Franklin Templeton: To Stake or Not to Stake Cryptocurrency

Author: Franklin Templeton (Franklin Templeton, a publicly traded fund management company in the United States)

Translated 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 stake and earn returns in the form of native assets. Additionally, not actively staking means forgoing the native returns of the network.

What is Staking?

PoS networks rely on node operators to validate transactions and ensure network security. 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 capital-intensive and daunting for many, passive investors can delegate their tokens to node operators to earn staking rewards.

Actual Returns Comparison Between Staking and 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 earn staking rewards, which can offset network inflation.

The chart below shows the potential returns adjusted for inflation through staking and not staking. Whether staking or not, investors will benefit from burn adjustments, which mitigate some of the inherent inflation of the protocol. However, it is worth noting that staking does introduce new risks, such as slashing and illiquidity.

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

The chart below shows: In the Ethereum network, the difference in returns between staking and not staking is 2.7% (2.8%-0.1%); in the Solana network, the difference is 6.5% (8.4%-1.9%); in the Avalanche network, the difference is 7.3% (10.2%-2.8%).

What Are the Risks of 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 considered securities, they may be deemed to violate 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 key compromise), 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 the security of 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.

Related Reading: Coinbase Research Report: Restaking, When All Old Things Become New Again