Crypto for Advisors: Where investors stake crypto shapes how much of the reward they keep
Happy Thursday, advisors!
In today’s newsletter, John Keller from Morgan Stanley Investment Management compares staking through an ETP, an exchange and a self-custody wallet
Then, in “Ask an Expert,” Waseem Salim, CEO of Valdora, on the due diligence that protects clients from validator slashing
Happy reading.
Where investors stake crypto shapes how much of the reward they keep
Staking refers to locking up a proof-of-stake cryptocurrency, such as Ethereum’s ether (ETH) or Solana (SOL), to help validate network transactions in exchange for protocol rewards. Transaction validation is essential for the security of decentralized blockchains, so holders are paid to commit their tokens. Staking rewards differ by blockchain and vary over time based on network activity and demand for staking among token holders.
Investors have different ownership options for cryptocurrencies, and each has different implications for staking. They can invest in an exchange-traded product (ETP) that holds the underlying token, they can hold their tokens on an exchange, or they can self-custody using a digital wallet. For staking, the choice turns on three factors: operational complexity, how much of the reward reaches the investor and how quickly the investor can unstake their coins, a precursor to selling.
Operational complexity An ETP investor simply buys a share in a brokerage account. The ETP sponsor selects the staking service provider, so the investor does not manage wallets with private keys or monitor the provider. Exchange staking is also simple, typically a setting within the account, with the exchange controlling the staking process. Self-custody takes the most work. Investors must secure their own keys, choose a staking service provider, approve transactions through a wallet, pay network fees when staking and unstaking, and monitor the position. Operational risks do not disappear in an ETP or with an exchange. They move to the sponsor or the exchange, so advisors and investors should ask how validators are selected and monitored.
Who keeps the reward
The protocol pays the same staking reward regardless of where tokens are held. What changes is the share ultimately passed along to the investor. Exchanges commonly retain roughly 25% to 35% of rewards, and some keep more. Self-custody holders who use a staking service typically give up about 5% to 15%. Staking ETP sponsors typically retain 5% to 25% of rewards. Advisors and investors should ask for the net figure to determine which ownership path, or which ETP, fits best. ETP investors may also want to weigh the percentage of tokens the fund stakes because those percentages can vary as well.
Consider $100,000 staked at a 2.5% gross rate, or $2,500 a year. With a 5% share retained, the investor keeps about $2,375. With a 25% to 35% share, the investor keeps roughly $1,625 to $1,875. These examples assume the ETP stakes 100% of its cryptocurrency. The actual share varies by issuer and over time, and any portion that is not staked earns no reward.
Time to liquidate
For an investor seeking liquidity, the ETP wrapper offers a significantly different profile from holding tokens on an exchange or in self-custody. A cryptocurrency ETP, as with all ETFs, can be sold at any time with T+1 settlement, regardless of the percentage of the fund that is staked. For holders of staked tokens on an exchange or in a digital wallet, the crypto must first be unstaked before it can be sold. Unstaking timelines differ by blockchain and have ranged from zero days to multiple weeks. Some exchanges offer flexible products with faster access, typically at lower rewards.
Chart 1: Staking paths compared
Source: ?
The takeaway The reward itself is the same on every path. What differs is how much work staking requires, how much of the reward reaches the investor and how quickly the position can be sold. On those measures, a staking ETP offers advisors a distinct alternative to staking on an exchange or from a self-custody wallet.
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Ask an Expert
Q. What primary trade-offs separate native, liquid and exchange staking?Each approach comes with its own trade-offs. With native staking, investors retain control over their assets and validator selection, but unstaking can take time. Liquid staking offers more flexibility, allowing investors to put their staked positions to use elsewhere, though that brings additional smart contract and liquidity risks. Exchange staking makes the process easier by handling the technical side, but investors are trusting a third party with their assets. I think the most important consideration is understanding where the assets sit, who controls them and how easily investors can access their funds when needed.
Q. How should investors think about custody, pooled delegation and lockups?I believe custody should be the first question investors ask, even before looking at returns. Who controls the assets, who has authority to move them and what happens if something goes wrong? Pooled delegation can help distribute exposure across validators, but investors should understand how that allocation is managed. Lockups deserve equal attention. Having a liquid token doesn’t necessarily mean the underlying assets can be withdrawn immediately. Investors need to distinguish between selling a token in the market and completing the actual unstaking process.
Q. Do liquid staking tokens introduce smart contract vulnerabilities?Yes. Liquid staking adds another layer of risk because investors are relying on smart contracts alongside the underlying staking network. If something goes wrong with those contracts, it can affect deposits, rewards or withdrawals. Audits help identify vulnerabilities, but they cannot eliminate every risk. I would pay particular attention to who can upgrade the contracts, how funds are managed and what safeguards are in place if an issue arises. Investors should be looking at how a protocol handles security in practice, rather than relying on an audit report alone.
Q. What due diligence protects clients from validator slashing penalties?Validator selection is ultimately a question of risk management. I would look beyond uptime and historical performance to understand how an operator manages infrastructure, monitors risk and responds to failures. Advisors should also assess concentration across validators, the governance behind delegation decisions and the process for replacing underperforming operators. A clean track record matters, but it doesn’t guarantee future performance. What gives me confidence is knowing that risks are being actively monitored, responsibilities are clearly defined and there is a plan in place when something goes wrong.
Keep Reading
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