Alluvial raises $12 million to build out Liquid Collective, an Ethereum staking protocol for institutions

Alluvial is the developer behind Liquid Collective, a protocol that supports “liquid staking” for Ethereum. Unlike competitors such as Lido and RocketPool that offer a “staking-as-a-service” product, Alluvial is catering to institutions and traditional finance, predicting that larger players will want to enter the space. With regulators including the Securities and Exchange Commission circling around staking, Alluvial is making a long-term gamble on the Ethereum ecosystem.

Proof of stake

Blockchains require a decentralized consensus mechanism, where network participants verify and validate transactions, adding them to the distributed ledger. Bitcoin employed a proof-of-work mechanism, in which miners race to validate blocks in exchange for rewards. Its energy-intensive nature led later projects to adopt a proof-of-stake model, where validators who lock up large amounts of cryptocurrency within the blockchain get a chance at processing transactions. In late 2022, Ethereum—the second-largest blockchain by market cap—switched to proof of stake in a process known as the Merge.

While staking can yield lucrative rewards, it poses multiple challenges, including a technical cliff to entering as well as the difficulty of accessing staked Ether, despite the recent Shanghai upgrade. Liquid staking providers such as Alluvial’s Liquid Collective ease these challenges, working with exchanges to offer simple on-ramps into staking as well as a “receipt token” that users receive after staking cryptocurrencies. Liquid Collective’s token, LsETH, reflects the accrued network rewards and can be traded on exchanges such as Coinbase.

Liquid Collective differs from other products by catering to institutions. While individual users can purchase LsETH on exchanges, they cannot stake Ether with Liquid Collective without access to institutional trading platforms like Coinbase Prime and Bitcoin Suisse, which require a higher barrier of entry for traders.

Regulatory clarity

In recent months, the SEC has targeted staking, with Chair Gary Gensler noting in public comments that proof-of-stake tokens should be regulated as securities, and the SEC suing both Coinbase and Kraken for their staking-as-a-service programs, alleging that the products constitute an unregistered security. A task force of 10 state securities regulators also alleged that Coinbase’s staking program violated state securities law.

In an interview with Fortune, Alluvial CEO Mara Schmiedt argued that the company’s focus on compliance will position it for a future where there is more “regulatory clarity,” even if that means staking services are not viable in the short-term in the U.S. Unlike other products, Liquid Collective’s closely guarded entry means that it includes more know-your-customer and anti-money-laundering checks than competitors. Schmiedt also said that its noncustodial model, meaning it doesn’t hold users’ Ether, and fixed reward mechanism from Ethereum differentiates it from other services that bear the characteristics of a security offering.

Jesse Walden, managing partner at Variant, said his firm invested in Alluvial because it uses Liquid Collective. They chose it over other KYC-compliant services, including Coinbase’s, because of its diversification of validator nodes. He acknowledged the regulatory risk but remains bullish on staking’s future. “Access to this very large—and growing—market that is not going away is going to triumph over the short-term regulatory uncertainty,” he told Fortune.

Alluvial is a Delaware-incorporated company, with the Liquid Collective Foundation registered in the Cayman Islands. The team is distributed, including across the U.S., Europe, and Dubai. Schmiedt said Alluvial plans to use the funding to grow the team, particularly in engineering, to continue product development and expand staking services to other blockchain networks.