Investing in Alluvial

Lisa Cuesta and I are proud to announce our investment into Alluvial’s Series A via Credibly Neutral, our new early-stage venture fund investing in protocols, infrastructure, and crypto SaaS (learn more here). The round is co-led by our good friends at Ethereal Ventures and Variant.

Alluvial is a software development company supporting the development of Liquid Collective, the enterprise-grade liquid staking protocol. Alluvial’s API-first integration makes it easy and efficient for digital asset exchanges, custodians, and other enterprises to integrate Liquid Collective’s liquid staking capabilities into their existing product experiences.

Alluvial is the culmination of years of learning. I’ve been supporting it since its earliest days and am thrilled to tell you about its founding, the team, the LST market, and why Alluvial’s unique strategy is a winning one.

The Alluvial team is composed of staking veterans that have previously helped build Coinbase Cloud (formerly Bison Trails) and Figment, and I’ve had the pleasure of working closely with many of them for years. As a bit of a throwback, I worked with Mara and Evan (CEO and Head of Business & Policy at Alluvial, respectively) on a liquid staking token (LST) proposal for Coinbase more than 3 years ago, prior to the Bison Trails acquisition. When Alluvial was getting spun up between Coinbase Cloud and Figment, I happily supported the team on the new effort as a Protocol Specialist at Coinbase Cloud.

These days it feels like there’s a new liquid staking (LS) protocol launching every week, fueled by Lido’s incredible success. While it is heartening to see economic forces attempting to make the LS industry more diverse and decentralized, Alluvial and the Liquid Collective stand out in their views and approach to how this market will change in the coming years, and have the best shot at bringing about the diversity the LS market so desperately needs.

Specifically, there’s a clear trend 15 years in the making of assets transitioning to asset custodians (such as exchanges, custodians, and banks). The industry started out with 100% self custody by individuals, since there were no other options and no funds investing. Now, custody is continuing to increasingly trend towards asset custodians as retail, institutional investors, and soon hopefully ETF holders look to securely store their assets.

Importantly, I do not believe this is bad for crypto. I think most people would prefer to not be solely responsible for securing 100% of their assets at all times. The important thing to maintain the balance of power between individuals and institutions is the ability to opt out. This ability is missing in tradfi since you always needs banks to store and move your money, but will always remain an option with crypto, leading to much more fairness for end users.

Alluvial’s core insight, and the reason for its founding, is to create win-win scenarios with these asset custodians when it comes to their staking strategy.

Each asset custodian has a few options when it comes to offering staking services:

• Offer traditional (not liquid) staking to validators they operate or those of partners
• Offer their own proprietary LST
• Offer an industry-standard LST

These options go from good to great. Liquid staking is strictly superior to traditional staking due to its liquidity, use as collateral, etc.. As we’ve seen in the current ETH staking market, the ratio continues to trend towards liquid staking over traditional staking, and my belief is that trend will continue in the coming years.

Asset custodians therefore have a choice — offer their own proprietary LST or an industry-standard one. This is a nuanced question with many considerations, but the two most salient are viability and profitability.

What makes an LST viable, and determines its long term success, are liquidity and integrations. Explained simply, the LST becomes more viable the larger and more useful it is. There must be sufficient liquidity for large institutions to actually be able to take advantage of the “liquid” part of LSTs. If you can’t enter and exit in size, the LST would not fully fulfill one of its core value props, diminishing the advantage it has over traditional staking. The integration component is equally important. Folks must be able to use the LST across many centralized and decentralized financial products, such as collateral on centralized derivative exchanges or decentralized lending markets.

While it is certainly possible for a proprietary LST to gain significant traction, it would be extremely difficult for a single asset custodian to custody enough customer assets and have those customers stake their assets to create a major LST. The main headwind is that the asset custodian would need to do it all on their own as there is no incentive for any other asset custodian to also adopt that proprietary asset standard.

This leads to the other primary consideration — revenue.

Revenue from the provision of staking services is some of the most valuable revenue a business can have. It is ARR in the truest sense since staking will always be a need and it is an effortless way to have exposure to the overall success of the industry, since other sources of revenue are typically denominated in USD, rather than tokens.

Asset custodians have the clearest path to earning revenue on the first two options — traditional staking and proprietary LST. To date, no LST has created a clear and sustainable path for asset custodians to earn revenue from adopting industry-standard LSTs. All efforts to do so quickly break down as they typically reward the asset custodian for the initial staking deposits, but do not create an ARR stream over the long term.

Until Alluvial and the Liquid Collective.

Alluvial’s core insight is to create a path for asset custodians to choose option 3 — offering an industry-standard LST — as the default best option that is both viable and profitable. They do this through the Liquid Collective, an enterprise-grade liquid staking standard that is designed to meet the needs of institutions, built and run by a collective of leading web3 teams.

The end goal is to have a LST that is governed in a decentralized manner by a broad and dispersed community of industry participants and that aligns interests between those participants.

It’s an incredibly powerful primitive.

Having said all that, it’s not all roses. There is a cold start challenge with any LST. Hovering at just over 2,500 ETH at this time, LsETH adoption has a long way to go to challenge Lido’s enormous supply of 7.6m stETH. You need early adopters to bootstrap the protocol and create the liquidity and integrations that make it impactful.

What Alluvial is doing isn’t easy. It’s ambitious and hard. But they have the single best team and product one can hope for, which gives them the greatest opportunity to fundamentally change the liquid staking market to become more diverse and decentralized.

At Credibly Neutral, we are grateful for the opportunity to continue supporting these amazing folks.