Big names like BlackRock, Deutsche Bank, Fidelity, and Schwab have recently surged into the world of ETFs related to cryptocurrencies. The EY-Parthenon team also recently conducted a survey of 250-plus institutions on their sentiment towards crypto and blockchain. A staggering 69% of respondents anticipate increasing their allocations to cryptocurrencies, digital assets, and crypto products over the next two to three years.

This demonstrates a clear shift towards cryptocurrencies as a long-term asset class.The appeal of potential high returns, portfolio diversification, and a hedge against traditional market risks is fueling this surge in institutional interest. However, entering the crypto space poses substantial challenges, from navigating regulations to managing volatile digital assets.

This is where staking comes in offering a solution to these challenges driving institutional adoption. Staking involves participating in network validation and governance by holding a designated amount of a cryptocurrency in a wallet, with two primary forms: direct and indirect staking.

Direct Staking

Direct staking is the traditional form of staking, where individuals or entities directly participate in network validation and earn rewards. Here’s how it works:

• Wallet Setup: Users hold a specific cryptocurrency in a compatible wallet, often referred to as a staking wallet. The amount of cryptocurrency held typically determines the staking rewards.
• Node Participation: To participate in direct staking, individuals can run a full node or delegate their coins to a trusted validator, depending on the blockchain’s consensus mechanism (Proof of Stake or Delegated Proof of Stake).
• Network Validation: Validators (or the node operators) are responsible for validating transactions, creating new blocks, and maintaining the blockchain’s security and integrity. In return, they receive staking rewards.
• Reward Distribution: Staking rewards are usually distributed in the same cryptocurrency being staked. The rewards can vary depending on factors like the network’s inflation rate, total staked amount, and the validator’s performance.

Direct staking provides a direct and active involvement in the blockchain network and allows participants to have a say in the network’s governance decisions.

Indirect Staking

Indirect staking, on the other hand, involves using third-party services or platforms to participate in staking without running a full node. Here’s how it differs from direct staking:

• Third-Party Services: Users deposit their cryptocurrency into a third-party staking platform or service. These platforms often pool users’ funds to create a larger stake.
• Staking as a Service: The platform handles the technical aspects of staking, including running nodes, validating transactions, and ensuring network security
• Reward Distribution: The staking platform typically takes a fee for its services, and the remaining staking rewards are distributed among the users who have deposited their coins.

Indirect staking is more user-friendly and convenient, making it accessible to individuals who might not have the technical expertise or the necessary capital to run their own nodes.

Direct vs Indirect Institutional Staking:

When you directly stake your cryptocurrency tokens, you typically have the potential to earn higher rewards compared to indirect staking. This is because you are often rewarded with a larger share of the staking rewards since you are directly participating in network security and consensus.

Direct stakers have more control over their staked assets. They can choose when to start or stop staking, which validator or node to stake with, and they can easily move their assets in and out of the staking pool, providing greater flexibility and responsiveness to market conditions.

In some PoS networks, direct stakers may have voting rights that allow them to influence network upgrades, proposals, and decisions, giving them a say in the blockchain’s governance.

On the other hand, Indirect staking is often more accessible to individuals who are not well-versed in the technical aspects of blockchain networks. Staking through third-party services or exchanges simplifies the process, making it easier for newcomers to participate.

Indirect staking services usually manage the technical aspects and security concerns for you. This can be a significant advantage for those who are not comfortable with the complexities and potential risks associated with running their own validator nodes.

Understanding Institutional Interest in Crypto

Institutional investors are increasingly turning their attention to cryptocurrencies, drawn by several compelling factors that promise to optimize their investment strategies.

• Diversification of Investment Portfolios

Institutions seek diversification to manage risks and explore opportunities across sectors. Cryptocurrencies, as an uncorrelated asset class, offer a fresh avenue for enhanced portfolio diversification.

• Potential for High Returns

The crypto market’s history of substantial price growth, exemplified by Bitcoin and Ethereum, attracts institutions looking for exceptional returns. Despite market volatility, the potential for significant gains remains a strong incentive.

• Hedging Against Traditional Market Risks

Traditional markets are prone to volatility and uncertainty. Cryptocurrencies serve as a unique hedge, offering an independent investment option, especially during economic or geopolitical turmoil.

Challenges for Institutional Investors

Despite the promise of cryptocurrencies, institutional entry faces two significant challenges.

• Regulatory Concerns

Navigating evolving crypto regulations across jurisdictions poses uncertainty that institutions must evaluate before investing. Clearer regulations are essential for institutional confidence.

• Risk Management

Cryptocurrency’s volatility, while promising high returns, presents substantial risks. Effective risk mitigation strategies are crucial to protect institutions from potential losses.

The Role of Staking in the Crypto Ecosystem

Staking involves actively participating in a blockchain network by holding and “staking” native cryptocurrency, enhancing network security, efficiency, and lowering entry barriers.

• Enhancing Network Security and Efficiency

Staking replaces resource-intensive mining with economic stake collateral, reducing malicious activity and energy consumption, making it eco-friendly.

• Lowering Entry Barriers through Reduced Risk

Staking allows institutions to enter crypto with reduced risk. Staked assets act as collateral, shielding against market volatility and reducing portfolio impact.

• Mitigation of Volatility through Staking Rewards

Staking rewards, often in additional tokens, offer stability in a volatile market. They offset potential losses from price fluctuations, ensuring a predictable income stream.

• Earning Passive Yields for Institutions

Staking introduces passive income generation. Institutions can earn rewards without active trading, enhancing portfolio performance and aligning with income-focused goals.

Comparatively, staking rewards provide unique advantages over traditional investments, offering diversification tied to blockchain network activity, reinforcing its value for institutions.

Conclusion

Institutional Staking stands out as a formidable force, facilitating institutional entry into the dynamic realm of cryptocurrencies. With the surge in institutional enthusiasm for digital assets, staking emerges as an appealing remedy for the pressing issues confronting these investors.

At Dexponent, we present a dual approach, offering both direct and indirect staking options to accommodate varying preferences. Our staking solutions open doors to substantial returns while upholding complete ownership and control of assets. This approach harmonizes with the rigorous standards and requirements of institutional investors, empowering them to navigate the cryptocurrency landscape with conviction and versatility.