The recent public launch of Anchorage and the surrounding press coverage appear to have sparked some debate about the suitability of cold storage for institutional investors in digital assets, and especially Proof-of-Stake (PoS) assets. At Anchorage, we believe custodians have a responsibility to protect their clients’ investments with the highest possible standard of security at all times, and to never compromise that security for the sake of accessibility. The idea that assets can be held either securely in cold storage or accessibly in hot wallets is a false binary, and we created Anchorage so that investors would no longer have to face such a trade-off.
Staking Must Be Done Securely
Staking is not a separate service from institutional custody. Staking is custody, and should meet all the same security standards.
Most PoS digital assets require their private keys to be internet-accessible. This is because the keys are needed for the consensus protocol of these blockchains to function. Some protocols, such as QTUM, require that the same private key used for asset ownership also be used for staking. For these assets, custody and staking are one and the same: compromise of the staking private key can mean total loss of assets.
Other protocols allow for the use of a “valet” key with capabilities limited to staking and governance. Examples of assets designed with a valet key mechanism include Cosmos and Tezos. But even though the valet key can’t steal the staked principal, much like in real life, the valet can still crash your car. For example, an attacker who gains access to the private key used for staking can still cause loss of the gains accrued. Errors and outages can also result in asset loss: for many PoS networks, even simply losing connectivity may cause a validator to be slashed.
Even if a validator does not intentionally misbehave, it can still be slashed if its node crashes, loses connectivity, gets DDOSed, or if its private key is compromised.
Investors Reject the Trade-off Between Security and Accessibility
The need for an institutional custodian to handle both custody and staking became clear through conversations with dozens of institutions regarding what they were looking for when investing in digital assets. Institutions are require their custodians to offer certain capabilities in order to meet their needs: fast access to assets, full auditability, and the ability to capture yield, all without ever compromising asset security.
Fast Access to Assets
Institutional clients want to be able to move funds to numerous exchanges, OTC providers, or counter-parties. An institution’s custodian should not dictate the fund’s trading strategy. Rather, trade execution must be flexible, fast, and safe regardless of where the trade happens.
Auditors must prove a number of key audit assertions in order to give comfort and peace of mind to an institutional investor’s LP base. With that in mind, Anchorage was designed to provide auditors with unparalleled visibility into the assets being held within our custodial system. We’ve shared our system with a broad range of fund auditors, all of whom are excited to issue unqualified opinions on our clients’ audits.
Ability to Safely Capture Yield
Institutional clients have a responsibility to capture financial gains for their investors, and an equal responsibility to ensure that their clients’ assets are never exposed online. Given the track record of hot wallets, no institutional custodian should ever store clients’ private keys in the cloud, or expose them un-encrypted to an internet-connected server at any point in their lifecycle. We’ve designed a secure system that allows safe participation in yield generating activities for all assets, not just those with delegation. For assets with delegation capabilities, we treat the delegated staking keys with the same care and consideration as we do the asset keys.
Choosing an institution to stake your assets should be done with the same care and due diligence as choosing a custodian to safeguard your assets, and investors shouldn’t settle for any custodian that enables active participation by compromising on security.
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.