Staking Cosmos Ecosystem Tokens

Interested in staking in the Cosmos ecosystem?

In addition to custody, Anchorage Digital offers institutions the ability to participate in staking, governance, financing, trading, and even NFTs. We provide our clients with an increasing number of ways to participate in the crypto ecosystem, including staking as a service for a variety of blockchains. Today, we’ll focus on staking with eligible Cosmos chains. Earlier this month, we announced custody support with Agoric (BLD), and today we’re pleased to share further ways institutions can get involved with staking on Cosmos with us.

The Cosmos Ecosystem is an expanding set of blockchains, each one tailor-made to a particular use case, built to a technical specification called the Inter-Blockchain Communication Protocol (IBC) that allows them to pass data freely between one another. Conceptually, they liken themselves to a network of cities, each one constructed to suit the needs of its citizens, but with shared infrastructure that serves as “roads” connecting the various locations.

In addition to IBC, this shared infrastructure also includes a consensus mechanism called Tendermint, a proof-of-stake (PoS) algorithm that is designed to provide strong security guarantees. Tendermint and IBC are packaged together, along with modules that handle other common blockchain functions like token transfer, into a piece of software called the Cosmos SDK. The Cosmos SDK, in turn, serves as scaffolding to build blockchains that can easily plug into the Cosmos Ecosystem at large.

Cosmos Ecosystem Tokens are the native cryptocurrencies of these application-specific blockchains. In nearly all cases, they can be staked to secure the network and earn rewards for the institution holding them.

Why is staking so important with Cosmos Ecosystem Tokens?

Because of the ecosystem’s design connecting many blockchains, there is no central validator set securing the entire network, like there is with general purpose chains such as Ethereum. Since each blockchain is responsible for attracting its own validators, they tend to offer boosted staking rewards early on to encourage participation.

Two such examples are the Evmos and Agoric chains, which both offer high staking rewards near launch that diminish over time as an incentive system to reward the earliest participants.

If funds are not staked during these inflationary periods, not only could a holder miss out on rewards, the value of their tokens as a percentage of the total supply will also be actively and rapidly diluted.

Staking early is not only important for helping secure the network during its critical launch phase, but also for capturing the maximum possible rewards from doing so.

Staking through Anchorage Digital: secure custody and access to lending

Staking through Anchorage Digital allows institutions to participate safely and easily, with operations executed directly from our custody accounts. The tight integration between staking and custody also means that rewards accrue directly to custody accounts, creating a closed loop with all funds secured by Anchorage Digital at all times.

On its own, staking is not without risk as its purpose is to secure the network. So when a validator acts outside agreed upon norms, they incur a penalty known as slashing, which can cause loss of principal. This misbehavior can result from anything as benign as downtime or misconfigured validator software, to something as malicious as attempting to broadcast illegitimate transactions. Anchorage Digital has de-risked staking on other chains like FLOW and CELO for clients by operating a validator in-house that comes with uptime guarantees and insured rewards, and has plans to offer the same service in the future for select Cosmos Ecosystem tokens.

Staking with Anchorage Digital also affords easy access to the other services provided; notably, the lending desk. Anchorage Digital's lending team has pioneering experience in facilitating staking loans and would be happy to help clients explore their options.

Validator risks

It is important to be aware of slashing conditions and penalties with Cosmos Ecosystem Tokens, especially when delegating to validators that Anchorage Digital does not operate. Different infractions have different degrees of punishment depending on severity, and are largely chain-specific. The Cosmos SDK only defines two penalty types by default, which are excessive downtime and double-signing.

Cosmos Ecosystem Tokens are delegated to validators through a process called “bonding”, and are conversely “unbonded” when the staker decides to stop staking. Unbonding has a fixed window where tokens will not earn rewards andare not withdrawable. The time frame varies depending on the chain, but is typically between seven and 21 days. “Rebonding '' is the process of delegating staked tokens to another validator, which can happen immediately.

The combination of the Cosmos ecosystem’s rising popularity and the unique incentive structures of new chains built there have made staking a widely requested feature, and Anchorage Digital is excited to continue giving our clients secure and regulated ways to participate in the crypto ecosystem.

At the time of this publication, Anchorage Digital supports staking for the following Cosmos Ecosystem Tokens:

• Cosmos (ATOM)
• Agoric (BLD)
• Axelar (AXL)
• Evmos (EVMOS)
• Osmosis (OSMO)
• Provenance (HASH)

We plan to add more Cosmos tokens as they launch. Existing clients can reach out to their client experience manager to learn more, and we encourage other parties interested in staking to get in touch.