New Venture Offers Ethereum Staking Yields With Limited Downside

‘Tis the season for tail risk.

Caught off guard by the market downturn precipitated by FTX’s bankruptcy, scores of big-money cryptocurrency traders have suddenly remembered why hedging matters. Deep, and in some cases, historic, losses in recent weeks — the third black swan event for digital assets this year, have portfolio managers hollering for downside protection.

Enter a new partnership between ether staking specialist MetaWealth Technologies and PowerTrade, a liquidity provider for digital asset-based derivatives. The end result, executives from both companies told Blockworks, is what’s been billed as a novel investment product designed to offer institutional crypto investors a straightforward and customized mechanism to gain exposure to cash-settled future trades and staking options blended for individual portfolios. 

Here’s how it works: A structured product employs liquid ether staking as collateral for put options, which are bundled together on a four-month rolling basis. The idea is to earn passive, yield-bearing income from the staking, while hedging the exposures with options designed to provide downside protection. The bundling is intended to shop around in bulk from various market makers in an effort to lock in better pricing. 

The initiative is starting to get traction with institutional investors — executives from MetaWealth and PowerTrade told Blockworks — who are interested in the yield-bearing and stable income that staking provides, but want to mitigate the impact another market dive would have on the underlying ether holdings US dollar value. 

The product, via a combination of interest rate swaps and derivatives, is designed to act as a buffer against drawdowns as extreme as 90%, MetaWealth CEO Florian Drummen said. Drummen has been mainly marketing the investment mechanism to digital asset-focused hedge fund firms and fund of fund operators. 

Seeking safer staking

A series of pilot test-runs are now underway, with the aim being to ink deals with about 10 funds by the end of the first quarter of 2023. 

The staking of digital assets overall has been valued at around $18 billion. MetaWealth estimates that 10% of that market will eventually be attributed to related structured products. The startup has partnered with Lido to facilitate staking and tells clients they can expect annual yields of 5 to 11%. 

“You need to show that the technology works, and you get these Ethereum staking returns, but at a much lower risk, because you have these downside protections,” Drummen said. 

The bet is that market participants who have been stung thrice this year — from the depegging of Terra’s UST stablecoin and the demise of big-name crypto lenders, as well as FTX’s bankruptcy — have finally learned their lesson, at least when it comes to protecting against yet another worst case scenario. 

Bernd Sischka, PowerTrade’s head of institutional sales and business development, dubbed the partnership as a means to “protect your assets, versus saying, ‘Hey, I’ll give you 50x on some yolo trade.’” 

“If anybody wants to call the bottom, be my guest,” Sischka said. “But I think we can collapse another 50%, maybe.”

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