Unlocking Institutional Staking Success

1. Unlocking Institutional Staking Success: A Deep Dive into White-Labeled Validators, Taming Risks, and Boosting Yields By: Ravi Chamria, Co-founder, CEO of Zeeve

2. Staking in a Nutshell Staking is a key feature of Proof-of-Stake (PoS) blockchains. It involves token holders committing their assets to support network security. Unlike PoW, This model does not require miners to work through complex math problems to validate transactions and add blocks to the blockchain. Instead, transactions on the blockchain are validated by the entities, called validators. Validators are chosen based on factors like the number of tokens staked and staking duration. Staking allows participants to earn rewards in the native cryptocurrency for their contribution to network security.

3. How Staking Works in a PoS Blockchain 2 Algo psuedo-randomly selects next validator 3 1 Owner stakes their native tokens in staking pools The selector validator proposes a block of transactions 4 Other validators verify and approve the transaction 5 6 The block is added to the existing blockchain The validator earns a transaction fee

4. Why Institutional Staking is on the Rise Low Returns in Traditional Investments: • Traditional investments like bonds offer relatively low returns, as seen in the case of AA/AAA rated bonds in various countries (e.g., US, UK, Germany, Japan). • These low yields have led investors to seek alternative investment options. Country 10-Year Yield (%) U.S.A 3.819 China 2.728 UK 4.377 Japan 0.440 Australia 3.750 Germany 2.480

5. Despite the short-term price fluctuations risks, many institutions consider staking an integral part of their VDA investment strategy for several reasons: • Staking can offer passive income on assets that may otherwise be underutilized. o Staking rewards are akin to compound interest, like in traditional markets when dividends are reinvested. Users can “reinvest” rewards and receive a higher payout at the next period. o It doesn’t require giving up or lending out assets in order to stake. o For example, to earn yield on AAVE or Compound, investors must physically give up their tokens to a borrower with potentially no guarantee that they will receive the principal paid back in full. With staking, all tokens could remain in self custody.

6. How Institutional Staking is Different? Institutional staking involves large-scale participation by organizations, such as banks, hedge funds, and asset management firms, compared to individual investors in traditional staking. Institutional stakers often have higher staking volumes, which can impact network dynamics and rewards. Institutional staking may involve custodians, and high-maintenance infrastructure to engage in staking activities across multiple blockchains. Institutions may have specific compliance requirements and risk management protocols to adhere to, adding an additional layer of complexity to their staking activities.

7. The Staking Yields & Rewards Yields differ on a token-by-token basis, with some offering higher percentages than others. However, nominal yield isn’t the only consideration for staking participants. The process of issuing rewards to token holders who participate in staking in the native token is inherently inflationary (inflation in this case referring to money supply growth). Therefore, those token holders who choose to stake are less impacted by the inflationary effect of minting new tokens. • • • Our Analysis of the Top Blockchains Blockchain Ethereum Solana Cardano Avalanche Polkadot Kusama Moonbeam Tezos Coreum Reward Rates 1 – 18% 5.59% 5.26% 9.28% 14.74% 15.38% 3.48% 5.87% 4% Inflation 1% 8.43% 1.96% 26.07% 9.99% 2.35% 5% 5.51% 20% Slashing YES NO NO NO YES YES NO NO YES Lockup 365 Days 5 Days No Locking 14 Days 28 Days 1 Day 7 Days NO 7 Days

8. Risks Associated with Institutional Staking  Like any investment vehicle, staking comes with risk. The three big risks in staking are: Custody (someone taking your assets) Maintenance (network updates) Slashing (Caused by errors in your staking setup & downtime) Other Considerations

9. Custody Risks Who is going to manage the assets? Will that be via a custodian that has full control over your assets, or a non-custodial solution where you still manage your own private keys? The main risks with using a custodian are that a third party has some form of access to the assets. The main risks with doing it yourself are that you need to have the knowledge and security protocols in place to ensure you cannot lose access to your assets or have them stolen. In some staking solutions, you transfer/delegate the assets completely to a third party who will then stake on your behalf. This might mean your assets will be mixed with other participants, but this can be more cost effective.

10. Maintenance Risks Blockchain networks are not 'set and forget'. It regularly goes through a wide variety of changes. These can be upgrades to the base software, network changes and security patches. When staking, it is important to ensure that you have as much uptime as possible, in order to take as much advantage of your capital as possible. Even worse, is losing access to your assets via some form of exploit in code or missing out on returns due to the occasional network updates

11. Slashing PoS protocols employ a penalty mechanism to revoke or slash a portion of a validator's stake for rule violations. Slashing incentivizes proper consensus and deters bad actors from participating in the blockchain. Active network actors act as whistleblowers, catching offenders and constructing infringement statements in a new block. When a validator is found guilty, they face penalties such as invalidation of their validator ID and monetary fines. The severity of the penalty depends on the number of validators involved, with a greater number leading to higher penalties. Whistleblowers receive a fraction of the collected penalties as a reward. There are two behaviors that generally trigger slashing: o Downtime o Double signing

12. Downtime & Double-Signing Downtime Downtime occurs when a validator is offline for any reason when the blockchain calls on it. When this occurs, validators will miss out on the opportunity to validate the transaction and forfeit the rewards they would have received. If this happens on a consistent basis, validators can be penalized by forfeiting a small amount of their staked tokens. Somewhere around 0.1% of the stake. Because of downtime issues, less technically-inclined investors may choose to utilize public validators instead of being a dedicated validator themselves. • • • • Double-Signing Double signing occurs when a validating entity (private key) submits two signed messages for the same block. This can happen if a node operator or infrastructure provider optimizes their node configuration to prevent downtime by having a highly available backup entity running at the same time as a primary entity. This is a much greater offense than downtime, making double signing penalties much larger (could be around 5% of the stake) • • •

13. Other Considerations Setup & Educational Time: o Each blockchain requires a separate node for staking, leading to challenges in managing and maintaining multiple nodes with different requirements and learning curves. So, it doesn’t make strategic sense to get the necessary skills in-house always.  Cost Analysis:   o Building and maintaining a staking system can incur substantial costs that may outweigh the potential returns, considering the rapidly changing and evolving nature of this new generation of financial products. Unbonding Periods:   o Unbonding Periods: Staking involves protocol-enforced periods where tokens are locked and unavailable for sale or immediate use, varying in length from hours to weeks depending on the specific token.

14. So, What Options do Enterprises have for Staking? There could be three ways: Go Self-Hosted: • When you want to manage staking on your own, it means running your own node infrastructure, which keeps you in full control. • However, this decision should be approached with caution, as it involves strategic considerations and diligent planning, such as building an in-house team and making substantial investments in the required infrastructure.   Custodial Solutions / Delegation Route: • On a high level this is the simplest solution. However, there may be third-party costs involved for custody and also the potential for third-party data breaches. • You may also choose to delegate your tokens to the validators instead of becoming a validator and live on the delegator % rewards. Become White-Labeled Validator: • Here a third-party service provider (an infrastructure provider) operates the validators and provides the necessary infrastructure and expertise, while allowing the entity to maintain their full control of their nodes. • It’s a fully non-custodial solution with all the benefits any particular blockchain offers for their validators.

15. Why Zeeve for your White-Labeled Staking Nodes? Enterprise-Grade Security We provide 24/7 security monitoring and security tools to manage your staking node. Uptime Guarantee Our multi-layered proactive monitoring ensures that your validator node is forever active. Non-Custodial Control your own dedicated staking node while we manage the underlying infrastructure Support over 40 PoS Networks Support for all legacy blockchains like Ehtereum, Polygon, Binance Chain, Avalanche, Near etc, plus comparatively newer ones like Shardeum, Aptos, Coreum, DCOMM, and many more. ISO/ SOC2 TypeII & GDPR Compliant: Zeeve complies to all these major standards, ensuring security & data privacy for even the most demanding customers.

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