Staking Custodied Assets: Options Explained for Crypto Investors

As digital assets evolve and diversify, staking and related mechanisms (baking, inflation) are becoming more widespread. According to our own estimates, $22 billion of digital assets are expected to have adopted Proof-of-Stake (PoS) mechanisms by the end of this year. If you’re an investor with a significant position in PoS assets, you likely already know that staking your assets helps you capture yield and avoid asset dilution. But many investors may not realize how much their choice of custody solution matters for the security of PoS assets, and the potential returns they may generate.

Staking and Third-Party Cold Storage

Most digital asset custodians hold investors’ long-term investments in cold storage. When done correctly, cold storage can keep your assets safe, and may be a low-risk option for investors who will not need to transfer, audit, or otherwise access their assets while in custody. That said, cold storage presents some significant challenges for investors in PoS assets.

Under cold storage, key access involves risk
Each time your organization must access assets held in cold storage, the assets are made vulnerable to compromise. This includes pulling keys out of cold storage to facilitate audits, asset transfers, staking, and even one-time delegation operations.

If you choose a cold storage custodian for your digital asset investments, your only option for staking them is to take the private keys out of cold storage and either delegate or run your own staking nodes. When you delegate, you allow another asset holder to stake your assets for you. This is done without sharing the private key, but the private key is needed to run the operation to delegate. The asset must leave cold storage, and therefore be made vulnerable, every time you want to delegate or (in most cases) put new deposits into the delegating contract.

Delegation involves additional risk exposure
Unless your custodian is also running the staking nodes or inflation pools securely themselves, you expose your investments to unnecessary counter-party risk when delegating staking to any third party.

Staking keys require protection
When private keys in cold storage delegate to different private keys used for staking, the staking keys are required to be online. Cold storage simply doesn’t work for storing these staking keys, and the staking keys still must be handled securely, since misuse of them exposes asset-holders to potential loss of either the staked assets or the gains accrued.

Staking and Cold Storage Self-Custody

Self-custody can be a good solution for individual investors, because this storage method works best when an individual is safeguarding their own personal investments, and the security of the assets is entirely under their own control. Self-custody is typically a bad fit for institutions, however, because it’s both impractical (investors have to figure out their own bespoke alternatives to the full suite of custodial services) and poses business continuity risks in the event of an accident affecting multiple secret-sharers — to say nothing of security, which varies per implementation.

Whoever collects staking gains can unilaterally move them
For PoS assets, investors face not only the fundamental challenges inherent to cold storage, but also additional risk of internal theft because the entity responsible for collecting inflation or staking gains can abscond with the assets. Institutions should only entrust yield collection capabilities to an accountable third party digital asset custodian such as Anchorage.

Self-Custody and Delegation

If you choose to self-custody your assets, you can delegate staking to a third party provider of staking-as-a-service. If you decide to delegate, there are a few things to look out for:

1. Make sure that the delegation service guarantees the node to be online at all times, because failing to do so can result in losing a portion of the participating assets.
2. Find out whether the delegation service has its own minimum, and if so, whether it makes sense for your organization’s strategy.
3. Find out how the delegation service handles security of their private keys, and how their infrastructure is built, since attackers can execute denial-of-service attacks or sabotage the delegation service for penalties by accessing the keys.

Self-Custody and Self-Staking

Your organization can choose to configure its own staking node for self-custodied PoS assets. In order to self-stake without penalties, your node must be online at all times, and the private keys must be securely generated, stored, and accessed. This means running and managing a server to run the node on, and ensuring reliable and redundant power and networking to stay online. In addition, the node will need access to the private keys to be used for participation. Mismanagement or loss of these keys can lead to loss of funds. Once the node is up and running, a few commands need to be run with those keys to stake — refer to the asset documentation for details.

It’s up to you whether the benefits of self-staking (control over getting your reward) are worth the costs (node upkeep, security compromises, and meeting the minimum amount to stake).

Staking and Anchorage

Anchorage is designed to enable active participation for all assets we support, and to keep assets both secure and accessible at all times. To learn more about Anchorage, please get in touch.

Services are offered either through Anchorage Hold LLC, a Delaware limited liability company and registered Money Services Business, or Anchorage Trust Company, a South Dakota-chartered trust company. Anchorage Hold and Anchorage Trust Company are not registered with the SEC. Services are not yet offered to residents of New York. Anchorage Hold and Anchorage Trust Company do not engage in the offer or sale of securities or digital assets, and do not provide legal, tax, or investment advice. Anchorage Hold LLC and Anchorage Trust Company are wholly-owned subsidiaries of Anchor Labs Inc., a Delaware corporation headquartered in San Francisco, California.