To limit the chances of being adversely impacted by the actions of a rogue validator, asset managers should ensure that their chosen validator has the requisite experience. In his written answers sent to Bitcoin.com News via Telegram, the Validation Cloud CTO said asset managers “should engage staking-as-a-service providers with strong security and slashing insurance.”

Another way asset managers can reassure their clients that their staking-as-a-service provider is a bona fide industry player is by choosing an audited staking platform. Staking service providers are either issued the SOC2 Type 1 or Type 2 attestation reports. While both attestations are valuable, McFarlane told Bicoin.com News that he sees SOC2 Type 1 as a better attestation report.

Meanwhile, when asked about the Ethereum network’s low staking ratio, McFarlane said its only because the “complete” staking became effective after the so-called Shapella upgrade in April. The CTO revealed that since the upgrade there has been an “over 50% growth in staked Ethereum over the last six months.”

Below are Andrew McFarlane‘s answers to all the questions sent.

Andrew McFarlane (AM): The Staking-as-a-Service product enables asset managers to support the operations of a blockchain network, without the burden of launching, maintaining, and scaling the necessary infrastructure – in return, asset managers earn significant rewards generated by the network.

The ability to provide this service without taking custody (non-custodial) of the tokens is the defining characteristic of a Staking-as-a-Service solution. This is in contrast with protocols like Lido or centralized exchanges, which require asset managers to deposit funds into these systems first, rather than staking directly from their wallets/custodians.

Institutional asset managers typically have strict obligations to hold assets with qualified custodians and procure tech partners who are SOC2-compliant. Staking-as-a-Service uniquely satisfies both of these obligations, allowing asset managers to keep their tokens in a custodian while being serviced by secure, compliant infrastructure.

AM: The main risk in Proof of Stake (PoS) networks is slashing, which refers to the penalty imposed on tokens staked on a validator who contravenes the rules of the network – the severity of the penalty can vary depending on the protocol. Institutional asset managers should be aware of the specific slashing risks for the networks in which they stake.

Validators are responsible for proposing and validating new blocks of transactions, yet proposing more than 1 block (double signing), proposing invalid blocks, or prolonged downtime can result in slashing by the network. While such events are rare, experienced operators significantly reduce this risk. Institutional asset managers should engage Staking-as-a-Service providers who have strong preventative (e.g. security) and corrective (e.g. slashing insurance) measures in place for their clients.

AM: Validation Cloud’s platform was purpose-built to onboard institutional assets – the largest asset managers in the world are rapidly entering Web3 and in the near future, there will be over a trillion dollars in assets staked. As an example of scale, in order to facilitate the next $100M in staked Ethereum, 1.5M additional validators are needed. Furthermore, asset managers demand real-time infrastructure to stake/unstake, in order to facilitate dynamic, programmatic portfolio management. With respect to rewards automation, Validation Cloud has simplified the flow with on-chain smart contracts, which eliminates intermediaries and counterparty risk – driving superior experience and performance.

AM: Acknowledging that compliance is critical for institutional asset managers and traditional enterprises, Validation Cloud prioritized SOC2 – completing its audit with SF-based Sensiba LLP in August. Remarkably, only a small fraction of Web3 companies have achieved SOC2, in fact, Validation Cloud is the only company providing Staking and Node API to achieve SOC2. Within Web3, SOC2 holds pivotal importance for bridging the gap with traditional enterprises, aligning industry standards with those of Web2.

SOC2 defines criteria (security, availability, integrity, confidentiality, privacy) for managing customer data. The main difference between SOC 2 Type 1 and Type 2 lies in the duration of evaluation. Type 1 focuses on security controls at a specific point in time, whereas Type 2 covers those controls over a period of time, typically several months. Validation Cloud’s Type 2 observation period will conclude at the end of 2023.

AM: Ethereum has a lower staking ratio since its complete staking mechanism has only been in effect since April 2023 when the Shapella upgrade enabled the ability to unstake Ethereum. While “The Merge” in September 2022 ushered in the proof-of-stake consensus mechanism and the ability to stake Ethereum, it was impossible to unstake that Ethereum until the Shapella upgrade. Shapella was the inflection point for institutional asset managers, driving over 50% growth in staked Ethereum over the last six months.

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