Proof-of-Stake (PoS) networks have been rising in popularity as an alternative consensus mechanism to PoW, as it minimizes energy outputs while allowing for higher scalability. Around 21% of the current crypto market cap comes from PoS chains, particularly following the Ethereum Merge. Staking is a by-product of PoS networks, where stakers lock up their assets in a smart contract to have a chance at validating the legitimacy of transactions, and earning rewards in return for doing so.
Staking is unique in that it involves lower risks while generating relatively stable yields. This makes it a suitable product for institutions to participate in the digital asset economy. Hex Trust, Hedera, Clearpool, and BCW Technologies have already started noticing the opportunities, and providing the safe and secure way of allowing institutions to access different staking products.
How does Hex Trust enable institutional participation in staking?
Our mission at Hex Trust is to provide the building blocks that enable institutions to grow with the digital asset ecosystem. One of these building blocks is staking, which lies at the heart of PoS networks. Staking products provide institutions a gateway to directly participate in the digital asset economy, while earning yield in return.
As a leading digital asset custodian with an institutional client base, we enable our clients to access these staking products in the most secure, transparent, and efficient way possible. By partnering with Hedera and Clearpool, Hex Trust offers institutional staking for both HBAR and CPOOL through Hex Safe, our proprietary bank-grade platform. In collaboration with BCW Technologies, we also provide clients premium services such as auto-compounding – a feature that automatically claims and re-stakes rewards each epoch.
This Safespace session invited representatives from leading projects including Hedera and Clearpool, to respectively introduce their own staking products, with Hex Trust as a connecting bridge to institutions. There can be a differentiation made between 1) protocol-based staking, and 2) application-based staking.
Hedera’s staking program & its mechanisms
A market leading example of protocol-based staking is Hedera – an enterprise-grade public ledger and governing body which supports decentralized applications. The network sits within the top 10 PoS networks in terms of market cap, and earlier this year announced its newly launching staking program.
Hedera’s staking program is divided into 4 phases: 1) Technical Availability, 2) Ecosystem Development, 3) Staking Rewards Program Launch, and 4) Complete Staking Implementation. The network has recently completed up till phase 3, where details such as reward allocation for and staking reward caps were decided by the Hedera Governing Council and CoinComm (tokenomics committee). The team announced a total of 1 billion HBAR allocated for staking rewards, and approved a maximum staking reward percentage of 6.5%.
To better enable institutional participation, Hedera works closely with its council members and partners like Hex Trust to integrate with their network, and ultimately offer staking programs to the institutional client base.
Clearpool’s staking program & its mechanisms
Clearpool is another project which recently launched its staking program. Clearpool’s staking program offers the same yield generating opportunities as Hedera’s, yet is different in the sense that it offers application-based staking rather than protocol-based staking.
Clearpool combines capital markets with blockchain technology, offering a decentralized marketplace for institutional unsecured capital. The project is unique in its design and infrastructure, where market forces of supply and demand drive the size of the liquidity pools on the platform, as well as the interest rates of each of those pools. The platform’s interest rates are determined by Oracles, which can be compared to PoS networks’ validator nodes. Oracle positions are currently open to institutions holding and staking CPOOL. Oracles are tasked with providing 3 different parameters to determine the interest rate curves: interest rate at 0% utilization, at 100% utilization, and at the lowest rate on the curve, which together determine optimal utilization rates.
After every epoch, Oracles are required to vote on these parameters. Clearpool ensures Oracles provide unbiased and accurate parameter predictions by rewarding them only when the voted parameters are near the range of the actual values. This design ensures Oracles are incentivized to provide correct voting but also earn additional yield by staking their CPOOL, and participating in the network’s operations.
By launching such a program, institutions can now interact with Clearpool by participating in the network through staking CPOOL, as well as determining interest rates for the platform’s liquidity pools. The team also mentions plans to open up Oracle positions to retail audiences in the future, to provide a truly decentralized capital market system.
What are the main challenges of providing a staking program?
One of the biggest challenges of providing staking is to ensure the program’s design cannot be manipulated by third party actors, and that it performs the way it is intended to. Much of the DeFi ecosystem has been designed with capital incentives in mind, sometimes leading to the failure of certain protocols or even lost funds. It is important that when offering staking products, there is a balance between token utility as well as incentivization, in order to create realistic and feasible outcomes for all participants. Hence, repeatedly cross checking protocol design is important to ensure valuable participants remain as trustees of the program, and derive value from participating in the decentralized economy.
Another challenge is bringing multiple parties with different levels of knowledge on staking together. Hedera for example, works with various bodies including the Governing Council, the CoinComm, as well as its retail users. Making sure all parties are aligned and agree upon overall mechanisms of staking programs can be tricky, and require a lot of education to be done. Regulatory uncertainty in the digital asset landscape also has implications on staking programs, and institutional participants in particular, need to be thoroughly educated on this matter as well.
What does institutional interest in staking look like currently and where is it heading?
There are three main trends that can be observed in the institutional market.
First, institutional investors are looking to obtain higher yield due to current market conditions, in place of obtaining profit from token volatility. This makes staking a highly popular product.
Second, there is growing interest and education around the activity of staking due to the rise in popularity of PoS networks (especially following the Ethereum Merge). Investors are learning about the different types of staking products available in the market, and the mechanisms behind each product.
Lastly, in light of what’s happened with FTX recently, institutional investors are becoming increasingly stringent with their intermediary interactions. More investors are looking at practices adopted by these intermediaries, including asset segregation, third-party auditing, and on-chain asset monitoring to prevent risk of losing funds. They now seek direct access to staking programs via direct connection of their institutional wallets to staking products, or by running validator nodes themselves.
To meet this demand, Hex Trust provides its institutional clients with direct access to staking programs across projects like Hedera and Clearpool.
Another overlooked product which is currently in high demand is liquid staking. This form of staking is unique because it provides liquidity alongside staking rewards, which is not offered with normal staking. This provides perfect opportunities for institutional investors to generate yield while maintaining control and ownership of their staked assets. These types of composed staking solutions are being highly demanded by Hex Trust clients, alongside additional features such as auto-compounding.
Listen to the full Safespace session here.
Find out more about our staking solutions
Financial institutions and organizations can access our institutional staking solutions including premium features such as auto-compounding. Learn more about the assets we support, and how you can get started here.