Without staking, institutional crypto investors cannot escape inflation


By 2021, Proof of Stake (PoS) has established itself as the consensus mechanism of choice for new and innovative blockchains. Ethereum 2.0, Cardano, Solana, Polkadot, Terra Luna – five of the top 10 base layer blockchains run on PoS. It’s easy to see why PoS blockchains are popular: the ability to put tokens to work – by verifying transactions and earning a reward in the process – allows investors to earn passive returns while improving network security. blockchain in which they have invested.

As blockchains make incredible progress, the financial products and services available to institutional investors struggle to keep up. Of the 70 crypto exchange-traded products (ETPs) in the market, for example, 24 represent ownership of staking tokens, but only three make a profit from staking. Not only do ETP holders lose the return on staking, they pay, on average, between 1.8% and 2.3% in management fees.

This lack of staking in ETPs is understandable, however, as the staking mechanism requires tokens to be locked for periods that can range from a few days to several weeks, which adds complexity to a product that is supposed to be easily tradable on exchanges. .

Related: Staking Will Eat Proof Of Work For Breakfast – Here’s Why

Missing the staking yield means holding an inflationary asset

For PoS token investors, missing the staking return is more than just a missed opportunity – it translates into holding a highly inflationary asset. Since the return paid to stakes is mostly new tokens, any portion of unstaked tokens continually decreases from the total supply. As explained in an article by Messari, staking rewards do not represent the creation of wealth, but rather a distribution of wealth – from passive holders to biters.

The irony here is that many of those institutional investors who passively hold PoS tokens have started investing in the digital asset space to hedge against inflation on real world assets, and they are now experiencing rates of decline. even higher inflation on their PoS tokens.

According to Stake, the average supply inflation rate for the first 25 PoS tokens is around 8%, which is way above the real world numbers. Meanwhile, token players earn returns above the rate of inflation, as the rewards consist not only of newly created tokens, but transaction fees as well. On average, the tramlines earn 6.4% per year in actual yield. The contrast is clear: Passive holders experience 8.2% inflation on their investment, potentially paying an additional 1.8% to 2.3% in management fees if invested through an ETP, while investors earn. 6.4% in real returns.

Related: Ethereum 2.0 Staking: A Beginner’s Guide to How to Stake ETH

Investors must participate in blockchains in addition to owning them

The value of a blockchain network comes from its ability to act as a layer of settlement, safely adding new transactions to the decentralized ledger. This capacity depends on widespread and decentralized participation in the network – therefore, a PoS blockchain is only as secure as the number of tokens put into play, which is basically used to verify transactions. Passively holding PoS tokens and not staking them subtracts the value of the network, which is not in the interests of investors.

Unfortunately, this means that the growth of assets under the management of PoS ETPs will represent a decreasing share of the token supply put into play, as well as less secure blockchains. As institutional capital flows into passive PoS ETPs, the share of total supply involved decreases, leading to increased incentives for staking and exacerbating inflationary effects for passive holders. If institutional investment is to drive the growth of PoS token markets, it will need to participate in networks in addition to owning them.

Ignoring the complexity of blockchain is difficult, but possible

Of course, staking is not a simple exercise. It is about running a secure and constantly available infrastructure, with very little margin for error, making sure to follow the rules of the blockchain network. Fortunately, there are many knowledgeable validators today with superb track records who will do the staking work in exchange for a share of the reward. Importantly, validators can stake tokens without taking custody of them, and as such, the best way for an institutional investor to stake their assets may be with a validator, from a custodian’s account.

Ultimately, buying PoS tokens without staking them is the modern day equivalent of putting money under your mattress. It makes no long-term budgetary sense. Participation in staking allows institutional investors to add PoS tokens to their portfolios without suffering the effects of inflation while still benefiting from the security and value of the underlying blockchain of the crypto.

This article does not contain any investment advice or recommendations. Every investment and trading move comes with risk, and readers should do their own research before making a decision.

The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of dailynewscatch.

Henrik gebbing is co-CEO and co-founder of Finoa, a European platform for custody of digital assets and financial services for institutional investors and businesses. Prior to founding Finoa, Henrik worked as a consultant at McKinsey & Company, serving financial institutions and high tech companies around the world. He started his career with a double degree in the high-tech branch of Siemens AG.