4 min readIn the rapidly evolving world of cryptocurrency, staking Exchange Traded Products (ETPs) have emerged as an innovative investment vehicle. These financial instruments allow investors to gain exposure to the potential rewards of crypto staking without directly managing the technical complexities. As a leader in digital asset investment, CoinShares has developed a robust strategy to address the inherent risks associated with staking protocols, particularly focusing on liquidity and slashing risks.
Understanding Staking Crypto ETPs
Staking crypto ETPs are financial products that track the performance of proof-of-stake cryptocurrencies. These ETPs not only provide exposure to the price movements of the underlying assets but also generate additional returns through staking rewards. By participating in the network's consensus mechanism, staked assets earn rewards, a part of which is then distributed to ETP holders. This approach allows investors to benefit from staking without the need for technical expertise or direct cryptocurrency ownership.
The Dual Risks of Staking Protocols
While staking ETPs offer attractive opportunities, they are not without risks. Two primary concerns for investors are liquidity risk and slashing risk.
Liquidity risk arises from the nature of staking, where for some protocols, staked assets can be locked up for a certain period. During such a period, the coins remain property of the ETP holders but cannot be transferred (as transfers cannot be registered on the protocol). If not managed properly by the issuer of the ETP, his can potentially impact an ETP's ability to meet redemption requests promptly, especially during market volatility or increased withdrawal demand.
Slashing risk, on the other hand, is a penalty mechanism implemented in certain proof-of-stake networks designed to discourage malicious behaviour. If a validator node fails to perform its duties or acts against the network's interests, a portion of the staking rewards or even in some cases a portion of the initially staked assets may be lost, a penalty commonly referred to as “slashing”. If not managed properly by the issuer of the ETP, this could translate into unexpected losses for ETP holders.
CoinShares Capital Markets: A Dedicated Staking Agent
To mitigate these risks, CoinShares has leveraged its trading desk, CoinShares Capital Markets, as a dedicated staking agent. This strategic decision plays a crucial role in safeguarding investor interests.
In the event of a slashing incident, CoinShares Capital Markets has committed to compensate the issuer for any losses incurred. This commitment provides a safety net for ETP holders, effectively transferring the slashing risk from investors to CoinShares itself.
Addressing liquidity concerns, CoinShares Capital Markets, acting as Staking Agent, will decide which portion of the assets can reasonably be staked at any time, taking into consideration lock-up periods of each protocol and keeping eventual liquidity buffers.
Besides, CoinShares Capital Markets stands ready to provide necessary liquidity to the ETPs. This capability ensures that even if a portion of the assets is locked in staking, the ETP can still meet redemption requests efficiently. By acting as a liquidity bridge, CoinShares Capital Markets helps maintain the ETPs' flexibility and responsiveness to investor needs.
Partnering with Top Tier Staking-as-a-Service Providers
CoinShares recognizes that prevention is better than cure. To minimise the risk of slashing events occurring in the first place, the company has established partnerships with leading staking-as-a-service providers. These collaborations leverage the expertise and infrastructure of specialised firms with proven track records in secure and efficient staking operations.
By working with top-tier staking service providers, CoinShares aims to ensure high uptime, proper key management, and adherence to network protocols. This approach significantly reduces the likelihood of validator misbehaviour or technical failures that could lead to slashing events.
Committed to Investor Protection
While it's important to acknowledge that all investments carry some level of risk, CoinShares has demonstrated a strong commitment to mitigating these risks for its ETP investors. The company's comprehensive approach addresses both the potential consequences of risks (through CoinShares Capital Markets' expertise and additional commitments) and their root causes (via partnerships with expert staking providers).
This multi-faceted strategy reflects CoinShares' dedication to creating a secure and transparent investment environment in the crypto space. By shouldering key risks and implementing robust preventative measures, CoinShares aims to provide investors with peace of mind and the opportunity to participate in staking rewards without undue exposure to the technical risks involved.
As the cryptocurrency market continues to mature, CoinShares' proactive risk management approach sets a standard for the industry. While risks can never be entirely eliminated, the company's efforts demonstrate that with careful planning and the right infrastructure, it's possible to offer innovative crypto investment products that balance opportunity with investor protection.
