Turning Proof of Stake yield into fixed-income products

Trillions of dollars are currently sitting in negative-yield bonds, with hundreds of trillions more having their purchasing power eroded by negative real rates. Meanwhile, in crypto, the Proof of Stake industry generates 6.5% annually for the $275 billion of staked capital used for verifying blockchain transactions.

What would a bond-like fixed income product that derives its yield from Proof of Stake look like? Can it be done, and what are the challenges of making it a reality? What role would such a product play in building crypto’s still non-existent interest rate markets?

Given the lack of opportunities for conservative, yield-seeking investors to confidently put capital to work in the crypto space, in the latest Finoa research piece, we analyze the possibility for Proof of Stake yield to be offered in a dollar-denominated fixed-income product.

Learn more about the context and findings of this research from our summary below and read the entire paper on our website.

Can staking yields become crypto’s benchmark rate?

The market for traditional fixed-income securities is one of the largest financial markets in the world, but fixed-income products in crypto have taken a back seat to higher demand-driven yield opportunities. A lack of hedged, institutional-grade financial products prevents the shift of traditional capital into this low-risk crypto activity.

If risks are managed correctly, the rate of return of this product would constitute crypto’s “benchmark rate” — much higher than the current risk-free rate of traditional bond markets — and be a prime source of fixed yield for crypto’s future interest rate markets.

This paper asserts that yield from Proof of Stake does not change significantly over time, persists over the long term, and remains high even after significant amounts of capital are deployed into it.

It would in theory be possible to create a fixed-income product with proof of stake as its source of yield, which would be completely hedged against the underlying tokens and thus a “yield-only” product with no market risk.

Research paper contents:

• The nature of blockchain creates yield opportunities

• In traditional finance, yield comes from lending

• In the bond market, fixed income is king

• Today’s crypto yields fluctuate with market demand

• Proof of Stake has a fixed “worst-case” yield

• Hedging is possible in theory

• Hedging difficulty #1: using staked tokens as margin

• Hedging difficulty #2: continuously hedging at low cost

• What would this fixed-income product look like?

• Is staking yield the lowest risk “benchmark rate” of crypto?

• Theory versus practice — comments from industry experts

• Crypto’s benchmark rate is much higher than bonds

• Crypto’s interest rate market has yet to bloom

• We stand on the shoulders of giants

• Further reading

Crypto is emerging as an industry that is not only innovative and disruptive but also regulated and competent. New products and services build on existing ones, and innovation happens at an extreme pace. Finoa is one of these core building blocks, offering institutional-grade custody and staking to investors in emerging blockchain protocols, creating a bridge for institutional capital to flow into the crypto world.

We look forward to enabling the newest wave of crypto innovators and service providers, as they leverage infrastructure like ours to build financial products like the one described in this piece, tearing down the remaining separation between traditional finance and crypto in the process.

If you have any questions or comments on this piece, please don’t hesitate to get in touch with Max Sherwood or Marius Smith.

About Finoa

Finoa is a regulated custodian for digital assets, servicing professional investors with custody and staking. The platform enables its users to securely store and manage their crypto-assets, while providing a directly accessible, highly intuitive, and unique user experience, enabling seamless access to the ecosystem of Decentralized Finance (DeFi). Reference customers include the world’s most renowned Venture Capital firms, large corporations, and financial institutions. Finoa was founded in Berlin in 2018, has received a preliminary crypto custody license (§64y Para. 1 KWG), and is supervised by the German Federal Financial Supervisory Authority (BaFin).

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Reliable and secure custody and staking solutions for institutions across a wide range of digital assets.

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