Make Your Crypto Work for You

A guide to passive income opportunities in the cryptoverse

Part 1: Staking

Global crypto adoption rose by over 880% in 2021, according to research conducted by Chainalysis. Prompted by low-interest rates, high inflation, and local currency depreciation many have sought out cryptocurrency primarily as an investment vehicle. Stories of overnight success and the entrance of institutional players have given the market increased legitimacy. 

Over the last decade, the cryptocurrency market has developed into something much more than just a marketplace to buy and sell cryptocurrencies. The birth of smart contracts and DeFi (decentralized finance) have established a multitude of ways investors can generate passive income. Some say it has “redefined the concept of ‘currency,’” and others claim it will define the future economy. 

With all the success stories, it is easy to forget that making your money work for you is not without risks. The articles in this series will look at the popular revenue-generating options institutional investors have to ‘make their crypto work for them.’ 

Staking

What is staking?

Staking is the process in which users lock up assets or holdings to support a Proof-of-Stake protocol and receive a reward in return. The more they stake, the higher the reward.

How does staking differ between protocols?

The crypto staking process is based on a consensus algorithm called Proof-of-Stake (PoS), which requires miners (called validators or bakers in PoS) to lock a sum of crypto in the blockchain protocol in order to participate in the validation process. Staking is how new transactions are added to the blockchain, the protocol chooses validators to confirm blocks of transactions. In most cases, the more coins you lock-up, the more likely you are to be chosen as a validator.

In most cases, the rewards are given in the same type of cryptocurrency that participants are staking. However, some blockchains use a different type of cryptocurrency for rewards. While the concept of staking is similar across most PoS protocols, the APY (annual percentage yield) or APR (annual percentage rate) can often vary dramatically. 

Most protocols take into consideration a number of factors to determine the APR/APY: 1) minimum value staked, 2) lock-up period, and 3) the total amount staked. For example, on Cardano the delegation reward stands at 4.6% (for a minimum value of 5.5 ADAs) whereas with ETH2.0 the staking rewards range from 22% to 5% per year depending on the amount of ETH staked (for a minimum of 32 ETH2.0 staked). At Fantom, validators can earn up to 15% APY, at BNB Chain up to 6.2%, and at Mina 24% (supercharged rewards). 

Staking via delegated staking pools 

Delegation to a staking pool is the process by which token holders delegate their tokens to a validator who runs the pool. It allows token holders that do not have the skills or desire to run a node, or that don’t have the minimum number of tokens required to participate in staking, to be rewarded in proportion to the amount of stake delegated.

The amount staked in these pools is higher, hence in most cases, they will likely have a higher chance of being selected to validate. Also important to know, is that at times the validator will ‘charge’ a percentage of the rewards as a fee. 

Staking via delegation to staking pools can be conducted via dedicated protocol-centric staking pools or via various exchanges such as Binance, Kraken, and others. When choosing a staking pool examine: 1) reliability, 2) fees structure, and 3) size. All 3 will determine the size of the reward received. Additionally, for those institutions choosing to stake via exchanges, remember in this case the assets/private keys are not with you. Do you trust your exchange to keep your institutional assets safe?

What are the risks of staking?

While it may not sound like it, staking is not a sure thing. There are risks involved in staking. Here are just a few:

• Valuation risk (AKA impermanent loss) – is the risk of the cryptocurrency value going down while the currency is locked.
• Liquidity risk – the inability to move (transact) the cryptocurrency during the lock-up period.
• Validator risk (slashing risk) – in some protocols, if the validator node does not have 100% uptime or the attestation is not correct, it might cause a penalty on the assets that are locked.
• Private keys risk – while the assets are staked, if the validator doesn’t manage his staking private keys securely, a hacker can withdraw the funds back from the protocol and run off with the assets. Institutions can mitigate this risk by incorporating cold-staking technology that enables the staking of assets without connecting to the internet.

To stake or not to stake, that is the question

Theoretically, of course, the answer to this question is an unequivocal ‘yes.’ Not earning money on your crypto is equivalent to putting all your money in your checking account and not earning interest on it.

Financial institutions can enjoy the following benefits from staking:

That said, there are other alternatives for passive income in the cryptoverse. Yes, they are sometimes riskier, and sometimes the APY/APR earned can be higher. But staking is a good, solid option. While not all risks in staking can be mitigated, some can.

Mitigating the risk to your private keys while staking

Institutions typically don’t stake directly on the blockchain, they rely on a financial institution that holds their coins to do so (whether an exchange, custodian or bank) or browser-based wallets which store the private keys controlling digital assets in encrypted form in your browser’s data cache. In both cases, the institutions’ assets are exposed to risk or are no longer in their control.

The GK8 Solution

GK8 supports staking on a wide variety of cryptocurrencies including Ethereum, Cardano, Polygon, Near, Tezos, and dozens more. To delegate stake institutions have a few options:

1. Cold Staking – The staking process is managed through our air-gapped Cold Vault, which remains 100% offline and ensures no exposure to potential cyber attack vectors. In this case, the private keys never leave the cold vault, hence assets are 100% secure. For additional peace of mind, GK8 has an arrangement with USI/AON for customers to quickly and seamlessly access insurance of up to $1 billion per Vault, the highest in the market today.
2. Deploy assets to liquid staking or DeFi staking solutions of your choice directly from the platform by leveraging our universal smart contract support. GK8’s ‘out-of-the-box’, universal support for ‘smart contracts’ enables clients to instantly deploy assets to almost any DeFi protocol (or any other smart contract), without any development resources. This capability extends to support for both existing and future protocols on any supported chain.

In other words, GK8 enables one-click staking to hundreds of protocols through the solution’s own UI. Thus enabling clients to keep pace with the rapidly evolving blockchain ecosystem, and allowing the integration of additional services, platforms, and protocols at the customer’s discretion.

In Summary

If we’ve learned anything during these volatile times, it is the need for more control and fast response times. GK8 enables staking as a built-in feature in our end-to-end custody platform, without requiring any further investments or development efforts from the institutions’ end. Simply click to stake, without exposing your private key or giving control to a third party.

To learn more about the GK8 solutions, click here or contact us.