Asset Managers Should Only Engage Staking Platforms With Strong Security

Institutional investors who wish to participate in digital asset token staking must prioritize strong security measures to protect their clients’ interests, according to Andrew McFarlane, CTO at Validation Cloud. He emphasizes that asset managers should be aware of the risks involved, particularly slashing penalties imposed on validators who violate network rules. To mitigate these risks, asset managers should choose staking platforms with strong security measures and slashing insurance. Additionally, audited staking platforms that possess attestation reports, such as SOC2 Type 1, provide further reassurance of their credibility. By prioritizing security and choosing reputable staking service providers, asset managers can ensure a reliable and secure staking experience for their clients.

The Importance of SOC2 Attestation Reports

In the growing digital asset industry, security is of paramount importance, especially for asset managers who are responsible for safeguarding their clients’ funds. One crucial way for asset managers to ensure a high level of security is by engaging staking platforms with strong security measures. However, it can be challenging to determine which platforms are truly secure and reliable. This is where SOC2 attestation reports come into play.

SOC2, or Service Organization Control 2, is a widely recognized auditing standard developed by the American Institute of Certified Public Accountants (AICPA). It focuses on the controls and processes implemented by service organizations to ensure the security, availability, processing integrity, confidentiality, and privacy of customer data. SOC2 attestation reports provide an independent assessment of whether these controls are suitably designed and operating effectively.

The importance of SOC2 attestation reports lies in the trust and confidence they inspire in asset managers. By engaging staking platforms that have undergone a SOC2 audit, asset managers can be assured that their chosen platform has implemented robust security measures and has been assessed by a reputable third-party auditor.

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Why Asset Managers Should Engage Staking Platforms with Strong Security

As asset managers, your primary responsibility is to protect your clients’ assets and deliver satisfactory returns. Engaging staking platforms with strong security measures is crucial for several reasons. First and foremost, it helps mitigate the risk of a security breach that could result in the loss of assets. In the digital asset space, security breaches can have severe consequences, including financial loss and reputational damage.

Secondly, by partnering with staking platforms with strong security, asset managers can ensure the integrity of the staking process. Staking involves delegating tokens to validators who participate in securing the network and validating transactions. It is essential to choose experienced and secure validators to reduce the risk of malicious activities that could compromise the network’s security and integrity.

Moreover, engaging staking platforms with strong security measures demonstrates a commitment to due diligence and responsible asset management. It shows clients that you prioritize security and take the necessary steps to protect their investments.

Choosing Experienced and Secure Validators

When selecting a staking platform, asset managers should carefully assess the experience and security measures of the validators associated with the platform. Validators play a crucial role in the staking process, as they are responsible for proposing and validating new blocks of transactions. Their actions and adherence to the network’s rules significantly impact the security and stability of the network.

Experienced validators who have a proven track record of successful participation in various networks are generally more reliable. They understand the complexities and risks associated with the staking process and can efficiently navigate them. Engaging validators with a solid reputation for security and experience can provide asset managers with peace of mind, knowing that their staked assets are in good hands.

The Role of Audited Staking Platforms

Another way asset managers can evaluate the security and reliability of staking platforms is by considering whether the platforms have undergone a SOC2 audit. SOC2 audits provide an independent assessment of the controls and processes implemented by service organizations. By engaging an audited staking platform, asset managers can gain confidence in the platform’s ability to protect their clients’ assets.

Staking service providers who have achieved SOC2 compliance undergo a rigorous evaluation of their security controls, availability, processing integrity, confidentiality, and privacy. The SOC2 Type 1 and Type 2 attestation reports provide asset managers with valuable insights into the platform’s security posture and its commitment to maintaining robust controls.

While both types of attestation reports are valuable, SOC2 Type 1 is often considered a stronger attestation because it evaluates the design and implementation of controls at a specific point in time. On the other hand, SOC2 Type 2 covers the effectiveness of controls over a specified period, typically several months.

By selecting audited staking platforms, asset managers can demonstrate to their clients that they prioritize security and have taken steps to ensure that their investments are securely held and processed.

Understanding Slashing as a Risk

One of the risks that asset managers must consider when engaging staking platforms is slashing. Slashing refers to the penalties imposed on tokens staked on a validator who contravenes the rules of the network. The severity of the penalty varies depending on the specific network and the nature of the violation.

Validators can be penalized for actions such as double signing, proposing invalid blocks, or extended periods of downtime. While these events are relatively rare, asset managers should be aware of the specific slashing risks associated with the networks in which they stake.

Engaging staking platforms with strong preventative measures can significantly mitigate the risk of slashing. Preventative measures can include robust security controls, active monitoring of validator performance, and measures to minimize the likelihood of validator misconduct.

Strong Preventative Measures for Risk Mitigation

Asset managers should prioritize staking platforms that have implemented strong preventative measures to mitigate security risks. These measures may include:

Robust Security Practices: Staking platforms should follow industry best practices for security, such as employing strong encryption methods, multi-factor authentication, and regular security audits.
Active Monitoring: Platforms should actively monitor the performance and behavior of validators to detect any signs of misconduct or malicious activities.
Network Participation: Engaging validators who actively participate in the network and have a proven track record of adherence to the rules and regulations can reduce the risk of security breaches.
Insurance Against Slashing: Some staking platforms offer slashing insurance to compensate asset managers in the event of a slashing incident. Asset managers should consider platforms that provide this additional layer of protection.

By incorporating these preventative measures, asset managers can significantly reduce the potential risks associated with staking and ensure the security of their clients’ assets.

The Concept of Staking-as-a-Service

Staking-as-a-Service (SaaS) has gained popularity in the digital asset industry as a way for asset managers to earn rewards from staking without the burden of managing the necessary infrastructure. SaaS providers offer a range of services, including secure staking, regular rewards distribution, and reporting.

With SaaS, asset managers can delegate the staking of their tokens to experienced validators who are responsible for securing the network. This allows asset managers to focus on their core competencies while benefitting from the potential rewards generated by the network.

The key advantage of SaaS is that asset managers do not need to dedicate resources to set up and maintain the infrastructure required for staking. By leveraging the expertise of SaaS providers, asset managers can access the benefits of staking in a secure and hassle-free manner.

Key Features of Validation Cloud’s Staking Platform

Validation Cloud is a leading staking-as-a-service platform that offers institutional-grade solutions for asset managers seeking secure and reliable staking services. The platform provides several key features that make it an attractive choice for asset managers:

Strong Security Measures: Validation Cloud prioritizes security and has undergone a SOC2 Type 1 audit, ensuring that the platform has robust security controls in place.
Experienced Validators: The platform engages experienced validators who have a proven track record of successful participation in various networks. This ensures the reliable and secure operation of the staking process.
Slashing Insurance: Validation Cloud offers slashing insurance to compensate asset managers in the event of a slashing incident, providing an additional layer of protection against potential risks.
On-Demand Deployment: The platform offers on-demand deployment, allowing asset managers to stake and unstake their tokens in real-time. This flexibility enables dynamic and programmatic portfolio management.
Rewards Automation: Validation Cloud has simplified the rewards distribution process by leveraging on-chain smart contracts. This eliminates intermediaries and counterparty risk, ultimately enhancing the overall experience and performance for asset managers.

Through its comprehensive suite of features, Validation Cloud’s staking platform aims to address the security and operational needs of asset managers while maximizing the potential rewards from staking.

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Benefits of SOC2 Compliance for Staking Platforms

SOC2 compliance offers several benefits to staking platforms, especially those catering to institutional asset managers:

Enhanced Trust and Confidence: SOC2 compliance provides asset managers with the assurance that the staking platform has implemented robust security controls and has undergone an independent assessment by a reputable third-party auditor. This instills trust and confidence in the platform’s ability to protect the clients’ assets.
Competitive Advantage: SOC2 compliance sets staking platforms apart from their competitors, especially in the institutional market. Having an attestation report demonstrates a commitment to security and compliance, which can be a crucial factor for asset managers when selecting a staking platform.
Alignment with Industry Standards: SOC2 compliance aligns staking platforms with industry standards, particularly those followed by traditional enterprises. This enables staking platforms to bridge the gap between the traditional and digital asset industries and cater to the specific requirements of institutional asset managers.
Risk Mitigation: SOC2 compliance requires staking platforms to implement robust security controls and processes, reducing the risk of security breaches and associated penalties. By complying with SOC2 standards, staking platforms can effectively mitigate potential risks and protect the interests of asset managers.

Overall, SOC2 compliance enhances the credibility and attractiveness of staking platforms, making them an appealing choice for asset managers seeking secure and reliable staking services.

Ethereum’s Low Staking Ratio

It is worth noting that Ethereum, one of the largest blockchain networks, currently has a relatively low staking ratio. According to Staking Rewards, only about 23% of eligible Ethereum (ETH) is currently being staked or delegated to the network. In comparison, other proof-of-stake networks like Solana, Cardano, and Avalanche have staking ratios above 60%.

This relatively low staking ratio can be attributed to the timing of Ethereum’s complete staking mechanism. The Shapella upgrade in April 2023 enabled the ability to unstake Ethereum, making the complete staking process effective. Before the Shapella upgrade, staked Ethereum could not be unstaked, limiting the participation of asset managers who require more flexibility with their staked assets.

Since the Shapella upgrade, there has been a significant increase in staked Ethereum, with over 50% growth in the last six months. This growth indicates the growing institutional adoption of staking and the increasing recognition of its benefits for asset managers.

In conclusion, asset managers should prioritize engaging staking platforms with strong security measures to protect their clients’ assets and mitigate potential risks. SOC2 compliance offers a reliable benchmark for assessing the security and reliability of staking platforms, providing asset managers with the trust and confidence they need. By choosing experienced and secure validators, asset managers can ensure the integrity of the staking process. The concept of Staking-as-a-Service offers asset managers a hassle-free way to participate in staking and earn rewards. Validation Cloud’s staking platform, with its key features and SOC2 compliance, presents a compelling option for asset managers seeking secure and reliable staking services. Overall, the adoption of staking and the increasing staking ratio in networks like Ethereum reflect the growing recognition of its potential benefits for institutional asset managers.

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