ETPs facilitated by staking are not so easy to understand
Sophisticated crypto investment tools that aim to add an extra “oomph” to returns are rolling out in Europe.
- A pair of exchange-traded product (ETP) firms have launched a series of strategies aimed at providing staking rewards, defined as passive income generated by holding a coin native to a proof-of-stake blockchain.
- But the simplified staking, carried out via a investment vehicle, comes with significant trade-offs.
why is it important: New crypto ETPs tend to launch first in Canada or Europe, where regulations allow.
- However, these products are proliferating, and people are pumping money into it despite the recession. That means they could eventually see the light of day in US markets.
be smart: Staking is in demand now, in part because people want to be compensated for sitting on the sidelines waiting for coin prices to move in the other direction.
- There are some 207 yield-bearing digital assets that pay an average rate of 9.1%, according to data compiled by Stakingrewards.com. And there are 229 staking services suppliers-DeFi, exchanges, wallets and more – to choose from (needless to say, that’s a lot of “Do your own research“).
What is happening: CoinShares and 21Shares are trying to take the guesswork out of the strategy, having launched around half a dozen physically backed staking ETPs on tokens like Polkadot, Tezos, Cardano and Solana.
How it works: CoinShares shares ETP staking rewards with buyers in the form of an annual return, plus a reduced management fee of zero.
- CoinShares FTX Physical Staked Solanafor example, says it will provide a 3% annual return on top of solana’s price returns, even though client assets could theoretically provide more (or less) than that per year.
- CoinShares Product Manager Townsend Lansing tells Axios, “Stake rewards are volatile and we smooth them out. So we think that’s a more transparent message, right. We want to make sure that investors understand exactly what they are getting and are fully aware of it.” he said. “There are no other hidden costs.“
- 21Shares Solana Staking ETP charges a 2.5% management fee, plus a 25% fee on earned staking rewards that the custodian and 21shares collect. The issuer does not market the return a client might expect from any of its staking ETPs. (However, their website says there is “high earning potential” in “cooking rewards.”)
Yes, but: These investment vehicles are also structured as debt securities. This means that buyers holding ETP shares are effectively holding IOUs from the issuer committing to deliver returns, plus yield on any outlet tracked by ETP.
- Only, it’s hard to say what to expect from these returns, in part because it’s unclear what percentage of these ETPs’ underlying assets are staked.
- Transmitters also have to share staking rewards with their clients, but it is unclear what the catch rate is for clients versus issuers.
What they say: Staking ETPs cannot stake 100% of assets for a multitude of reasons, including variable lock-up periods, Arthur Krause, head of ETP product development at 21shares, tells Axios.
- For example, Polkadot has a 28-day lock-up period that would prevent the company from redistributing funds to investors in the event of large redemptions.
To note: When Axios asked the stores what part of the underlying assets were staked, they refused to answer. However, Krause agreed that it would be accurate to report somewhere between 0% and 100%.
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