9 min readCoinShares is Europe’s foremost digital asset manager, opening up access to crypto to investors through innovative products. We currently offer a wide selection of Physical ETPs, which are listed securities tracking the performance of an underlying asset or benchmark they actually purchase. Some of our ETPs are staked ETPs, which means they allow for a staking reward.
Introduction to Staking
Each block in a blockchain contains a set of transactions that are verified by network nodes before being added to the chain. This validation is crucial to ensure that the information stored on the blockchain is accurate and reliable.
Broadly speaking there are two major types of validation processes: Proof-of-work (PoW) and Proof-of-stake (PoS).
For PoW blockchains, such as Bitcoin, nodes in the network compete to solve complex mathematical puzzles, a process known as mining, to validate blocks. Once a block is successfully mined, it is added to the blockchain, and a new set of transactions can be verified and added to the chain.
In a PoS blockchain, blocks are also verified before being added to the chain. Validators, also known as ‘stakers’, lock up a certain amount of cryptocurrency as collateral to participate in block validation. The probability of a validator being selected to validate a block is usually proportional to the size of their stake in the network. Once a validator is selected, they verify the transactions in the block and add it to the chain. Validators are incentivized to behave honestly and maintain the security of the network by receiving rewards in the form of additional cryptocurrency.
As well as being integral to the security of a PoS blockchain, staking provides users with an opportunity to earn passive income from their cryptocurrency holdings.
Staked ETPs are built to allow investors to benefit from the growth of tokens that offer staking, through a regulated and easy-to-access product. You can consult our article What are Staked ETPs for more information.
How our Staked ETPs are structured
CoinShares Physical Staked ETP catalogue is composed of 8 ETPs, making up for a wide selection of leading Proof-of-Stake blockchains, and allowing investors to be exposed to major staking coins.
Various entities are involved in the staking process:
- The Issuer
- The Staking Agent
- The Custodian
- Third party staking services providers
- The validators
As explained above, staking involves depositing and holding coins in a cryptocurrency network to participate in block validation and earn rewards. In this context, the Staking Agent, represented by CoinShares Capital Markets (“CSCM”), takes on the role of managing the staking activities. They are responsible for determining the appropriate proportion of coins to be staked at any given time and initiating the staking process with the custodian.
Once the staking decision is made, the custodian, in collaboration with selected third-party staking services providers (like Blockdaemon for example), facilitates the staking of the coins.
As the staking process progresses, CSCM tracks and verifies the amount of staking rewards generated. They ensure that the rewards are accurately calculated and managed. This management includes overseeing the staking process to ensure sufficient funds are available to cover the payment of the staking rewards.
Crucially, at no point in the process do the staked coins move from the secure Custodian where they are stored, and the ETP remains 100% physically backed at all times.
In summary, the Staking Agent, CSCM, takes charge of determining the staking proportion, coordinating with the custodian for implementing the staking operations, confirming staking rewards, and managing the staking activities to ensure a smooth and reliable staking experience.
CoinShares Physical Staked ETPs: How are staking rewards shared?
CoinShares is the only issuer which provides transparent & shared staking rewards for investors. This is achieved via
a reduced management fee and;
the increase of the Coin Entitlement (CE) by a certain pre-set percentage every day.
The adjustment amount is determined by the Issuer and Staking Agent based on the expected staking rewards which can be obtained. Our approach, contrary to the one followed by other products, is to provide investors with transparency and predictability in the daily staking rewards for a foreseeable future. This is achieved through increasing the CE every day by a fixed rate, rather than changing this number on a frequent basis to try to stick to the real staking rewards. We think this approach allows for better predictability, transparency and is beneficial for the proper functioning of the ETP.
Staked Polkadot Example:
Initial Coin Entitlement (“CE”): 1.0000000000 DOT
Management Fee: Reduced to 0.0% p.a.
Staking Reward Adjustment: +5.0% p.a.
Source: CoinShares, For illustrative purposes only.
Management Fees
We have reduced the management fees to zero for our staked ETPs, retaining a portion of staking rewards in exchange for operating the products.
Transparent staking rewards
CoinShares stands out as the only issuer that offers investors transparent staking rewards for PoS crypto assets. We provide a unique and clear system for distributing staking rewards, ensuring that investors have visibility into the process and outcomes.
Source: CoinShares, For illustrative purposes only.
Daily accrual
Awards accrue on a daily basis via an increase in the Coin Entitlement.
Disclosure and mitigation of risks
Slashing risk and indemnification from the Staking Agent
Certain proof of stake protocols impose penalties on validators who negligently validate transactions on the protocols. Such penalties can also be imposed due to inadvertent errors, technological problems and hacking. The penalties can comprise loss of rewards as well as a loss of initial coins staked.
As part of the CoinShares’ unique structure, the Staking Agent agrees to indemnify the Issuer against any losses related to slashing.
Liquidity risk and liquidity bridge
Staked coins are often subject to liquidity restrictions (e.g. staked coins that are ‘locked up’ for a period of time). The Staking Agent therefore provides a liquidity bridge to ensure the Issuer can continue to satisfy redemption obligations while its holdings are restricted.
Full physical backing
All CoinShares Physical Staked ETPs remain 100% physically-backed at all times and staked coins do not move from the secure Custodian where they are stored.
Track record in underlying crypto markets
Since 2014, we’ve been building the future of investing at CoinShares - creating Europe’s leading European digital asset manager and innovating the technology and infrastructure to enable access and power investment in the new digital economy.
How to access CoinShares Physical Staked ETPs
CoinShares’ Physical Staked ETP range currently consists of 8 cryptocurrencies:
Source: CoinShares
CoinShares’ ETPs are available for purchase on several online investment platforms. Refer to our How to Buy section to see if your preferred broker carries CoinShares’ products. If it’s the case, all you need to do is follow these simple steps in your broker’s account or application:
Search for the product name, ISIN code, or ticker symbol (all featured on the CoinShares’ website) of your chosen ETP.
Choose the notional amount or number of securities you wish to buy.
Place the execution order.
You can then monitor your assets through your broker profile, and wait for the staking rewards to add up overtime.
Conclusion
CoinShares’ Physical Staked ETPs are a convenient way to earn passive income. As they are regulated and physically-backed, they offer a strong level of investor protection, while opening up access to the dynamic crypto market through a variety of underlying assets.
Check CoinShares ETP catalogue for detailed information on Physical Staked ETPs featuring rewards and fees.