Franklin Templeton: To Stake or Not to Stake Cryptocurrency?

Original Title: “To Stake or not to Stake?”

Author: Franklin Templeton

Compiled by: Felix, PANews

There is a key difference between the native assets of Proof of Stake (PoS) networks and traditional assets. The native assets of PoS networks provide long-term passive investors with the ability to earn network-native asset rewards through staking. Additionally, not staking will forfeit the native rewards of the network.

What is Staking?

PoS networks rely on node operators to validate transactions and ensure the security of the network. In addition to newly created staking rewards, operators can also earn a portion of transaction fees. The network requires node operators to commit a minimum capital denominated in native assets to ensure honest behavior (initial capital can be slashed to prevent dishonest behavior). Therefore, while directly operating a node may be a capital-intensive business that deters many, passive investors can delegate their tokens to node operators to earn staking rewards.

Comparison of Actual Returns from Staking vs. Not Staking

If passive investors choose not to stake, their holdings will be diluted in a network with positive net inflation, but net deflation will bring additional value to these investors. However, if passive investors choose to stake, they will receive staking rewards, which can offset network inflation.

The following chart shows the potential returns from staking and not staking after adjusting for inflation. Regardless of whether they stake, investors will benefit from the burn adjustment, which alleviates some of the inherent inflation of the protocol. However, it is worth noting that staking does introduce new risks, such as slashing and lack of liquidity.

For each respective asset, staking adds a significant amount of additional returns for passive investors, which are provided by each respective network.

The chart shows: In the Ethereum network, the return difference between staking and non-staking is 2.7% (2.8%-0.1%); in the Solana network, the return difference is 6.5% (8.4%-1.9%); in the Avalanche network, the return difference is 7.3% (10.2%-2.8%).

What Risks Are Associated with Cryptocurrency?

All investments involve risks, including the loss of principal.

Blockchain and cryptocurrency investments face various risks, including the inability to develop or utilize digital asset applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technology may never be fully implemented, cybersecurity risks, conflicting intellectual property claims, and inconsistent and evolving regulations.

Speculative trading in Bitcoin and other forms of cryptocurrency (many of which experience extreme price volatility) carries significant risks, and investors may lose their entire principal. Blockchain technology is a new, relatively untested technology that may never achieve widespread adoption. If cryptocurrencies are deemed securities, they may be subject to violations of federal securities laws, and the secondary market for cryptocurrencies may be limited or nonexistent.

Digital assets are susceptible to the following risks: immature and rapidly evolving technology, security vulnerabilities (such as theft, loss, or destruction of keys), conflicting intellectual property claims, credit risk of exchanges, regulatory uncertainty, high volatility in value/price, unclear acceptance by users and global markets, and manipulation or fraud. Although investment managers and service providers strive to adopt technologies, processes, and practices designed to mitigate these risks and protect their computer systems, networks, and other technological assets, these systems remain vulnerable to many different threats as market participants increasingly rely on complex information communication systems to conduct business, which may adversely affect portfolios and their investors.