concerns, institutional investors are becoming more knowledgeable about these risks and are able to underwrite them effectively. With the rewards of staking outweighing the risks, institutional investors are increasingly adopting staking as a technology and actively seeking opportunities to allocate their portfolio to staked versions of assets. The trend towards staking maximization among institutional investors showcases their growing confidence and enthusiasm for this investment strategy.

"Assuming security for institutions, it does feel like on the traditional investment side, when you have undeployed capital, you want to put it to work in essentially some risk-free way. And for institutions coming into crypto that already have that mind, staking feels like a natural extension of that to them." - Colin Butler, Head of Institutional Capital at Polygon Labs

Institutional staking has evolved into a vital driver of blockchain growth and adoption. With the recognition of staking's value and rewards, platforms like Ceffu offer secure infrastructure for institutions to participate, while Polygon's advancements and educational efforts facilitate institutional adoption. 

Despite regulatory challenges and risk aversion, institutional investors are embracing staking as a strategic investment approach, capitalizing on the advantages it offers within the broader crypto space. By allocating their portfolio to staked assets, institutions can enjoy predictable yields, closely aligned behavior to fixed-income assets, and potential token appreciation. The continued growth of institutional staking will further accelerate blockchain adoption and drive innovation in the ecosystem.

Watch the recording of our conversation with Polygon Labs by clicking the image below.

About Polygon Labs
Polygon Labs develops Ethereum scaling solutions for Polygon protocols. Polygon Labs engages with other ecosystem developers to help make available scalable, affordable, secure and sustainable blockchain infrastructure for Web3. Polygon Labs has initially developed a growing suite of protocols for developers to gain easy access to major scaling solutions, including layer 2s (zero-knowledge rollups and optimistic rollups), sidechains, hybrid chains, app-specific chains, enterprise chains, and data availability protocols. Scaling solutions that Polygon Labs initially developed have seen widespread adoption with tens of thousands of decentralized apps, unique addresses exceeding unique addresses exceeding 211 million, over 1.12 million smart contracts created and 2.36 billion total transactions processed since inception. The existing Polygon network is home for some of the biggest Web3 projects, such as Aave, Uniswap, and OpenSea, and well-known enterprises, including Robinhood, Stripe and Adobe. Polygon Labs is carbon neutral with the goal of leading Web3 in becoming carbon negative. 

For more information, visit www.polygon.technology

About Ceffu
Ceffu is a compliant, institutional-grade custody platform offering custody and liquidity solutions that are ISO 27001 & 27701 certified and SOC Type 1 & Type 2 attested. Its multi-party computation (MPC) technology, combined with a customizable multi-approval scheme, provides bespoke solutions allowing institutional clients to safely store and manage their digital assets. Such solutions include insured on-chain cold storage, escrow services, staking, OTC and spot trading.

Institutions also benefit from Ceffu’s secure gateway to a wide range of liquidity products within the Binance ecosystem as Binance’s institutional custody partner through Mirror, its off-exchange settlement solution.

Media contact: pr@ceffu.com 

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