September 17, 2024

Digital asset staking through the lens of traditional yield-bearing instruments

Overview
Research and Insights

To better understand digital assets, it can often be valuable to compare and contrast its features to other asset classes.

In this paper we have put together a side-by-side comparison of digital assets and other yield-producing asset classes including fixed income, equities and real estate investment trusts (REITs).

 Key takeaways:

Yield incentives are a component of many major asset classes and a comparison with traditional asset classes provides some high-level takeaways
There are similarities and differences across all the major asset classes included that are valuable in understanding digital asset staking and how it can contribute to a total return profile
Staking is an active decision, and notable difference between digital assets and other yield bearing assets
Digital asset programming differs from protocol to protocol making staking rewards more variable

When comparing digital asset staking rewards to equities, the most striking similarity is in how distributions are made to asset holders. Staking rewards appear similar to dividends paid in parent company stock.* Staking rewards are paid in tokens, based on the number of digital assets staked, which is somewhat analogous to a stock dividend where the dividend is awarded as of additional shares, calculated as a percentage of the number of shares held. As is the case with equities, this could have a dilutive effect on token holders, as well as creating longer-term tax liabilities versus those created by an immediate cash distribution.

* Proof of stake rewards, while usually distributed as tokens of the native blockchain, but can also be programmed to deliver a different token.
When comparing the source of yield in fixed income and digital assets, it is at the structural level where the greatest similarities can be seen. In the fixed income markets, the trust deed, paying agency agreement and deed of covenant set out the terms according to which income is paid. The rules around coupon payments are set out up front, when the bond is issued. For a digital asset, the terms of its structure are written into its code. While not quite as immutable as a bond covenant, which remains in place for the life of a bond or until recall, digital asset tokens (and staking rewards rules) are programmed and as such, will function as written. As alluded however, changes to a protocols programming can be made over time, and staking methodologies can be changed. Beyond the connection to the predetermination of yield, the similarity between these asset classes diverge, as staking yields are based on multiple factors and are highly variable versus bond coupons.
On their face, REITs more closely resemble equity in their cash dividends, but also have some unique relationships that are interesting to note. First, digital asset staking requires that staked assets be locked up, freezing the ability to redeem assets until the staking period is over. In a similar vein, REITs also impose lock up periods in an effort to reduce redemption risk. Second, REITs are managed portfolios, the success of which are, to a greater or lesser extent, investment manager dependent. On this last point, a comparison can be drawn from quality of management to the quality of (digital asset) programming and ongoing developer activity key to the health of the asset.

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