Hello everyone. It's a pleasure, and thank you for making the time to come to this session, and more importantly, to this conference. Very excited to have this panel here. I think we're going to have a really interesting conversation about a topic that is close to my heart, which I think has a lot to do with the infrastructural sustainability of the chain. And the people here are the ones actually doing the work. So we have Constantine, Josh, and Pete, which I will let them introduce themselves, and we can go from there.
Hey everyone, Pete Wyckoff, Chief Executive Officer at AVAX1. We're the first publicly traded digital asset treasury in the Avalanche ecosystem, a large staker of the asset. Really excited to be here with the panelists today and tell you more about what we're doing at AVAX1 and in the institutional staking business for large institutions.
Great. Hi everyone, Josh Deems. I'm Head of Revenue at Figment, a validator company and staking services provider, where we work with some of the largest exchanges and financial institutions globally to secure a bunch of different protocols, Avalanche included, as part of their staking plans. So excited to dive in today a little bit more about what that means and the trends we're seeing and whatnot.
I'm Constantine, the CEO and founder of Blockdaemon. We're the trust layer for cryptographic infrastructure for the largest institutions in the world. That means MPC wallet, policy and procedures, signing architecture, data and yield infrastructure. Our customer base is a little unusual. Our large major holders are JP Morgan, Goldman Sachs, Citibank. We sell predominantly to the top 100 financial institutions in the world, and we're happy to say that some of them are starting to seriously engage in staking.
So who is better to speak about institutional staking than this panel right here. Perhaps we can start with a rather broad question, which is why are institutions staking today? And maybe Josh, since you are on the side of sales, you'll probably have some very interesting insights there.
Yeah, I think the main reason institutions are staking today, there's a couple of things. One, if you're holding a productive asset like Ethereum, Solana, Avalanche, whatever, it's effectively inflating itself to not stake it over time. So to stake the asset means you actually participate in the inflation rate of the network plus earn some of the rewards that are paid as a benefit from the network for locking up your tokens in a validator and earning rewards on top of them. So that's the basic reason that any individual or institution would stake.
I'd say the main reason we're seeing one, the ETFs coming to market this year with regulatory clarity that actually came out in May of 2025 allowing them to stake, is a major reason we're seeing a lot of the institutions adopt. If you're a fund issuer and you can earn a 5 to 7% additional rewards rate on top of just issuing a product, that's a revenue stream that you can pass on to your end users, the shareholders of the fund. So I think that's a primary reason is obviously capital formation or capital attraction by some of the large ETF issuers.
There's the other side, which is participating in blockchain security. So if you are a large bank, broker, dealer, the types of clients that Constantine was mentioning, when you have investments in this space or your clients are holding these assets, it's certainly important to ensure that there's security in the chain. And blockchains become more secure as more assets are staked to them. And so I think it's a combination of investment case plus blockchain security that is really the driver behind a lot of institutions starting to come into the market.
And I'd say, barring yesterday's events on Capitol Hill, the regulatory clarity at least provided by the SEC, that basically says staking is not a security and permissible within grantor trust, which are the backbone of how ETFs in the US function, has really been a major catalyst. We're seeing a lot of institutions come into the market with.
Yeah, I can maybe offer a little bit of a different tilt. I think one important factor is the definition of what you look at when you say institution, right? And so I think the only institutions actively staking are mostly crypto-native investment funds, right? And so I would say the staking landscape in terms of regulation, vendor quality, as well as protocol quality is very limited for large-scale institutions. I mean, there's still a lot of work to be done for JP Morgan to want to stake assets, right?
And so what I mean with that is that obviously one, we don't have long-term clear regulatory ruling in place, and yes, there's going to be compromises, but it's going to slow that down a little bit. I think most networks and the way they operate rewards have an inherent conflict that's not going to work for a lot of these institutions, which is the people who control the security of the networks earn fees and tokens to pay for infrastructure in dollars, right? Meaning companies like us run heavy infrastructure, support engineers, all that type of stuff. We pay them in dollars, we get paid in AVAX or whatever other token. That token is hugely volatile, and so your net margin as a validator or operator are constantly under pressure, and in a winter, mostly negative. And so it threatens the security of the whole network.
And so I would say that these large institutions have no interest in participating in networks at scale where that occurs. And so I would say that's why you see stuff like Converge, right, where the economics are differently structured. And so I love staking, you know, we were probably the first institutional staker in the world. But I think it's a flawed institutional proposition, frankly. It's going to work for token speculation. I think as a real institutional tool that provides real yield alternatives to a large institution, it's going to happen at one point, but we're early.
And you know, we run infrastructure together with Figment for Fidelity on ETH ETFs and stuff like that. Like there's stuff happening, but you know, it's hundreds of millions of dollars, right? Like I mean, it's fractional to what it could be. And I think there's a long way to go. And there's a question everyone has to ask themselves, including the foundations who are rewarding the validator operators. The last thing I'll say, and then I'll pause, sorry, is the other conflict, for example, for us, why most networks are very unprofitable, is because when I sell infrastructure to a Fidelity or Citibank or JP Morgan, they basically...
I need to sustain a three times as large team than, let's say, a small validator operator because I need to provide full support and auditability functions following the sun around the world. So basically I need three engineering teams being as qualified as one every eight hours around the world. For example, to support you, you have a zero fault tolerance. If you want to sell to those institutions, there's no staking network currently live that offers rewards to run a profitable zero fault tolerance network.
We have a slightly different view because staking is our core business model. 75% of our most recent quarterly revenue. It was part of the strategy when we launched the business. So we're excited to be one of the first publicly traded businesses really using staking as a core revenue driver, and proud to be a partner of Avalanche, and excited to see it grow and scale from there.
And I want to highlight also that all I'm saying is it's an innovation business still, you know, which means it's super exciting. There's great stuff to build. There's great investments to be made. But for example, for you to run your validator infrastructure, you can do it a lot more efficiently than I can, which is I'm audited by like freaking JP Morgan, right? And so that means my cost of my infrastructure is probably three times as high as yours. I see what you do, and that makes a lot of sense.
That's interesting. Perhaps we can dig deeper on that particular topic that you mentioned, that he can run his infrastructure for cheaper than you can, but yet you may be able to be one of the service providers, and Figment as well, of course, for them. What's the barrier there? Why is it that he can run it for cheaper?
I think, well, and you interrupt me, but I'm not going to talk about why he can, you can answer for you. But what I'll say is the problem is that when we started staking protocols, and a staking protocol always starts centralized, meaning there's a couple of key operators that launch the networks, it's always us and Figment. And then the protocol is like, well, we need more diversity, we got to kick these guys down, and we need to invite more developers, smaller validator operators, we need more validators, right? Which is true, but it comes at a cost of like you invite validators who don't have the same security parameters, but we're all paid the same.
And so if you run high security, zero fault tolerance, you can't compete in an open validator market. And so if the foundations aren't supporting high-quality validators, and they generally don't, then you can't compete. And then most of the validators that carry the weight of the network have fault built into them.
As Constantine mentioned, us and Figment and Blockdaemon are in the ETFs together is because we made the capital investment to actually be kind of the forefront of the validators that networks generally launch with, whether it's a network launching or an ETF launching. But it is extremely capital intensive. You have server costs, you have engineering resources, you have reporting. I think one of the challenges of staking in general, especially for someone who's multi-asset, is rewards are paid out on different time periods.
Different protocols have different lockup periods for different assets. Ethereum has a much different or more dynamic bonding and unbonding process where it's unpredictable to the issuer. Like if you're an ETF issuer, for instance, you get an inflow of capital from, you know, I don't know, let's say Vitalik blows up on Twitter and now all of a sudden a bunch of retail people are going into an Ethereum ETF. Well, that new ETH doesn't actually get staked until, you know, 25, 30, whatever the bonding period is right now later. And so you need to manage capital efficiently as an ETF issuer.
But for the service provider on the back end, you're sort of unifying the differences between Avalanche, between Solana, between Ethereum, and newly launching chains for investors. And that's a significant amount of work to do. And so I think, you know, Constantine's point, a lot of times the foundations tend to favor diversity. It does come at a cost to the larger providers who have built these services for the needs of institutions, have gone out and got the audits, have gone out and built a balance sheet credible enough to work with the JP Morgans and the Citibanks and the Morgan Stanleys of the world. Like that's, you know, only credible, reputable validator companies are going to be able to do that.
And you said something right there that was quite interesting, which is every network has different bonding periods, different cash flow. Well, they're not cash, token flows. And so as an institutional staker, I mean, institutionals are famous for hedging literally everything, right? Isolating to the risk that they're willing to take and nothing else. That's why interest rate swaps is such a large, massive market. So from that perspective, how do institutionals and also service providers that you are also paid in tokens, how is that handled? How do you think through that? Is it hedged? Is it not hedged? How do you think about this particular problem? And perhaps Pete, you can...
Yeah, a little bit how you do it. Exactly. So when you know 75% of your revenue is in kind and you have dollar-based expenses, we have very similar problems to what Constantine mentions that we're managing on a go-forward basis. And you try to keep operations really lean when doing so. And obviously getting paid in a currency that can fluctuate in value when you have very fixed and predictable dollar-based expenses is just a challenge that you sign up for when you're going to take your business in the staking direction. So, you know, it's a lot of planning. It's keeping your operational costs really lean and then ultimately, you know, having great service providers like Figment and others to support you.
