Understanding the Risks of Token Staking
Institutional investors looking to earn rewards through digital asset token staking must be aware of the associated risks. Andrew McFarlane, CTO at Validation Cloud, a Web3 infrastructure company, emphasizes that asset managers should take steps to protect their clients. One particular risk that asset managers need to be mindful of is slashing, which refers to the penalty imposed on tokens staked by a validator who violates network rules.
Choosing a Reliable Validator
To minimize the chances of being adversely affected by a rogue validator, asset managers should ensure that they select a validator with the necessary experience. McFarlane suggests that asset managers engage staking-as-a-service providers that offer strong security measures and slashing insurance.
The Importance of Audited Staking Platforms
Asset managers can further reassure their clients by choosing an audited staking platform. These platforms receive either SOC2 Type 1 or Type 2 attestation reports. While both attestations are valuable, McFarlane considers SOC2 Type 1 to be a superior attestation report.
The Ethereum Network's Low Staking Ratio
When asked about the relatively low staking ratio on the Ethereum network, McFarlane attributes it to the delayed implementation of the complete staking mechanism. It was only after the Shapella upgrade in April 2023 that the ability to unstake Ethereum became effective. Since the upgrade, there has been a significant growth of over 50% in staked Ethereum over the past six months.
Staking-as-a-Service and its Benefits for Institutional Asset Managers
Staking-as-a-Service allows asset managers to support blockchain network operations without the burden of launching and maintaining the necessary infrastructure. In return, asset managers earn rewards generated by the network. The key advantage of Staking-as-a-Service is the ability to provide this service without taking custody of the tokens. This is different from protocols like Lido or centralized exchanges, which require asset managers to deposit funds into these systems. Staking-as-a-Service satisfies the obligations of institutional asset managers to hold assets with qualified custodians and work with SOC2-compliant tech partners.
Managing Risks in Proof of Stake (PoS) Networks
The main risk in PoS networks is slashing, which refers to the penalty imposed on tokens staked by a validator who violates network rules. Institutional asset managers should be aware of the specific slashing risks for the networks in which they stake. By engaging with Staking-as-a-Service providers that have strong security measures and slashing insurance, asset managers can mitigate this risk.
Validation Cloud's Institutional Staking-as-a-Service Platform
Validation Cloud recently introduced an institutional staking-as-a-service platform that offers on-demand deployment and rewards automation. On-demand deployment allows asset managers to scale their staking operations efficiently. Rewards automation simplifies the process through on-chain smart contracts, eliminating intermediaries and counterparty risk.
SOC2 Compliance and its Significance
Validation Cloud's staking platform is SOC2 Type 1 compliant. SOC2 is a set of criteria that defines security, availability, integrity, confidentiality, and privacy standards for managing customer data. SOC2 Type 1 focuses on security controls at a specific point in time, while SOC2 Type 2 covers these controls over a period of time. Validation Cloud's SOC2 Type 2 observation period will conclude at the end of 2023.
Ethereum's Staking Ratio and Institutional Adoption
The lower staking ratio on the Ethereum network can be attributed to the delayed implementation of the complete staking mechanism. However, with the increasing institutional adoption of staking, driven by the Shapella upgrade, there has been significant growth in staked Ethereum over the past six months.
What are your thoughts on the risks and rewards of digital asset token staking? Share your opinions in the comments section below.
Frequently Asked Questions
How can you withdraw from an IRA of Precious Metals?
First, determine if you would like to withdraw money directly from an IRA. After that, you need to decide if you want to withdraw funds from an IRA account. Next, make sure you have enough money in order for you pay any fees or penalties.
An IRA is not the best option if you don't mind paying a penalty for early withdrawal. Instead, open a taxable brokerage. If you choose this option, you'll also need to consider taxes owed on the amount withdrawn.
Next, determine how much money you plan to withdraw from your IRA. The calculation is influenced by several factors such as your age at withdrawal, the length of time you have owned the account and whether or not you plan to continue contributing to retirement plans.
Once you know what percentage of your total savings you'd like to convert into cash, you'll need to determine which type of IRA you want to use. Traditional IRAs allow you to withdraw funds tax-free when you turn 59 1/2 while Roth IRAs charge income taxes upfront but let you access those earnings later without paying additional taxes.
Once you have completed these calculations, you need to open your brokerage account. To encourage customers to open accounts, brokers often offer signup bonuses and promotions. It is better to open an account with a debit than a creditcard in order to avoid any unnecessary fees.
When it's time to make withdrawals from your precious-metal IRA, you'll need a place to keep your coins safe. Some storage facilities can accept bullion bar, while others require you buy individual coins. You'll have to weigh the pros of each option before you make a decision.
For example, storing bullion bars requires less space because you aren't dealing with individual coins. But you will have to count each coin separately. You can track their value by keeping individual coins.
Some prefer to store their coins in a vault. Some people prefer to store their coins safely in a vault. You can still enjoy the benefits of bullion for many years, regardless of which method you choose.
What amount should I invest in my Roth IRA?
Roth IRAs are retirement accounts where you deposit your own money tax-free. These accounts cannot be withdrawn until you turn 59 1/2. You must adhere to certain rules if you are going to withdraw any of your contributions prior. First, you cannot touch your principal (the original amount deposited). This means that no matter how much you contribute, you can never take out more than what was initially contributed to this account. If you take out more than the initial contribution, you must pay tax.
You cannot withhold your earnings from income taxes. When you withdraw, you will have to pay income tax. Consider, for instance, that you contribute $5,000 per year to your Roth IRA. Let's further assume you earn $10,000 annually after contributing. On the earnings, you would be responsible for $3,500 federal income taxes. That leaves you with only $6,500 left. The amount you can withdraw is limited to the original contribution.
So, if you were to take out $4,000 of your earnings, you'd still owe taxes on the remaining $1,500. On top of that, you'd lose half of the earnings you had taken out because they would be taxed again at 50% (half of 40%). So even though you received $7,000 in Roth IRA contributions, you only received $4,000.
Two types of Roth IRAs are available: Roth and traditional. A traditional IRA allows you to deduct pre-tax contributions from your taxable income. To withdraw your retirement contribution balance plus interest, your traditional IRA is available to you. There are no restrictions on the amount you can withdraw from a Traditional IRA.
Roth IRAs do not allow you to deduct your contributions. However, once you retire, you can withdraw your entire contribution plus accrued interest. There is no minimum withdrawal requirement, unlike traditional IRAs. It doesn't matter if you are 70 1/2 or older before you withdraw your contribution.
Is gold a good IRA investment?
For anyone who wants to save some money, gold can be a good investment. You can diversify your portfolio with gold. There's more to gold that meets the eye.
It's been used throughout history as a currency, and even today, it remains a popular form of payment. It is often called “the most ancient currency in the universe.”
But gold, unlike paper currency, which is created by governments, is mined out from the ground. Because it is rare and difficult to make, it is extremely valuable.
Gold prices fluctuate based on demand and supply. People tend to spend more when the economy is healthy, which means that fewer people are able to mine gold. The value of gold rises as a consequence.
On the other hand, people will save cash when the economy slows and not spend it. This results in more gold being produced, which drives down its value.
This is why investing in gold makes sense for individuals and businesses. You'll reap the benefits of investing in gold when the economy grows.
Also, your investments will earn you interest which can help increase your wealth. Additionally, you won't lose cash if the gold price falls.
What are the pros & cons of a Gold IRA?
An Individual Retirement Plan (IRA) has a major advantage over regular savings accounts. It doesn't tax any interest earned. An IRA is a good choice for those who want a way to save some money but don’t want the tax. There are some disadvantages to this investment.
If you withdraw too many funds from your IRA at once, you may lose all your accumulated assets. The IRS may prohibit you from withdrawing funds from your IRA before you are 59 1/2 years of age. You will likely have to pay a penalty fee if you withdraw funds from an IRA.
Another problem is the cost of managing your IRA. Many banks charge between 0.5%-2.0% per year. Other providers charge monthly management fees ranging from $10 to $50.
You can purchase insurance if you want to keep your money out of a bank. Most insurers require you to own a minimum amount of gold before making a claim. Insurance that covers losses upto $500,000.
If you are considering a Gold IRA, you need to first decide how much of it you would like to use. Some providers limit how many ounces you can keep. Others let you pick your weight.
You will also have to decide whether to purchase futures or physical gold. Physical gold is more expensive than gold futures contracts. Futures contracts offer flexibility for buying gold. They let you set up a contract that has a specific expiration.
Also, you will need to decide on the type of insurance coverage you would like. The standard policy does not include theft protection or loss caused by fire, flood, earthquake. It does include coverage for damage due to natural disasters. You might consider purchasing additional coverage if your area is at high risk.
Additional to your insurance, you will need to consider how much it costs to store your gold. Insurance doesn't cover storage costs. Additionally, safekeeping is usually charged by banks at around $25-$40 per monthly.
If you decide to open a gold IRA, you must first contact a qualified custodian. A custodian helps you keep track of your investments, and ensures compliance with federal regulations. Custodians are not allowed to sell your assets. They must instead keep them for as long as you ask.
Once you have chosen the right type of IRA to suit your needs, it is time to fill out paperwork defining your goals. You must include information about what investments you would like to make (e.g. stocks, bonds and mutual funds). Also, you should specify how much each month you plan to invest.
After filling in the forms, please send them to the provider. Once the company has received your application, they will review it and send you a confirmation email.
A financial planner is a good idea when opening a gold IRA. Financial planners are experts at investing and can help you determine which type of IRA is best for you. They can also help reduce your costs by suggesting cheaper options for purchasing insurance.
How is gold taxed in an IRA?
The fair market price of gold when it is sold determines the tax due on its sale. If you buy gold, there are no taxes. It is not income. If you sell it after the purchase, you will get a tax-deductible gain if you increase the price.
For loans, gold can be used to collateral. Lenders will seek the highest return on your assets when you borrow against them. This often means selling gold. This is not always possible. They may just keep it. Or, they may decide to resell the item themselves. You lose potential profits in either case.
In order to avoid losing your money, only lend against your precious metal if you plan to use it to secure other collateral. It is better to leave it alone.
Is buying gold a good retirement plan?
Although buying gold as an investment might not sound appealing at first, when you look at the average annual gold consumption worldwide, it is worth looking into.
The most popular form of investing in gold is through physical bullion bars. But there are many other options for investing in gold. The best thing to do is research all options thoroughly and then make an informed decision based on what you want from your investments.
If you don’t need a safe place for your wealth, then buying shares of mining companies or companies that extract it might be a better alternative. If you are looking for cash flow from your investment, buying gold stocks will work well.
ETFs are an exchange-traded investment that allows you to gain exposure to the market for gold. You hold gold-related securities and not actual gold. These ETFs can include stocks of precious metals refiners and gold miners.
Who is the owner of the gold in a gold IRA
The IRS considers an individual who owns gold as holding “a form of money” subject to taxation.
To be eligible for the tax-free status, you must possess at least $10,000 gold and have had it stored for at least five consecutive years.
While gold may be a great investment to help prevent inflation and volatility in the market, it's not wise to keep it if you won't use it.
If you plan on selling the gold someday, you'll need to report its value, which could affect how much capital gains taxes you owe when you cash in your investments.
A financial planner or accountant should be consulted to discuss your options.
Statistics
- (Basically, if your GDP grows by 2%, you need miners to dig 2% more gold out of the ground every year to keep prices steady.) (smartasset.com)
- The price of gold jumped 131 percent from late 2007 to September 2011, when it hit a high of $1,921 an ounce, according to the World Gold Council. (aarp.org)
- Gold is considered a collectible, and profits from a sale are taxed at a maximum rate of 28 percent. (aarp.org)
- Instead, the economy improved, stocks rebounded, and gold plunged, losing 28 percent of its value in 2013. (aarp.org)
- If you accidentally make an improper transaction, the IRS will disallow it and count it as a withdrawal, so you would owe income tax on the item's value and, if you are younger than 59 ½, an additional 10% early withdrawal penalty. (forbes.com)
External Links
law.cornell.edu
- 7 U.S. Code SS 7 – Designation of boards of trade as contract markets
- 26 U.S. Code SS 408 – Individual retirement accounts
cftc.gov
investopedia.com
- Are You a Good Candidate for a Gold IRA
- What are the Options? Types, Spreads, Example and Risk Metrics
forbes.com
How To
Guidelines for Gold Roth IRA
Starting early is the best way to save for retirement. You should start as soon as you are eligible (usually at age 50) and continue saving throughout your career. It's vital to contribute enough money each year to ensure adequate growth on an ongoing basis.
Also, you want to take advantage tax-free options such as a traditional 401k, SEP IRA or SIMPLE IRA. These savings vehicles allow you the freedom to contribute without having to pay tax on your earnings until they are withdrawn. This makes them great options for people who don't have access to employer matching funds.
Savings should be done consistently and regularly over time. If you aren't contributing the maximum amount permitted, you could miss out on tax benefits.
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By: Terence Zimwara
Title: The Risks and Rewards of Digital Asset Token Staking for Institutional Investors
Sourced From: news.bitcoin.com/asset-managers-should-only-engage-staking-platforms-with-strong-security-andrew-mcfarlane/
Published Date: Sun, 03 Dec 2023 12:30:45 +0000
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