coindesk.com
Happy Thursday, advisors!
In today’s newsletter, John Keller from Morgan Stanley Investment Management compares staking through an ETP, an exchange and a self-custody wallet
Then, in “Ask an Expert,” Waseem Salim, CEO of Valdora, on the due diligence that protects clients from validator slashing
Happy reading.
- Sarah Morton
Where investors stake crypto shapes how much of the reward they keep
Staking refers to locking up a proof-of-stake cryptocurrency, such as Ethereum’s ether ETH$2,273.62 or Solana (SOL), to help validate network transactions in exchange for protocol rewards. Transaction validation is essential for the security of decentralized blockchains, so holders are paid to commit their tokens. Staking rewards differ by blockchain and vary over time based on network activity and demand for staking among token holders.
Investors have different ownership options for cryptocurrencies, and each has different implications for staking. They can invest in an exchange-traded product (ETP) that holds the underlying token, they can hold their tokens on an exchange, or they can self-custody using a digital wallet. For staking, the choice turns on three factors: operational complexity, how much of the reward reaches the investor and how quickly the investor can unstake their coins, a precursor to selling.
Operational complexity An ETP investor simply buys a share in a brokerage account. The ETP sponsor selects the staking service provider, so the investor does not manage wallets with private keys or monitor the provider. Exchange staking is also simple, typically a setting within the account, with the exchange controlling the staking process. Self-custody takes the most work. Investors must secure their own keys, choose a staking service provider, approve transactions through a wallet, pay network fees when staking and unstaking, and monitor the position. Operational risks do not disappear in an ETP or with an exchange. They move to the sponsor or the exchange, so advisors and investors should ask how validators are selected and monitored.
Who keeps the reward
The protocol pays the same staking reward regardless of where tokens are held. What changes is the share ultimately passed along to the investor. Exchanges commonly retain roughly 25% to 35% of rewards, and some keep more. Self-custody holders who use a staking service typically give up about 5% to 15%. Staking ETP sponsors typically retain 5% to 25% of rewards. Advisors and investors should ask for the net figure to determine which ownership path, or which ETP, fits best. ETP investors may also want to weigh the percentage of tokens the fund stakes because those percentages can vary as well.
