Cryptocurrency staking is practiced by both retail and institutional users, with the two groups having distinct needs and issues to address. While some of these requirements are constant, some of them can also vary—or be ameliorated—by choosing a different staking solution.

Crypto staking commonalities

Before we get into the disparate staking groups and options, it’s worth diving deeper into some of the core staking requirements that retail and institutional users share. Let’s look at a few of the staking basics that need to be accounted for.

Staking minimums

Some Proof-of-Stake (PoS) blockchains have minimum staking requirements that can be financially out of reach for many (such as Ethereum’s 32 ETH minimum). For this reason, investors stake using an alternative that allows a lesser amount to be staked. Using a crypto wallet or centralized exchange staking option, you can often stake at a much lower entry amount. This is because your crypto (ETH in this example) is pooled on your behalf with other investors in order to meet the minimum staking threshold.

For institutional crypto investors, these staking minimums may not be an issue. However, they may choose not to run their own node independently in favor of outsourcing this process to focus on other crypto initiatives.

Crypto lock-up periods and withdrawal times

While this varies, most staking protocols require you to stake for a certain amount of time in order to start accruing staking rewards. This can vary widely and staking rewards can start accruing nearly instantly, after a few hours, a couple days, or even a few weeks. In addition, you may be able to earn a higher staking reward if you choose to lock up your stake for a longer time period. For example, a staking protocol may have 3-month, 6-month, and 9-month staking rates—with a longer staking period typically yielding a higher staking reward.

In addition, the withdrawal period when you decide to unstake your crypto can also vary substantially based on the blockchain’s staking protocol, network activity, and various other factors. In some instances, you can do a full staking withdrawal. For other blockchains, your stake is released gradually over time. For example, fully withdrawing an ETH stake from Ethereum generally takes approximately 28 hours at Ethereum’s protocol level.

While some of these lock up and withdrawal parameters are dictated at the blockchain protocol level and are unchangeable, it’s worth noting that some staking options (outside of running a full node) may add on their own additional lockup or withdrawal requirements. For example, using an ETH staking option may require a longer withdrawal period than Ethereum itself dictates. On the other hand, other staking options may offer an “instant” staking withdrawal that would pay out faster than running your own full node (albeit with a service fee).

Crypto staking risks

While crypto staking is quite popular, it is worth noting that there are some risks that need to be considered. These risks vary based on the staking option you choose. While staking has a lot of promise, you should be fully aware of any additional risk you are taking on.

Staking lock-up and price volatility

While staking returns typically range from 3-8% annual percentage yield (APY), they can go up to 20% APY—or more. It’s also worth noting that these staking rates tend to fluctuate based on a host of factors (predetermined staking changes, market conditions, and more). While staking seems quite lucrative, it’s worth remembering that crypto assets can have significant price volatility. Substantial price drops could see your staked crypto be worth less after your staking period has concluded—even when accounting for the additional tokens gained via staking.

For example, let’s say you’re staking 100,000 XYZ (example ticker) for 5% annual staking returns. Should the price remain static (unlikely), your XYZ stake would increase in value by 5% (via the additional 5,000 XYZ = 105,000 XYZ). If the price appreciates, you’re doing even better. However, if you’re locked in to a one-year staking period and XYZ starts dropping in price, your additional crypto earnings may not pan out profitably, or could even result in a loss on your initial investment.

Using our aforementioned 100,000 XYZ staking example, let’s say you started staking XYZ at a market price (and purchase price) of $1.00 USD and that the price dropped to $0.73 after your staking period concluded. In this instance, you’d end up with 105,000 XYZ with a market value of $76,650 and a net monetary loss of $23,350 based on your initial investment.

Counterparty and hacking risks for staking

While not common, there is a chance that a staking pool or service could get hacked. This could result in a loss of your crypto assets. In addition, outside of running your own node, there can be counterparty risks based on the staking operator or validator you are using.

If the staking validator doesn’t do its job reliably or honestly, it could result in getting lower rewards or even staking penalties. For example, a staking node can be penalized for not being continuously online.

In addition, staking nodes that act dishonestly can also be penalized. This means that a staking node has its stake (the pooled crypto, including your own) reduced. Called slashing, this reduction can be a partial percentage of the staked crypto. In egregious examples of dishonest behavior, slashing can result in significant losses on certain blockchain protocols.

Institutional staking security

With a growing institutional interest in crypto investing, institutional crypto offerings are a burgeoning subsector of this dynamic industry. While a regular crypto investor may feel comfortable using a mobile wallet or a hardware wallet from a manufacturer such as Trezor or Ledger, at an institutional level this storage solution likely wouldn’t be acceptable. A crypto fund or exchange may build out its own bespoke crypto storage solution or use an institutional-grade crypto wallet from GK8, Fireblocks, Qredo, or Liminal.

In much the same way, institutional investors generally require more robust and secure staking options than those on offer to most retail crypto stakers.

For these reasons, staking at the institutional level is often done in one of two ways: running nodes completely independently or using an institutional-grade Staking-as-a-Service (SaaS) provider, which generally allows institutions to run their own nodes while simplifying some of underlying staking processes.

While running your own nodes gives you full control, the technical complexities and infrastructure may make a staking provider-backed option more appealing—especially if you are staking numerous crypto assets on various PoS blockchains. In the next article, we’re going to take a look at one of these institutional staking service providers.

Cheat Sheet

  • Crypto stakers at all levels should be aware of staking minimums, staking lock up periods, and staking withdrawal times.
  • Staking minimums can be met by using a staking solution that pools the staked assets of various crypto stakers.
  • Crypto staking risks include slashing, hacks, and downward price movement during a staking lock up period.
  • The institutional crypto sector typically uses more robust staking solutions that aren’t commonly used at the retail staking level.

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