Without collateral, institutional crypto investors cannot escape inflation
By 2021, Proof of Stake (PoS) will position itself as the consensus mechanism of choice for new innovative blockchains. Ethereum 2.0, Cardano, Solana, Polkadot, Terra Luna-5 of the top 10 base layer blockchains run on PoS. It is easy to understand why PoS blockchains are popular: the ability to put tokens into use-verify transactions and get rewards in the process-allows investors to gain passive income while improving the security of the blockchain network they invest in sex.
Although blockchain has made incredible progress, the financial products and services available to institutional investors have struggled to keep up. For example, in the 70 types of crypto exchange-traded products (ETP) on the market, 24 represent the ownership of pledged tokens, but only three receive income from the pledge. Not only did ETP holders miss out on staking gains, but they also paid an average of 1.8% to 2.3% in management fees.
However, the lack of staking for ETP is understandable, because the staking mechanism requires tokens to be locked for periods ranging from a few days to a few weeks-which adds to the complexity of products that should be easily traded on exchanges.
Missing staking gains means holding inflationary assets
For PoS token investors, missing Staking gains is not just a missed opportunity-it will lead to holding high-inflation assets. Since the proceeds paid to mortgagers are mainly composed of new tokens, any part of unsecured tokens is constantly decreasing relative to the total supply.As explain In an article by Messari, pledge rewards do not represent wealth creation, but a wealth distribution-from passive holders to pledgers.
The irony is that many institutional investors who passively hold PoS tokens initially began to invest in digital assets to hedge against inflation in real-world assets, and now their PoS tokens are experiencing higher inflation rates.
according to For Staked, the average supply inflation rate of the top 25 PoS tokens is about 8%, which is much higher than the real world figure. At the same time, the rate of return for token holders is higher than the inflation rate, because the reward includes not only the newly created tokens, but also transaction fees. On average, the mortgagor’s actual annual rate of return is 6.4%. The comparison is obvious: passive holders’ investment will suffer from 8.2% inflation. If you invest through ETP, you may need to pay an additional 1.8% to 2.3% management fee, and the actual rate of return for equity holders 6.4%.
In addition to owning the blockchain, investors also need to participate in the blockchain
The value of the blockchain network comes from its ability as a settlement layer to safely add new transactions to the decentralized ledger. This ability depends on extensive and decentralized network participation-therefore, the security of the PoS blockchain depends on the number of collateralized tokens, which are essentially used to verify transactions. Passively holding PoS tokens without staking will reduce the value of the network, which is not in the interests of investors.
Unfortunately, this means that the growth of assets under PoS ETP management will represent a decline in the supply of collateralized tokens and a decrease in the security of the blockchain. With the influx of institutional capital into the passive PoS ETP, the proportion of the total pledged supply has decreased, leading to an increase in pledge incentives and aggravating the inflationary effect of passive holders. If institutional investment is to promote the growth of the PoS token market, in addition to owning them, it also needs to participate in the network.
It is difficult to extract the complexity of the blockchain, but it may
Of course, staking is not a simple task. It involves safe, continuous and normal operation of the infrastructure, with almost no room for error, ensuring compliance with the rules of the blockchain network. Fortunately, today there are many competent verifiers with excellent track records who will pledge work in exchange for a reward. Crucially, validators can pledge tokens without custody of the tokens. Therefore, the best way for institutional investors to pledge their assets may be to use validators in the custodian’s account.
After all, buying PoS tokens without staking them is like stuffing cash under the mattress in modern times. In the long run, this makes no financial sense. Participating in staking allows institutional investors to add PoS tokens to their portfolios without being affected by inflation, while benefiting from the security and value of the encrypted underlying blockchain.
This article does not contain investment advice or recommendations. Every investment and trading action involves risks, and readers should research on their own when making a decision.
The views, thoughts and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Henrik Gobin Finoa is the co-CEO and co-founder of Finoa, a European digital asset custody and financial services platform for institutional investors and enterprises. Before founding Finoa, Henrik worked as a consultant at McKinsey & Company, providing services to global financial institutions and high-tech companies. He started his professional career with a double degree in the high-tech department of Siemens AG.