10 Points That Every Institution Should Consider Before Partnering With A Staking Provider
It’s no secret that institutional interest in staking is on the rise and one could argue that Ethereum’s recent move to Proof-of-Stake was a major boost in this regard. Due to the highly technical nature of running validator operations, institutions generally partner with staking providers like Chorus One to manage their node infrastructure. This is a crucial step as the node operator is not only expected to have protocol-specific failover strategies and all regulatory compliances but also be well versed with on-chain matters.
New staking entrants are often left with the question of what factors to prioritize when partnering with a node operator. Security, commissions, compliance or all of them?
To simplify these matters, we’ve made a list of 10 factors that any fund manager or institutional investor should consider when speaking with a staking provider. These are by no means exhaustive but are some of the most common questions we face when speaking to any institution. Ultimately your choice of a staking partner should encompass POVs from your colleagues in the legal, security, and finance teams too.
1) Node Operator Fees
The staking provider’s fees should be based on the protocol rewards earned and not on your total staked value. Consider the two scenarios listed out below:
If the staking provider’s fee is based on the total value of your staked assets, there’s a high chance that you’ll end up paying a higher fee. The fee percentage might seem lower when compared to other providers but as they say, the devil is in the details.
“Picking the right staking provider will have a big impact on fund yields. Fund Managers need to weigh rewards and many other factors like counterparty risk and MEV policies,” says Neal Roche, Chorus One’s Business Development Manager working with institutional clients.
You ideally want your staking provider to have equal skin in the game too and charging a fee on the protocol rewards rather than value of staked assets is one way to do that. Needless to say, Chorus One always follows this rule.
2) Maximal Extractable Value (MEV)
MEV stands for Maximal Extractable Value and refers to the additional rewards a validator can make by reordering, adding, or removing transactions from a block. In the last 12 months, MEV has been extensively discussed and various protocols like Skip and Jito exist today that are fully focusing on this subject. A validator participating in MEV can boost their share of rewards that are indirectly also transferred to their delegators. For an institution looking to stake, it’s a no-brainer to partner with a staking provider that runs relays like MEV-Boost to earn additional rewards.
At Chorus One, our team is fully invested in the MEV space and wants to create as much transparency around this subject as possible. Our Research Team has written extensively about MEV on our blog and we’ve even released a MEV bot on Twitter that delivers MEV extraction updates from Osmosis every day. You can also check out our Ethereum MEV dashboard and Solana MEV dashboard on Dune Analytics.
3) Access To New Networks
Fund managers usually like to diversify their assets into a couple of networks and hence like to work with multi-chain providers. Owing to the fast-paced nature of this industry, staking providers that onboard newer networks quickly are preferred. Major node operators like Chorus One work with over 30 PoS networks including all major Cosmos chains, Solana, Avalanche, NEAR, Tezos, etc. and are also involved with the testnet/incentivized testnets for multiple networks at the same time.
4) Automation Provided
Another key piece of the stack that will influence your time-to-deploy-funds. The last thing you want when you want to stake more or withdraw your assets is needing human intervention on the other side of the operation. You shouldn’t need to delay your transactions, because your staking provider is on leave. This is why it’s wise to evaluate if you can automate your staking procedure through an API.
This is exactly what OPUS is. You have FULL control over your validators and can increase allocation/withdraw assets whenever and wherever you wish. Your stake stays backed by Chorus One’s secure infrastructure with 24/7 supervision from our team.
You’re shooting in the dark if you cannot see the performance of your nodes or monitor rewards. It’s a good practice to ask your staking partner to first give you an overview of their dashboard and ask for any customizations if necessary. All OPUS clients get access to their own dashboard where you can track:
- Staked asset value & Node uptime
- Accrued Rewards
- Attestations & Effectiveness
- Client Diversity
- Billing Amounts & Invoices
6) Enterprise Grade Infrastructure
Though there are multiple newer staking providers in the market, the reason some of the older ones have survived and grown is because their infrastructure has been put to the real-world test through multiple turbulent phases. At the bare minimum, your staking partner should have:
- Multi-region setup for improved reliability
- Hot-spare and fully-synced backup nodes to provide for fast recovery
- 24/7 active node monitoring by the Engineering Team to avoid downtime related slashing
7) Security & Controls
This is arguably the most critical factor and one that separates the crypto natives from the hobbyists. Staking is non-custodial but if the node operator’s security practices are not up to the mark, your assets are at risk.
At Chorus One, we take security extremely seriously and follow industry-leading practices including:
- Non-custodial Keys. The customer retains control to exit and withdraw funds from staking anytime
- Authorization and Authentication using Open ID Connect (OIDC)
- Protection against Double Signing
- Private keys stored in a FIPS 140–2 compliant solution
- ISO 27001 and SOC (expected by end of 2022 and 2023 respectively)
- Flexibility to select jurisdiction
- No co-mingling of funds with unknown entities
Governance is both a power and a responsibility. The power to shape a network’s future and the responsibility of an educated vote. Deploying capital in different networks also means looking into proposals, analyzing them and casting votes. Ideally, your validator should be actively voting on these proposals as some of these could involve things like incentive updates and inflation reduction which impact you directly.
Chorus One works with 30+ networks and we take on-chain governance very seriously. Our Research Team looks into every proposal, discusses it rigorously, and then votes for them. We even release the rationale behind votes on our social media channels every week.
An equally important aspect is the protection a staking provider offers against being slashed and other similar penalities. Penalties differ from one protocol to another, but in essence stakers can lose rewards or, in the worst case, stake if the staking provider is slashed. Chorus One AG is a privately owned Swiss company with a strong balance sheet and over four years of staking experience with institutional clients. With over $750 million in AUM, we offer a standard SLA of 99% uptime and a “no slashing” guarantee to our clients. We have never had a node slashed and even offer Ethereum node slashing insurance as an option to our clients.
10) Investment Opportunities
Validators with an in-house Research Team closely study almost all the networks and hence they’re also the first ones to spot the high-potential ones among the array of new networks launching everyday. Since they will be the ones maintaining the infrastructure, they’re also some of the most knowledgeable teams a network could speak to. A few months back, we announced Chorus Ventures, a $30M initiative to invest in some of the most interesting PoS and interoperability networks, and middleware protocols. To date, we have made over 30 investments including Celestia, Quicksilver, Osmosis, Agoric, Uqbar, Lido, Anoma among many others. We continue advising and investing in projects with a crystal-clear focus and a passionate team. Our exclusive research is also shared with our clients to help them shape their investment strategies better.
So there you have it. The ten most important points that should be on your mind when partnering with a staking provider. What other points would you mention here?