Connecting blockchain validation with investor returns.
The Hashdex Staking Program provides the opportunity to reduce or eliminate fund costs for investors through staking, which contributes to the development and security of blockchain networks. This program is built around the same innovative principles that have guided our firm since inception and maintains the highest standards of compliance, security, and risk controls.
Staking is a required function of Proof-of-Stake (PoS) networks like Ethereum.
PoS protocols provide rewards to users who “stake” their tokens in the form of the network's native token (e.g., ETH). These rewards provide an important incentive that helps maintain the blockchain's functionality and resistance to attack. The aim of the Hashdex Staking Program is to use staking to eliminate the cost of the fund for investors. Profits from the program are reverted to the fund, which may then be used to increase the fund's overall return, reduce or eliminate fund fees, or reinvest in the fund.
Staking is the process by which holders of the native token of a proof-of-stake (PoS) blockchain1—such as Ethereum, Solana, or Cardano—can participate in the network's consensus2 by locking up a specified amount of their holding for a period of time in order to support the operation of a blockchain network.
This process is key to the security of the blockchain because it ensures that block proposers and attesters, collectively known as validators, have a stake in the network's integrity and are incentivized to behave with accountability. In return, stakers earn rewards in the form of additional tokens.
In a proof-of-stake (PoS) blockchain, validators are randomly selected to propose new blocks based on their stake in the network. When activated, validators receive new blocks from network peers.
The transactions delivered in said blocks are re-executed, and the block signature is checked to ensure the block is valid. The validator then sends a vote (called an attestation) in favor of that block across the network. Generally, the more tokens a validator stakes, the more likely they are to be assigned new validation tasks and receive rewards.
New blocks are proposed and/or attested by validators, who are required to both run a certain software and lock (i.e., stake) tokens to participate in this process. This discourages malicious behavior and acts as a sort of collateral.
Validators play an important role in maintaining the security and integrity of the blockchain network, as they help prevent centralization by allowing anyone with a specified amount of tokens to participate in the validation process. Due to the risk of slashing their staked tokens, validators tend to have their incentives aligned with the remainder of native token holders.
In addition to the potential price appreciation from holding a blockchain's native token, investors have the following incentives to engage with staking:
When validators add or attest to new blocks added to the chain, they earn rewards. The reward is typically determined by the consensus algorithm used by the blockchain network. It usually consists of a percentage of the total staked amount and is distributed among validators who participate in the process. The specific parameters for staking rewards can vary depending on the token and the network, but they typically involve a few key factors:
In its simplest form, assuming there are no operational expenses for staking and it only involves the locking of assets:
Staking yield = (Block rewards / Total network amount staked) * 100
Volatility risk: The price of the crypto asset that was staked is subject to volatility risk, which may affect the expected staking reward.
Liquidity risk: When a crypto asset is used for staking, it is typically locked up for a certain period of time. During this time, the asset cannot be easily accessed or sold, which could delay the payment of redemption to the investor.
Network risk: Staking involves supporting the operations of a blockchain network, which may be subject to security and network stability risks. If the network faces any security breaches, this may affect the crypto asset's price.
Technical risk: Staking involves using a staking platform/software, which may be subject to technical issues or bugs. If there are technical problems with the platform/software, this may affect its ability to stake or to earn rewards.
Slashing risk: Some staking systems have penalties or slashing mechanisms to discourage validators from engaging in malicious behavior or to deter operational risks. If the rules of the staking system are violated, the staking validator may lose a share of the deposited collateral, and even be excluded from the blockchain's validation set.
Many crypto assets can be staked, including native tokens for blockchains and utility/governance tokens for dApps. The specific list and their respective rewards depends on the protocol or the blockchain network that supports the crypto asset. Some examples of crypto assets that can be staked include:
Staking involves holding a certain amount of crypto assets in a network's wallet as collateral to participate in the consensus mechanism and validate transactions. This collateral may have minimum requirements, such as a minimum amount of crypto or a minimum amount of time for which the stake must be held. The amount needed to stake depends on the specific crypto network you wish to stake on, as each may have different requirements. For example, in order to operate as a validator on Ethereum's Beacon Chain, the exact amount required to be staked is 32 ETH.
The minimum staking period depends on the specific blockchain protocol or platform being used for staking. This means that once a user stakes their crypto on the network, they may not be able to withdraw it right away. Minimum staking periods can range from a few hours to several months or even years.
The amount of the rewards from staking crypto depends on several factors, including the crypto asset chosen to stake, the staking reward offered by the network, and the amount staked.
Crypto mining and staking are two different ways for a blockchain network to achieve consensus. Both staking and mining provide a way for a network’s nodes to include transactions in the next block. In both cases, miners or validators have a chance to be rewarded for the service they're providing to the network.
Mining involves using computational power to solve complex mathematical problems in order to validate transactions on a blockchain and maintain the network's security. Miners receive rewards for successfully validating transactions. This process involves specialized hardware and significant energy consumption.
On the other hand, staking is the process by which holders of the native token of a Proof-of-Stake (PoS) blockchain can participate in the network’s consensus algorithm. It involves locking up a certain amount of crypto for a period of time as a way to validate transactions to contribute to the network's security. Users who stake earn rewards in exchange. PoS systems are considered more energetically efficient than Proof-of-Work (PoW) systems, since they do not require the use of expensive computational resources.
Delegated staking, also known as Delegated Proof-of-Stake (DPoS), is a variation of the Proof-of-Stake (PoS) consensus algorithm. In a delegated staking system, token holders are able to delegate their stake to a validator, who is responsible for validating transactions and creating new blocks on their behalf.
Delegated staking is designed to address some of the potential problems with PoS, such as the concentration of power among a small group of wealthy participants. By allowing token holders to delegate their stake to a trusted delegate, even those with relatively small amounts of crypto can participate in the network and earn rewards.
Delegated staking can also help to improve the speed and efficiency of transaction validation and block creation by reducing the number of participants who are directly involved in the process. By delegating their stake to a trusted representative, token holders can avoid the need to actively participate in the network while still earning rewards.
Choosing a validator to stake crypto assets is an important decision that can impact returns and the security of investments. When investing in crypto assets via funds through an asset manager like Hashdex, investors benefit from their expertise and diligence regarding the best practices in crypto staking. Considerations to choose a validator include:
Slashing is a penalty that can be applied to stakers in case of malicious behavior or operational errors that can damage the network. It is designed to ensure the security of the network. For example, if the validator double-signs or withholds blocks, they can be penalized by having a share of the deposited collateral confiscated. In some cases, the participant may even be excluded from the blockchain’s validation set. Slashing penalties can vary depending on the severity of the offense and the rules of the particular blockchain network.
Staking and lending both involve using crypto assets to earn yields, but staking is a crypto native concept, while lending is a familiar concept in traditional finance. Staking is the process of holding and locking up crypto assets to support the operation of a blockchain network. In return, stakers earn rewards in the form of additional tokens. Lending is where users agree to loan their crypto assets in order to provide liquidity to borrowers. In return, lenders earn interest payments to compensate for giving up the use of their assets for a period of time, as well as for the risk that they might not get paid back.
Staked crypto assets can be lost through slashing or if the network experiences a hack or other security breach. In addition, stakers may be subject to market risk, as the price of the crypto asset being staked will fluctuate. If the value of the crypto asset declines significantly, stakers may experience a loss of funds when they withdraw their staked assets.
In some cases, the failure of a blockchain network may result in a complete loss of the staked crypto asset. This could happen if the network experiences a hack or other security breach that results in the loss of all funds, or if the network simply ceases to function due to technical issues or other problems. However, in other cases, staked crypto may be returned to stakers even in the event of a network failure. For example, if a blockchain network is designed with a built-in mechanism to automatically return staked assets to stakers in the event of a network failure, then stakers may be able to recover their funds.
It depends where the staking activity is happening. The Brazilian Federal Revenue Service has issued guidelines that apply to cryptocurrency transactions, including staking. According to the guidelines, cryptocurrencies are subject to capital gains tax, and staking activities may be subject to taxation as capital gains as well. The tax rate for capital gains in Brazil varies based on the amount of the gain and the type of asset being sold or exchanged, but it can range from 15% to 22.5%.
Staking is an important mechanism in the development of crypto assets for several reasons:
Staking allows token holders for certain blockchains to participate in the network by locking up (i.e., “staking”) some of their holdings. Staking has become an increasingly popular way to earn rewards in the crypto ecosystem. The Hashdex Staking Program provides an opportunity for investors to contribute to the development and the security of the blockchain networks in which they invest while simultaneously allowing for an increased return potential for their invested capital.