Basics of institutional staking

| December 22, 2023

Share this article

institutional staking

The cryptocurrency sector is experiencing robust growth, driven by the increasing demand for a diverse range of crypto offerings. Innovative services like institutional staking protocols have gained substantial traction in recent times. 

Based on a recent survey conducted among Chief Financial Officers (CFOs) representing 100 global hedge funds, a notable trend is on the horizon. It is anticipated that by the year 2026, approximately 7.2% of their portfolios will be dedicated to cryptocurrencies, equating to an impressive sum of approximately $312 billion. While lending and borrowing strategies remain attractive, a substantial portion of these investments is expected to funnel into the practice of staking.

The data reinforces this projection, with Ethereum 2.0 staking alone predicted to exceed $40 billion by 2025. Intriguingly, institutional investors are actively exploring the potential of harnessing staking rewards to support startup ventures, underscoring the broader possibilities for capital allocation within the blockchain staking ecosystem.

This guide will take a deep dive into staking, its operational principles, and the participation of businesses such as blackrock crypto staking in this ever-evolving sector.

Key Takeaways

  • Institutional staking is committing and allocating a particular sum of crypto assets to the blockchain infrastructure and validating on-chain transactions.
  • Institutional staking refers to the active involvement of major institutions such as banks, hedge funds, and asset management firms. These organizations typically participate in staking on a large scale, exerting substantial influence on network dynamics and the allocation of rewards.
  • Institutional crypto staking presents an alternative opportunity for institutions to engage with cryptocurrency and web3.0 applications. It allows investors to earn rewards by acquiring and holding crypto assets.

What Is Staking?

Staking is an investment feature found in Proof-of-Stake (PoS) blockchains. In PoS, token holders commit their assets to ensure the network’s security in return for rewards. In PoS systems, a validator is selected by the protocol to add each block of transactions to the blockchain and is compensated with the native token for this validation.

The likelihood of a validator being chosen depends on factors like the quantity of tokens staked and the duration of their staking. Thus, staking offers token holders a chance to actively engage in the security of blockchain transactions and receive rewards for their participation.

Working of institutional staking

Staking is a feature available in select cryptocurrencies (such as Ethereum, Cardano, Solana, Polkadot) that operate on the Proof of Stake (PoS) model. Individuals and institutions can engage in institutional crypto staking independently or through cryptocurrency exchanges that provide this service.

Institutional crypto staking demands a certain level of expertise, as it necessitates the setup and operation of a network node. Validators are also required to maintain a deposit of supported coins within the network. These staked coins serve as a guarantee of the legitimacy of newly added blockchain transactions. Validators receive rewards, either in the form of fees or newly minted cryptocurrency coins, for successfully adding blocks to the blockchain.

If a cryptocurrency exchange offers staking programs, users can directly stake the crypto they own on that exchange. Some exchanges even allow investors to select their preferred validator. Notable exchanges offering institutional crypto staking services include Binance, Kraken, and Coinbase. 

In cases where cryptocurrency institutional staking programs are not available on an exchange, the cryptocurrency must be transferred to a cryptocurrency or blockchain wallet. Popular wallet options include Coinbase Wallet, Metamask, Liminal Wallet, or Trezor Wallet. 

While institutional staking can yield higher returns, it requires substantial investment and expertise. For long-term cryptocurrency investors seeking a passive income with minimal effort, opting for a staking service provided by a cryptocurrency exchange is a simpler alternative.

What Are the Pros and Cons of Staking?

Institutional crypto staking offers investors the potential for higher returns on their assets compared to traditional yields, such as interest from savings accounts. It is an environmentally friendly process as it does not require significant computational power. Additionally, institutional staking contributes to enhanced efficiency and security within the blockchain.

Despite these advantages, cryptocurrency institutional staking has its drawbacks. Cryptocurrencies can exhibit high volatility, and at times, the decline in cryptocurrency value can outweigh the rewards, resulting in losses for the investor. Institutional crypto staking may also involve a lock-in period, unlike publicly traded stocks and bonds. The level of liquidity, or the lack thereof, varies among crypto projects, and it is important to review the terms and conditions before making an investment.

How Institutional Staking Differs from Traditional Staking

Institutional staking distinguishes itself from the more familiar retail staking due to its unique characteristics and distinct requirements. While there are no fundamental differences on the blockchain itself, the specific needs and demands of institutional staking set it apart.

Unlike retail investors, institutional crypto staking involves the active participation of large organizations, such as banks, hedge funds, and asset management firms. These entities engage in staking on a much grander scale, which can exert significant influence over network dynamics and reward distribution.

Institutional stakers often rely on custodial services and maintain complex infrastructure to support staking activities across multiple blockchains. Furthermore, institutions must adhere to specific compliance regulations and implement robust risk management protocols, introducing an additional layer of complexity to their institutional crypto staking endeavors.

These factors collectively establish institutional staking as a distinct practice, shaped by the tailored needs and considerations of sizable organizations as they navigate the world of staking within the blockchain ecosystem.

What cryptocurrencies you can stake

As mentioned already, staking is only possible with cryptocurrencies linked to blockchains that use the proof-of-stake consensus mechanism.

The most notable cryptocurrencies you can stake include:

  • Ethereum (ETH).
  • Cardano (ADA).
  • Solana (SOL).
  • Avalanche (AVAX).
  • Polkadot (DOT).

What are the institutional crypto staking yields?

Institutional crypto staking yields vary from one token to another, with some tokens providing more substantial returns than others. Nevertheless, the nominal yield is just one aspect that staking participants take into account. The mechanism of rewarding token holders who engage in staking with native tokens inherently contributes to inflation (referring to the growth of the money supply). As a result, those who opt for institutional staking are less affected by the inflationary consequences of token minting.

Why Institutions Are Exploring Staking in the Current Macro Environment

Despite inherent risks, many institutions view staking as an integral component of their cryptocurrency investment strategy for several compelling reasons. Firstly, institutional crypto staking provides an opportunity for generating passive income from crypto-assets that might otherwise remain idle. Secondly, institutional staking rewards exhibit characteristics similar to compound interest, resembling traditional market scenarios where dividends are reinvested. These rewards are paid out in the same token being staked, allowing users to effectively ‘reinvest’ these tokens and potentially receive higher payouts in subsequent periods. This approach can also reduce the fees associated with token swaps, whether for stablecoins, fiat currency, or alternative tokens.

Another factor driving institutional interest in staking is that it doesn’t necessitate lending out assets as required by some other forms of cryptocurrency investments. In contrast, institutional crypto staking allows tokens to remain securely stored within respective wallets. 

Conclusion

Institutional crypto staking presents an attractive choice for investors seeking to generate returns on their long-term investments while remaining less concerned by short-term price fluctuations. 

Data indicates that the average staking reward rate among the top 261 staked assets exceeds an annual yield of 11%. However, it’s crucial to bear in mind that these rewards can fluctuate over time.

Moreover, the fees involved in staking can impact the overall reward percentages. Staking pools deduct fees from the rewards for their services, and this can vary significantly from one pool to another and from blockchain to blockchain.

To maximize rewards, selecting an institutional crypto staking pool with low commission fees and a commendable history of block validation is advisable. The latter not only enhances potential returns but also reduces the risk of the pool facing penalties or suspension from the validation process.

 

More on Crypto

The digital asset industry is more popular than ever, but it still has a lot of gas in the tank. Its current prevalence makes it accepted beyond the niche subsection of retail investors and cryptographic enthusiasts. Financial institutions are also dipping their feet into the digital asset waters, trying to capitalize on the ingenuity the assets bring to finance.

With the recent listing of Bitcoin ETFs by mammoth financial houses, the scope of investing in digital assets for institutional investors has opened up for the better. 

So, what’s changed the game for institutions? Previously, many were hesitant to jump into the digital asset world due to concerns about managing private keys securely, finding reliable custodians, and ensuring smooth transaction processing. 

Digital Assets are catching the attention of all kinds of institutional houses

With the true potential of this asset class far from reached, many investors are flocking to get some, or lots, knowing how their values can be appreciated enormously in the times to come. Assets like Bitcoin constantly show how they can multiply investments severalfold when timed correctly.

Beyond that, digital assets have proved to be great stores of value over longer durations, helping beat the corrosive effects of inflation on fiat currency. Worried about the short-term volatility of these assets, most institutional houses prefer to hold on to them for extended periods.

Family Offices Find Themselves Growing Closer to Digital Assets. 

And that has positioned family offices perfectly to jump into the digital asset landscape. Single- and multi-family offices working to preserve and grow the wealth of affluent, high-net-worth families have begun making digital assets a significant part of their overall investment portfolios, looking to tap into the burgeoning potential of blue-chip tokens and altcoins.  

Blockchain and Web3 implementations depict their ability to transform the tech and finance industries over the coming decades. Logically, family offices are turning to digital assets at the center of the transformation to set future generations up with this lucrative innovation. While these investment strategies look to become generational, family offices must make several considerations, including educating themselves about the asset class and implementing effective risk management strategies.

Choosing the ideal custodian is imperative for Family Offices

A stop-stop solution for Family Offices to maneuver their way into simplified digital asset investing and management is with digital asset custodians

Handling millions or billions of dollars in assets is no sweat for experienced custodians. They have an arsenal of solutions from wallet options like hot and cold wallets, Multi-Sig and MPC configurations compliance integrations, regulatory licenses, institutional-grade custody structures, succession planning tools, and more. But choosing the right one for your specific situation is crucial.

Family offices are best suited to choosing the services of third-party custodians for managing the digital assets in their portfolios. Self-storage solutions come with a steep learning curve and, more consequentially, the possibilities of irrecoverable asset loss if the private keys securing the assets are mishandled or lost. There is no recourse from that, possibly jeopardizing vast amounts of value.

So, relying on reputed custodians specializing in managing digital assets for clients interacting with massive volumes is the best bet for family offices. Their convenience and security make them the pragmatic option for anyone beyond the average retail digital asset investor who deals with less significant values.

What to Look for When Choosing a Custodian

While several custodians operate in the digital asset landscape, family offices must choose the right one for various reasons. Let’s examine what they must focus on and how it can make their interactions with the asset class seamless.

Secure Infrastructure

Dealing with digital assets revolves around secure infrastructure, especially when trusting third parties to manage them. After all, the amount of security breaches around private key handling leads to losses in the billions in the industry every year. Custodians possessing secure infrastructure and integrating best practices to store private keys and transfer data regarding user accounts are the ones to look for.

Identifying such custodians requires checking if they hold cybersecurity certifications, including SOC2 (Systems and Organizations Control 2) and CCSS (CryptoCurrency Security Certification) certificates, which they obtain upon intense scrutiny and audits by the issuing agencies. Simultaneously, custodians engaging in continuous bug bounties and penetration testing stay safe from emerging cybersecurity risks.

Insurance

One thing is sure in the digital asset realm – anyone can be a victim of exploits and hacks despite employing all kinds of cybersecurity protection. Cybercriminals can stay one step ahead of all preventive measures, waiting for the right time to attack. And that can lead to the theft of millions of dollars worth of assets from custodian platforms.

Insurance is the recourse for such inevitable situations, ensuring custodian clients regain lost value. It also helps clients access their value if custodians misuse the funds under management and indulge in corrupt, self-serving practices. Think of the FTX catastrophe that caused losses of user values amounting to multiple billions.

Moreover, insurance providers are very strict about the platforms they insure, doing thorough due diligence before taking custodians on board. So, insured platforms are more trustworthy than those that are not.

Regulation-Oriented

Opting for custodians that focus on regulations is a must. Several jurisdictions have rolled out their digital asset regulations, with many more in the process of doing the same. Those in regulated jurisdictions must possess licenses from regulators overseeing their national crypto ecosystems. Others in countries yet to release relevant frameworks are still answerable to financial regulators.

Ergo, choosing licensed custodians, or those following digital asset and other financial regulations in areas without specific regulations, can save family offices many headaches stemming from non-compliance. They often manifest as having the assets entrusted to the custodians frozen or seized by authorities.

Good Track Record

Family offices must stick to well-established custodians favored by institutions and enterprises in the digital asset landscape. Looking for those operating in the industry with extensive and familiar clientele for considerable periods offers the social assurance that family offices need.

Such custodians have earned their reputations by servicing their clients aptly and focusing on their specific needs, making them better options to manage crypto funds. However, that is not to say that family offices should not consider newer custodian solutions.

Looking for ones that follow all best practices, offer avant-garde features, and work towards building trust in the ecosystem can be highly beneficial. Liminal is a custodian making strides in the digital asset management vertical, providing feature-packed solutions with bank-grade security to family offices. It has also received licenses to operate in multiple jurisdictions thanks to its emphasis on a regulation-first approach.

Comprehensive Reach

The digital asset landscape is evolving rapidly, with new tokens that power highly innovative use cases emerging constantly. Simultaneously, several dApps, including DeFi protocols and DAOs, are scattered across various blockchains, proven to offer high-level yields and profit-generation measures.

Engaging with custodians supporting multichain capabilities and allowing family offices to interact with various digital assets and protocols from various chains is necessary. Moreover, they must offer convenient and intuitive workflows on their platforms for their clients to buy, trade, sell, and utilize digital assets and Web3 applications.

Sensible Pricing

A good custody solution does not equate to being expensive. Several custodians offer economical pricing tailored to the needs and usage of family offices rather than rigid, one-size-fits-all plans. Delegating the custodianship of digital assets to such solutions can keep the billables inexpensive while still providing access to a broad range of features and high-quality service.

Conclusion

Digital assets are bleeding into the portfolios of family offices thanks to their capacity to preserve value, build wealth, and complement traditional investment vehicles as an emerging, speculative asset class. While family offices are accepting it wholeheartedly and geared towards indulging in risky assets, top digital assets’ value retention and inflation-beating capabilities set the asset class up for increased adoption.

Of course, dealing with these assets at any point in time requires family offices to be equipped appropriately. It includes choosing the proper digital asset custodian. Partnering with the right one can make all the difference while treading this novel landscape, allowing family offices to hold and generate value from all facets safely.

February 29, 2024

Digital Asset markets have taken a giant leap ever since their categorization from purely being a volatile alternate investment asset to now being a robust and regulated asset class. 

The journey of digital assets, most significantly that of blue-chip tokens like Bitcoin and Ethereum, has been nothing short of a protagonist in the fight against traditional financial systems, investment avenues, and age-old yield mechanisms. 

However, it was only after the introduction of regulation for these digital assets that they garnered huge institutional interest, pushing the scale of adoption and inviting the likes of family offices to partake in the “coming of age” story of investing in digital assets. 

In the underlying characterization of digital assets as the next best portfolio addition for institutional investors, with a significant boost kicking in after the launch of Bitcoin ETFs(with Ethereum ETFs also on their way), there are still reservations as to how to go about tackling the security, custody, and management challenges that come with them. 

To discuss how current market conditions are driving family offices to embrace portfolio diversification strategies that include allocating funds to digital assets, we dive deep into the intricacies of digital asset custody

Challenges In Secure Digital Asset Investing For Family Offices 

Family offices, traditionally known for their conservative investing approach, sit in the middle of the institutional investors’ branch, bringing untapped liquidity into the market. Conventionally, family offices used to rely only on safer investment bets to accrue value for their investments, but now they are increasingly dipping their toes into the dynamic world of digital assets. 

Despite the potential for high returns, family offices have historically faced significant challenges when considering digital assets as an investment class. Factors such as market volatility, regulatory uncertainty, and the need for established custody solutions have deterred many from fully embracing digital assets.

Talking about the key hurdles family offices face in navigating this exciting but complex landscape, here are some top-of-the-line challenges for them:

  1. Security Concerns: The nascent nature of digital assets presents unique security risks. Hacking, scams, and volatile markets can threaten portfolio stability. Family offices need robust custody solutions, advanced cybersecurity measures, and comprehensive risk management strategies to mitigate these threats.
  2. Regulatory Uncertainty: The regulatory landscape surrounding digital assets is still evolving, creating uncertainty and compliance hurdles. Family offices must stay updated on changing regulations and navigate complex compliance requirements across jurisdictions.
  3. Limited Expertise: Building internal expertise in digital assets can be time-consuming and expensive. Family offices often need more in-house knowledge and resources to properly evaluate, manage, and secure their digital asset investments.
  4. Lack of Infrastructure: Integrating digital assets into existing portfolio management systems can take time and effort. Family offices need secure and reliable infrastructure to seamlessly store, manage, track, and report on their digital asset holdings.
  5. Complex Valuation: Accurately valuing digital assets can be difficult due to their volatility and lack of standardized methodologies. Family offices need robust valuation frameworks and access to reliable market data to make informed investment decisions.

Enabling Family Offices to overcome challenges in digital asset custody

The promise of digital assets is undeniable, yet the hurdles for family offices can seem daunting. 

Overcoming the challenges mentioned above and finding the best probable solutions for them becomes a hardcore reality that must be dealt with utmost precision. 

At Liminal, we work extensively with institutions looking to go one step beyond simply investing in digital assets and look to operate them securely under all circumstances. The same logic applies to family offices as well. 

In our pursuit of building such a robust infrastructure solution, tailored to address the challenges faced by family offices fully and to empower them in their journey to moving to a new asset class for investment, we have created a comprehensive custody solution, integrated best-in-class security protocols and provide real-time monitoring and risk management services to proactively identify and mitigate potential threats, giving family offices peace of mind knowing their assets are secure.

  1. Security Concerns:

Fortress-grade custody: We leverage multi-sig and MPC wallets, leading asset-to-insurance ratios, and bank-grade security protocols to ensure the safety of your assets. Our CCSS Level-3 certification and FIPS-compliant hardware devices go the extra mile, minimizing security risks and providing unmatched peace of mind.

Advanced Cybersecurity Measures: Our vigilant team constantly employs 24/7 SOC monitoring, strict access controls, and penetration testing to identify and mitigate potential threats.

Comprehensive Risk Management: Our experts help you create and implement tailored risk management strategies, considering internal vulnerabilities, market fluctuations, and evolving threats.

  1. Regulatory Uncertainty:

Staying Ahead of the Curve: We have a dedicated team of compliance experts who stay abreast of evolving regulations worldwide. We integrate crucial compliance monitoring in our solutions such as KYC/KYB, AML, and Travel Rule checks, to help navigate complexities across jurisdictions and proactively adapt our services to ensure your portfolio remains compliant.

Streamlined Reporting: Our platform generates comprehensive compliance reports automatically, saving you time and resources while ensuring transparency and regulatory adherence.

Regulatory Partnerships: We actively engage with regulatory bodies and industry leaders 

to become accredited custodians. Currently, we hold a TCSP license in Hong Kong and have also received an IPA from ADGM for an FSP license for our Abu Dhabi entity. 

  1. Limited Expertise:

Your Digital Asset Knowledge Hub: Our team of seasoned custody, compliance, wallet, and security professionals offers expert guidance on evaluating, managing, and securing your digital asset investments. We share industry insights, educational resources, and ongoing support to enhance your knowledge base.

Dedicated Account Management: A dedicated account manager serves as your point of contact, providing personalized guidance and support tailored to your specific needs and goals.

Extensive Resource Library: Access easy onboarding docs, a curated developer section, seamless user-guiding workflow, and trending topic discussions through webinars, research whitepapers, and market reports to build your understanding of digital assets and make informed investment decisions.

  1. Lack of Infrastructure:

Seamless Integration: Our API library, Liminal Express, seamlessly integrates with your existing portfolio management systems, creating a smooth and efficient workflow for managing your digital assets.

Secure Storage and Management: We provide institutional-grade hot and cold wallets for self and managed custody infrastructure, eliminating the need to build or manage complex systems.

Automated Workflows: Streamline recurring tasks and automate key processes with our automation engine, with powerful functionalities like smart refill wallet, smart consolidation, and auto-sweep, enhancing efficiency and reducing operational burdens.

  1. Complex Valuation:

Reliable Data and Valuation Tools: We offer access to trusted market data providers and valuation tools tailored for digital assets, enabling you to make informed investment decisions based on accurate assessments.

Insurance-as-a-Service: We have collaborated with Costero brokers to provide the best possible insurance to our clients that covers their entire portfolio at the best market price. 

Asset segregation and transparency: We deploy segregated accounts, succession planning, and no rehypothecation of assets to allow family offices to maximize transparency and access. 

Embracing the Future Of Family Office Investing 

The future of wealth management includes digital assets. Family offices are actively exploring this burgeoning space, recognizing the potential for diversification and growth. Liminal Custody stands as your trusted partner in this journey. As a regulated custodian, we offer best-in-class security, industry-leading compliance solutions, and a dedicated team of experts, empowering you to invest in digital assets confidently.

Let Liminal Custody guide you through the process, making the path towards secure and compliant digital asset investment smooth and efficient. Contact us today and explore the new frontier of wealth management

Remember, while the potential is promising, navigating the digital asset landscape requires careful planning and collaboration with trusted partners. Liminal Custody is here to equip you with the knowledge and resources to succeed.

February 23, 2024

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture