- Stacks rolled out a new mining mechanism last month, called “stacking”
- Earning yield requires a two-week lock-up cycle that can earn returns between 7% and 20%
There’s a new way for institutional investors to earn high yield in bitcoin to the tune of 20%.
Floating Point Group, a capital markets infrastructure firm focused on digital asset market opportunities, has launched a service for holders of Stacks tokens (STX), the native token of the Stacks blockchain, that allows institutions and over-the-counter trading desks to earn passive yield on their STX denominated in BTC, an appreciating digital asset. It is the first delegation partner providing ways for institutional clients to get involved with Stacks.
Institutions have been trying to increase their bitcoin position at a lower risk as its price continues to swing within a $10,000 range; they’re finding that bitcoin, and other digital assets, can be productive assets that generate additional yield by utilizing networks and not merely their tokens.
Previously, the only way to earn that much back in bitcoin was to mine it, according to one partner and head of trading at a decades-old asset manager with tens of billions of dollars in AUM, who is also a client of FPG. But mining is impractical for institutional investors. “Unless you’re sitting there with a supercomputer in a place that has a really low cost of electricity, you can’t really compete, it’s not realistic for most people,” he said.
However, in the fast-paced world of digital assets, innovation is happening at every turn. Last month the company Stacks (which was rebranded this year from Blockstack) rolled out a new mining mechanism called “stacking,” which is what lets investors earn that bitcoin on their STX.
This follows the launch of the new Stacks blockchain in January and a change in STX’s previous status as a security under SEC regulations, making it now tradeable by US investors. STX’s current market capitalization is $1.2 billion.
How to stack Stacks
There are two ways to become a STX holder. You can buy the tokens off an exchange – OKCoin is the US exchange that supports STX – or you can mine them. When you buy STX on an exchange you need to hold it in a special wallet that allows you to participate in stacking.
While there are a number of wallets that support STX, investors must use a wallet that allows them to participate in stacking, according to Brittany Laughlin, executive director at the Stacks Foundation.
“This is where partnership is essential,” she said referring to the partnership between Stacks and FPG. “It allows you to take your tokens and use this service provider to do the stacking on your behalf.”
Stakes.US and the community group Secret Key Labs are among others trying to set up the infrastructure to provide delegation services like Floating Point Group’s, Laughlin said.
When you buy STX, which is currently trading at $1.15, you lock it up for a two-week cycle to earn returns between 7% and 20%. In the current cycle, investors need to have 80,000 STX in order to participate in the rewards. As participation goes up, the minimum amount required to invest goes up. The minimum is variable because it’s a percentage of the circulating token supply.
The concept of locking cryptocurrencies (on proof-of-stake networks) to receive rewards is called “staking”; and often, users may have to forfeit their investment due to “slashing”, which is when validators lose part of their stake for breaking the rules of the protocol.
If an investor doesn’t meet the minimum, they can pool their tokens together with others to earn the yield. This is where companies like Floating Point Group come in. Investors lock their tokens with Floating Point Group, which provides the mining mechanism on their behalf. Investors then get a proportion of the rewards based on the number of STX tokens they have.
“A big portion of it is how to be active with your investments, while still being safe around custody,” said FPG co-founder Kevin March. “That’s why delegated staking is really cool, because no matter how conservative you are – if you’ve never want to move your assets from, say, BitGo or Coinbase Custody – you can still participate in network reward mechanisms like this.”
Operating inside the comfort zone
The asset manager mentioned previously, who asked to remain anonymous for this story, said he was drawn to the stacking opportunity as someone who is interested in the Bitcoin technology but not very technologically oriented; and to Floating Point Group because it allows him to operate and execute within his comfort zone.
“At the institutional level, you see a bunch of screens, see what the best price is, then call somebody and get executed,” he said. “A lot of these markets aren’t quite deep enough to, at a large level, go ahead and execute this all in one swoop. You don’t want the markets to see all of a sudden that you’re buying and move the price up on you or see that you’re selling and move the price down on you.”
He also said he’s currently earning a 25% yield in bitcoin on his STX tokens, and noted that while he’s used to earning crypto yield in the same coins he’s invested in, earning bitcoin on a different asset is a “unique” and “intriguing” opportunity.
Although there are a handful of people within the company who are assessing how or if it will incorporate digital assets into its business, “it’s unclear institutionally where this will go” and they just “know it’s big,” he said. Bitcoin is still a highly volatile asset class, he added, and his firm is looking for more traditional institutional use cases for it.
In addition to the high yield, STX strengthens the Stacks 2.0 blockchain, which is building smart contracts on Bitcoin (rather than the Ethereum blockchain, where smart contracts usually reside).
Laughlin said Floating Point Group’s stacking delegation service is just one service it can provide for STX and that there are many ways it could help provide yield, like lending or collateralizing it or other fancy DeFi things that take advantage of the yield.
“The thesis is that bitcoin is a very secure asset and it’s been around for a while, it has a very large market cap so there’s a lot of liquidity that connects in through bitcoin,” Laughlin said. “Being able to build smart contract infrastructure on top of Bitcoin — that’s the core mission of Stacks.”
Investors in Stacks include Union Square Ventures, Winklevoss Capital, Blockchain Capital and Digital Currency Group as well as Harvard Management Company, the firm that oversees Harvard University’s multi-billion dollar endowment. Two years ago the company became the first to raise capital from retail investors through a Securities and Exchange Commission-approved token sale (an alternative to an IPO).