In a recent interview, Hex Trust’s head of markets technology, David Cicoria, revealed that institutional clients are not really interested in liquid staking of crypto assets.
Cicoria says the only interest Hex Trust has seen in such assets is when token holders cannot access native staking.
Native staking is what is done directly on validator nodes.
Some cryptocurrencies, such as Ethereum, base the validation of blocks in which transactions are recorded on Proof-of-Stake (PoS), which requires validation to be done by validator nodes with a certain minimum number of locked tokens.
For example, to be an Ethereum validator node one must lock in the node at least 32 ETH, which is more than $52,000 at current exchange rates.
In addition, in order to be natively staking it is necessary to install, properly configure, and run a node, which is objectively very difficult for the average investor.
For this reason, some companies, and in particular exchanges, offer staking services, that is, they act as intermediaries by allowing investors to stake their tokens on the nodes of others.
In addition, there are DeFi smart contracts that also offer liquid staking, which allows tokens to be staked but without giving up liquidity.
Although it is not known whether institutional investors do native staking, it is nevertheless possible to assume that they do not, because rather than an investment activity it is a technical activity, namely validating transactions.
What David Cicoria reveals is that those who opt for liquid staking do so primarily because they do not want to or cannot do native staking for a number of reasons, mainly including technical difficulties.
Cicoria also says that institutional investors are actually more interested in just native staking, although no one knows if they actually do it.
Therefore, assuming that institutional investors either don’t do native staking, or very few do anyway, the fact that they don’t even seem to be interested in liquid staking could mean that this type of investment is mostly the preserve of retail investors, or crypto technicians.
Staking on Ethereum
Furthermore, staking on Ethereum, i.e., by far the second most important cryptocurrency in the world, for now requires the locking of tokens on validator nodes for an indefinite period of time.
Therefore, it is reasonable to assume that institutions will not be staking, although things in this respect could change as early as this March.
In fact, as soon as the next Ethereum protocol update takes place, with the fork called Shanghai, staked ETH on validator nodes will finally be unlocked.
At that point, things could change for institutional investors, because being able to stake large amounts of ETH on one’s own node that can be withdrawn at any time is very different from having to leave them locked indefinitely.
The fact is that institutions are not interested in liquid staking on DeFi protocols either, because of the many risks of such an activity, including depegging, hacks, possible centralization issues, and lack of regulatory clarity.
Crypto staking as security: how will it be handled by Hex Trust?
Another issue, which has forced some exchanges to stop staking, is that offering such a service could be considered offering unregistered securities to the public.
Securities are in fact investment contracts, and providing an investment service such as indirect staking could appear as such.
Native staking is not a contract, because there are not two parties involved: those who put their tokens into staking on their own node do it themselves.
But offering third parties the opportunity to put their tokens in staking on their own node could for all intents and purposes be equated with offering them the opportunity to enter into a financial investment contract.
Such contracts in many countries are lawful only if the security is registered with regulatory authorities.
Hex Trust and crypto services at the institutional level
Hex Trust is precisely an institutional-level Digital Asset Custodian, that is, directed precisely at institutional investors.
In particular, it operates mainly in the Asian market, but it is hard to imagine that things are different in other areas than as recounted by Cicoria.
Hex Trust also offers precisely a liquid staking service on DeFi, so what he revealed in this regard should be seriously considered.
It is worth mentioning that DeFi’s protocols are often a bit too hostile to use, especially for those who are primarily used to trading in traditional financial markets, i.e., those dominated by brokers.
Even though Cicoria does not say so, it is also possible that such services are still too difficult for those coming from traditional finance to fully understand, and this may discourage especially those clients who have more funds to invest, and who therefore also have more to lose in case of problems.