Crypto rewards

Staking

February 2022
 Table of Contents

1. Introduction 3

2. Risk-free Rate & Currency Risk 8

3. Platform Risks 10

4. Implied Platform Risk Rates 16

5. Conclusion 18

Disclosures
This report has been prepared solely for informative purposes and should not be the basis for making investment decisions
or be construed as a recommendation to engage in investment transactions or be taken to suggest an investment strategy
with respect to any financial instrument or the issuers thereof. This report has not been prepared in accordance with the legal
requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing
ahead of the dissemination of investment research. Reports issued by Payward, Inc. (“Kraken”) or its affiliates are not related to
the provision of advisory services regarding investment, tax, legal, financial, accounting, consulting or any other related services
and are not recommendations to buy, sell, or hold any asset. The information contained in this report is based on sources
considered to be reliable, but not guaranteed to be accurate or complete. Any opinions or estimates expressed herein reflect a
judgment made as of this date, and are subject to change without notice. Kraken will not be liable whatsoever for any direct or
consequential loss arising from the use of this publication/communication or its contents. Kraken and its affiliates hold positions
in digital assets and may now or in the future hold a position in the subject of this research.

This report provides a general overview of staking rewards while recognizing that the features of staking are unique to each
network. References to certain networks are for illustrative purposes only, and are not commentary on the composition or risks
of staking rewards for any particular network.
1.
Introduction

You may have come across the concept of crypto rewards while journeying through the
cryptoasset industry. While crypto rewards have been around for years, their complexity
and adoption have seen a significant rise in the recent past. Whether it’s a reward earned
from a Decentralized Finance (DeFi) or Centralized Finance (CeFi) platform, there are
various ways one can earn a reward on the cryptoassets they hold. Offerings do differ by
platform and all carry different kinds of risks. In our past reports, we have covered the
common risks associated with DeFi and CeFi. In this report, we will discuss the risks tied
to single-asset (vs. multi-asset) staking through platforms that offer staking services, much
like Staked, which was recently acquired by Kraken. To make sense of these opportunities,
we explore the risks and how said risks stack up versus offered rewards.

To understand the concept of staking we will first break down two consensus
mechanisms, namely Proof-of-Work (PoW) and Proof-of-Stake (PoS). We will take a closer
look at PoS and the concept of staking rewards. This note will explore the rewards offered
by various PoS networks and explain the reward rate to provide a frame of reference
for the rates offered by platforms with staking services. Once we have established the
fundamentals of staking rewards, we will outline some of the common platform risks
associated with staking. These risks include counterparty risk and slashing risk. These
risks are quantifiable and inform an overall implied “hurdle rate” for staking. A hurdle rate
determines the reward required to offset the risks undertaken to stake an asset. With this
in mind, let’s first seek to understand PoW and PoS, and learn how PoS leads to staking
rewards.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 3

Proof-of-Work (PoW) vs. Proof-of-Stake (PoS)

There are two prominent consensus mechanisms in crypto: Proof-of-Work (PoW) and
Proof-of-Stake (PoS). While we will lightly touch on the two mechanisms in this
section, please refer to our primer on cryptocurrency mining for a deeper understanding
of the protocols.

It’s likely that you have come across both of these systems when learning about various
cryptoassets. First, we’ll briefly explain the process of PoW and provide an introduction
to PoS. PoW consensus is the set of network rules that determines whether blocks and
transactions are considered valid. The process of validating and recording transactions
is carried out by nodes and miners, the former being responsible for propagating and
storing the blocks of transactions in the blockchain and the latter for introducing new
blocks by confirming transactions from the memory pool (“mempool”). Miners receive
block rewards, or newly minted native tokens along with transaction fees, with each new
block successfully mined. Due to the computational effort expended with PoW and for
greater scalability, many smart contract protocols, particularly those developed in the last
two years, rely on PoS.

A popular alternative to PoW validation is PoS, which assigns the right to create, or forge,
a block through a deterministic lottery process, rather than through computational
expenditure. A PoS system requires the commitment (or “staking”) of one’s assets in
exchange for the ability to validate transactions. Unlike PoW networks, where miners
amass computational resources to hash more quickly, PoS assigns the right to create a
block through a lottery process. The amount of funds staked increases one’s odds of being
selected to produce the next block. Staking nodes with larger balances have a higher
chance of being assigned the right to forge. Under PoS, blocks are said to be forged or
minted rather than mined. Forgers are also referred to as validators, or the collective
group of stakers that are in charge of validating transaction. Participating in PoS forging
generally requires nodes to stake a portion (or all) of their available crypto balance in a
bound wallet, waiting to be selected as the next validator. Some staking networks will
allow the act of delegation, fit for those who do not wish to directly participate in staking

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 4

as a validator. Delegation involves token holders delegating their stake to a validator
in exchange for rewards proportional to their delegated stake. This process allows
for delegators’ assets to count towards the total stake of the chosen validator. This is
comparable to individuals who join mining pools under a PoW system. The individual
reward will be dependent on the miner’s contributed hashrate. In summary, PoS relies on
participants' staked coin supply to assign validation rights and drive consensus, whereas
PoW relies on brute force computational power for validation and consensus.

Rewards from PoS forging may include block rewards and transaction fees. Because
chosen stakers are given exclusive rights to create a block, protocols must consist of
measures to counteract malicious attack vectors. Under PoS, misbehaving validators will
have their staked coins taken away (slashed) and barred from future staking activities.
Though PoS systems are not immune to 51% attacks, compromising the security model
relies on a significant acquisition of the circulating currency supply. This exposes the
attacker to great economic loss, as attacking the network would likely result in the value
of all their staked coins plummeting if users catch on and lose confidence in the protocol
itself. PoS protocols are also unique in that they require an initial distribution of coin
supply to allow participants to stake at genesis. Other networks, similar to Ethereum,
have instead chosen to transition from PoW to PoS mining, though this introduces
migration complexity later on.

Figure 1
Proof-of-Work vs. Proof-of-Stake

PoW PoS

Validation & Miners, nodes Validators, delegators, nodes

Consensus Computational power/hash power Deterministic based on amount of
staked asset

Reward Block reward + transaction fees Block reward + transaction fees

Penalty Bad actors must spend capital on Bad actors can have their staked token
hardware and electricity slashed

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 5

In the case of PoS, there are two primary ways to participate in staking: as a validator
or as a delegator. As mentioned above, validators are directly involved in validating
new blocks. To become a validator, nodes must meet a set of criteria, such as having
the minimum amount of tokens required to participate, proper infrastructure that
will support a continuous connection, technical skills to upgrade one’s node to latest
protocol updates, among others. Alternatively, individuals can help secure the network
and validate transactions by staking their tokens as a delegator. Delegators can stake
their assets with a validator, effectively passing on the responsibility of validation while
receiving a portion of the rewards. Delegation means that an individual’s tokens will
count towards the stake of the chosen validator, often without having to send assets
directly to the validator. Generally, the delegator’s deposited tokens are sent to a smart
contract with a specified validator.

Figure 2
Validation and Delegation on a PoS network

Network

t ion Re
li da wa
Va rd
s
ar ds
R ew

Validator Taken
Delegation Holders

Staking providers such as Kraken, crypto wallets, or staking-as-a-service (SaaS) providers

such as Staked offer the opportunity for users to stake their tokens with the platform
for a reward. These platforms act as validators with the tokens deposited by users. For
the purposes of this note, we will discuss the risks associated with staking using service
providers rather than as an individual validator. The table below shows some stake-able

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 6

cryptoassets and their estimated reward rates. Some networks calculate reward based on
a number of different factors such as duration of staking and amount staked, whereas
others have a fixed reward schedule, often expressed as a percentage. Stakers receive
payments from newly minted coins and transaction fees. The percentage of reward given
out to a staker is denominated in the staked currency.

Moving beyond this overview of staking rewards, we raise a critical question: how do we
evaluate risk versus reward in staking?

Figure 3
Staking reward rates

Name Estimated Annual Reward

Algorand (ALGO) 9.39%

Avalanche (AVAX) 9.23%

Cardano (ADA) 5.02%

Cosmos (ATOM) 13.44%

Kusama (KSM) 14.80%

Polkadot (DOT) 13.98%

Polygon (MATIC) 12.93%

Solana (SOL) 5.88%

Terra (LUNA) 8.03%

Tezos (XTZ) 5.52%

Source: Stakingrewards.com
Note: Listed nominal reward rates are merely estimates and a snapshot in time. Staking rewards will vary depending on various dynamic variables.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 7

2.
Risk-free Rate & Currency Risk

Before diving into the risks specific to staking, it’s important to remember that in
traditional finance, “interest” is the cost of borrowing money, often expressed as a
percentage over an annual basis. The foundational interest rate is known as the risk-free
rate, which is the interest rate associated with a perceived, guaranteed future payment.
A payment is “guaranteed” when the issuer of the asset is a monetary sovereign who has
the theoretical authority to print its currency to finance future payments.1 Risky assets
will often carry a higher interest rate than the risk-free rate, which reflects the risk
attributable to the specific asset or issuer. This is also known as the risk premium and
represents the incremental risk an individual assumes with a risky asset. Accordingly,
interest rates are generally made up of two elements—a risk-free rate and a risk premium.
We propose applying this conceptual framework from traditional finance to staking
rewards, where rewards received from staking reflect a staking risk-free rate plus a
staking risk premium.

Figure 4
Interest rate

Interest rate = risk-free rate + risk premium

The risk-free rate for fiat is straightforward when compared to cryptocurrencies, largely
because government bond yields are generally used as the benchmark risk-free rate.2
In the case of crypto, more specifically stablecoins that are pegged to fiat, we argue the
risk-free rate follows that of the pegged fiat.3 For example, USD-pegged stablecoin USDT
would have a risk-free rate of 1% if the risk-free rate for USD were 1%. Say the reward rate

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 8

for USDT deposits is 5% on an exchange or wallet, then the 4% spread is the risk premium.
Noted above, interest rates are a function of the risk-free rate of a “risk-free” asset and
the risk premium associated with the asset. This risk premium could represent the
default risk (counterparty risk) associated with lending to a counterparty, for example.
In our example with USDT, this 4% would represent the default risk, or risk factors
relating to the staking platforms, such as scenarios of platform hacks and exploitations,
misappropriation, and slashing, or risk factors tied to USDT, such as risks with the issuing
entity of the token and market instability around the pegged value.

For Proof of Work (PoW) currencies, such as bitcoin, we argue that the risk-free rate is
zero.4 Conversely, in the case of Proof-of-Stake (PoS) cryptoassets where staking and
issuance are tied together as part of their network consensus mechanism, there may be
a risk-free rate that accrues to those who stake the currency on the issuing network. To
illustrate, say there is a PoS network named XYZ(XYZ). Imagine the annual inflation rate
for XYZ currently stands at 7% but will trend lower over time like some cryptoassets do.
We can then assume the 7% supply increase is the risk-free rate of the XYZ protocol to
compensate for the loss of purchasing power due to inflation.5

Overall, there are varying degrees of risk-free rates or none depending on the cryptoasset,
and for those with none, reward rates are the result of risks endemic to each currency,
platform, and reward offering. Understanding risk-free rates tied to each currency as
well as platform risk rates helps market participants to determine the real rate of reward
offered for customers of a staking platform.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 9

3.
Platform Risks

Staking platforms may offer somewhat similar services, albeit with varying tokens. Each
platform has a set of risks that should be carefully considered when weighing the potential
reward on staked assets. We look to major players in the market today to illustrate some
of the common risks present across platforms—namely counterparty risk and slashing
risk. Per figure 5, various exchanges and wallets offer different rewards on the same
cryptoasset, which is a reflection of their business model and aggregate staked tokens.
For instance, some platforms will have more staked tokens than others and some will
take a cut of the rewards as a fee. Regardless of staking conditions, platforms carry
common risks.

Figure 5
Staking platforms and their respective rewards
Kraken Platform Platform Platform Platform Platform Platform Platform Platform Platform
1 2 3 4 5 6 7 8 9
Polkadot (DOT) 12.00% 3.90% 12.98% 14.45%
Solana (SOL) 4.88% 7.25%
Cardano (ADA) 5.20% 4.99% 4.24%
Algorand (ALGO) 5.20% 7.49%
Kusama (KSM) 12.00% 11.60% 15.20% 15.20%
Cosmos (ATOM) 12.52% 8-15% 8.10% 14.36% 11.78% 13.25% 8.84% 14.73%
Kava (KAVA) 26.70% 13-15% 9.10% 25.85% 26.27%
Flow (FLOW) 9.00% 10.10%
Tezos (XTZ) 5.21% 5-7% 6.20% 6.12% 4.60% 5.51% 6.09%
Tether (USDT) 0.60% 1.83%
USD Coin (USDC) 7.50% 6.91%
Dai (DAI) 0.19% 3.91%
Synthetix (SNX) 18.00%

Source: Stakingrewards.com, respective platform or staking service websites

Note: Listed nominal reward rates are merely estimates and a snapshot in time. Staking rewards will vary depending on various dynamic variables.
Reward rates shown may not be net of any fees.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 10

Counterparty risk

As discussed in our previous report on CeFi lending, utilizing centralized platforms

comes with counterparty risk. Counterparty risk can be broken down to various layers,
including default risk and custodian risk. There is a default risk that the platform with
which a user stakes their tokens fails to pay out staking rewards. Whether it’s due to
a platform’s dishonest behavior or failure to make timely payments, users run the risk
of not receiving rewards or receiving smaller-than-expected rewards for their staked
assets. Lower rewards may be reflected in both the quantity and frequency of a reward.
Default risk could stem from internal stakeholders making decisions out of malicious
intent, poor maintenance of validator nodes, or misbehavior that lead to penalties such
as network slashing. In addition, some staking platforms can arbitrarily deny or decline
user accounts or geographically restrict users. In some instances, there may be cases of
regulatory scrutiny and uncertainty that could lead to restricted access for users.

Counterparty risk can also stem from custodial risk. There can be custodial risk
with platforms where users are required to have minimum holdings locked away to
participate in staking activities. Holding assets on an exchange, staking service provider,
or wallet carries security risks that may lead to loss of user funds. With staking services
on staking-as-a-service (SaaS) platforms or exchanges, users can stake with assets held
in their user accounts and assets may not be directly transferred to anyone, though the
custodians may have access to users’ staked funds. With wallets that provide staking
services, users generally have to send their assets to an address provided by the wallet.
In all cases, custodian risk is a significant risk factor in staking because there is either
a centralized point of attack or loss of control over one’s assets. If a malicious actor
compromises a platform or wallet holding user assets, those users could lose their staked
tokens or find themselves unable to withdraw their funds.

Accordingly, in order to quantify the counterparty risk of a platform, we look at the

level of theft present on centralized crypto platforms. According to Chainalysis, there
was around $3.2B worth of crypto stolen in 2021, roughly 13% of which occurred on
centralized exchanges. If we assume this 13% represents the level of theft on CeFi,

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 11

this implies that around $400M worth of crypto theft occurred in 2021. According
to CryptoQuant, there was at least $186B held in CeFi crypto exchanges as of end-
December, 2021. If we were to assume this figure represents the total balance held on
CeFi platforms, we can deduce the counterparty risk by taking the crypto theft value in
CeFi ($400M) and dividing it by the total balances held on CeFi platforms ($186B). This
would give us a conservative counterparty risk rate of 0.21% (=$400M/$114B =0.21%).

Figure 6
Total crypto theft

$2,500,000,000 2019
2020
2021
$2,000,000,000

$1,500,000,000

$1,000,000,000

$500,000,000

$0
Centralized exchange DeFi protocol Other

Source: Chainalysis

When looking to engage with staking platforms, it’s in the user’s best interest to look
at the platform’s history of fraudulent activity, fund misappropriation, consumer
protection, and transparency. Platforms that value transparency will generally outline
the specifics of staking rewards, with details on required staking period/duration,
frequency of payouts, lockup and withdrawal periods, types of staking offered, and types
of assets or tokens accepted. A good practice for users is to pay attention to the terms
of staking, and it’s important to remember that advertised staking rewards are highly
dependent on dynamic variables such as amount staked, duration staked, validator
performance, among other things. Reward rates are generally an estimated
rate based on current market conditions and thus platforms will publish a range of
reward expectations.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 12

Slashing risk

In addition to counterparty risk, there exists a slashing risk in staking activities. A

slashing penalty refers to an event where a validator of a network loses a portion of their
staked assets, which are generally burned or redistributed to other stakeholders of the
network. This is a measure in place to discourage malicious activity by participating
validators of a network. While not all PoS network implement the concept of slashing,
in those that do, there are generally two actions taken by a validator that can
trigger slashing: downtime and fraudulent signing, also known as double-signing or
equivocation. In order for a network to work properly, it is expected that its validator
nodes are on-line in a continuous manner. Therefore, based on the specific parameters
set out by the network, any validator node that is considered inactive may lose out on
block rewards, have their staked assets slashed, and even face potential suspension from
the validator set. Even if unintentional, validator nodes can experience downtime if their
infrastructure is unreliable and the software they are using goes out of sync. Similarly,
another action that can lead to slashing is known as double-signing. This is the act of
signing two blocks at the same block height of a network, often with the intention of
attacking a network. However, it is possible for a validator to unintentionally sign two
different blocks at once due to technical glitches. For instance, in ensuring there is no
downtime, a validator can run multiple nodes alongside its primary node as backups in
case the primary node goes down. In this process, if the primary node were to go offline
briefly before coming back online, there can be a situation where multiple nodes are
online, signing off blocks simultaneously with one validator key. Whatever the intent,
double-signing is a more direct threat to the security of a blockchain, and will usually
warrant more severe slashing. The specifics of slashing will differ by network and some
PoS networks may even choose not to slash at all. Networks that choose not to slash
validator assets may use the violations as an opportunity for delegator nodes to migrate
towards validators with a good reputation and create an overall more efficient delegation
market. Though rare, there are some networks that ensure delegator nodes are not
affected by their chosen validator’s potential malicious behavior and only hold validators
accountable. Below are examples of the varying network parameters that apply to
validator and delegator slashing.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 13

Figure 7
Slashing penalties
Validators Delegators Downtime slashing, at %
Network Double-sign slashing?
slashed? slashed? of staked assets
Cosmos Yes Yes Yes, after ~16 hours at 0.01% Yes, at 5%
Harmony Yes Yes Yes, after ~12 hours at 0.01% Yes, at a minimum of 2%
ICON Yes Yes Yes, when downtime is >15%, at 6% No
IRIS Yes Yes Yes, after around 28 hours at 0.50% Yes, at 1%
Livepeer Yes Yes Yes, at 1% Yes, at 3%
Terra Yes Yes Yes, after around 16 hours, at 0.01% Yes, at 5%
Tezos Yes No No Yes, 8,000 XTZ
Polkadot Yes Yes Yes, if more than 10%, at 7% Yes, at 1–100%
Celo Yes No Yes, at 100 CELO Yes, at 9,000 CELO
Solana Yes Yes No Yes, at 100%

Source: respective network websites, Novuminsights.com

Note: Not all staking networks will employ slashing penalties.

As we see in the figure, networks will set up their own rules when it comes to punishable
offenses but it is possible that participants to a staking service that rely on a validator
could have their staked assets slashed alongside the validator or see less returns than
initially promised. However, slashing is fairly uncommon and there is not much
historical data recorded on these events. To understand the expected risk of slashing,
we look at slashing costs by network and apply probabilities to derive a corresponding
expected slashing rate for each asset. As we can see in figure 7, slashing is an asset-
specific risk and the risk range can vary depending on the chosen network. As an
example, take the ICON network. If we assume there is a 1% probability of a slashing
event occurring with each event triggering a 6% loss of staked assets, this could indicate
a 0.06% slashing risk for those staking on the ICON network. Based on the various tokens
listed in figure 7, when we assume a 1% probability of slashing with 0.01%–100% slashing
penalty, we arrive at an expected slashing risk range of 0.0001%–1%.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 14

To mitigate slashing risk, it’s important for users to look into the approach taken by each
platform with regards to slashing. Often times, platforms will outline the steps taken to
ensure there is no downtime, discuss methods of ensuring there is no double signing as
a result of running multiple nodes, or even ensure that any validator slashing events will
not affect user funds or staked assets.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 15

4.
Implied Platform Risk Rates

As these examples of risks all illustrate, the level of risk on protocol-level rewards can
be measured in various ways and around specific events. In figure 8, we consolidate all
mentioned risks and the implied platform risk rates to get a better understanding of the
market pricing of each of the risks based on our examples. Because of limited historical
data, implied platform risk rates presented below are based on a narrow subset of data
reliant on specific time frames, assets, and are meant to illustrate a methodology to
calculate an implied hurdle rate for staking. They are by no means a permanent or
definite measure of the current risk present on the platforms or assets mentioned and are
subject to change at any time.

Figure 8
Implied platform risk rate

Risks Implied risk rates

Counterparty risk 0.21%

Slashing risk 0.0001%–1.00%

Implied hurdle rate 0.2%–1.2%

Note: The risks rates listed are anecdotal and based on specific scenarios on chosen platforms, and not meant to be taken as definitive figures of
each risk.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 16

There is more than one way to measure the level of risk we take when staking. However,
breaking down these layers of risk to arrive at a benchmark rate that captures the risks
staking incurs relative to DeFi or CeFi. For instance, using the risk calculation methods
above we can see if a platform is providing adequate reward. Assume there is a platform
offering 9% staking reward on a token named XYZ. At first glance, it’s easy to think this is
a high return on an asset, especially if we compare it to offerings seen in legacy markets
or traditional bank savings accounts. However, per figure 9, an implied hurdle rate of
7.2%–8.2% indicates that the risk premias associated with XYZ require a reward that is
higher than that of comparable legacy offerings. If network reward rates fall below the
implied hurdle rate, this may indicate the risk/reward is poor for a particular asset.

Figure 9
Scenario analysis

Risks Implied risk rates

Currency risk (XYZ) 7.0%

Platform risk 0.2%–1.2%

Counterparty risk 0.21%

Slashing risk 0.0001%– 1.0%

Implied hurdle rate 7.2%–8.2%

Reward offered (XYZ) 9.0%

Net reward 0.79%–1.79%

Note: The risks rates listed are merely anecdotal and based on specific scenarios on chosen platforms, and not meant to be taken as definitive
figures of each risk.

While the analysis above is anecdotal and based on broad generalization of all staking
platforms, the practice of quantifying the risks of a staking service or platform can help
us understand the net reward of an offering. High reward rates can be enticing, but it’s
always important to factor in the risks tied to staking to have a fuller understanding of
the offering.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 17

5.
Conclusion

The crypto industry continues to grow full of innovation alongside the appetite for
different types of reward-yielding opportunities within the ecosystem. With crypto
being as innovative and face moving as it is, a number of opportunities exist today for
market participants to actively receive competitive returns — a trend that we will likely
continue to see for the foreseeable future. Among these opportunities is staking, whereby
individuals can put their idle assets to generate rewards, sometimes double digit rewards
or more. It is vital to understand the risks associated with the platforms and services with
which we engage to ensure that the rewards are worth the risks.

Platforms will broadly offer similar staking services with different PoS tokens, and using
the methods we’ve illustrated above, each platform and asset should be carefully weighed
for its risks­­— including counterparty risk and slashing risk. It’s important to know if
one’s staked assets will be at risk of misappropriation, hacks, theft, or mishandling that
leads to slashing penalties. The risks behind the excitement of crypto rewards is less
spoken about, and the purpose of analyzing and quantifying risk rates is to ensure that
individuals can actively and safely participate in reward-bearing activities with a complete
understanding of accompanied risks. As offerings become increasingly complex, it’s
important to remember that each offering comes with its own portfolio of risk and it’s
vital to compare said risks relative to the returns that are offered. In the future, we believe
that staking will become more accessible to people who aren’t crypto- or tech-savvy,
especially as platforms expand their staking offerings. With an expansion of offerings, we
want to encourage active participation rooted in research and transparency. No matter
what product or platform, it’s always a good practice to research where and how your
tokens are being used, and how the rewards are being generated.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 18

Endnotes

1. The assumption of a ‘guarantee’ is moreso theoretical and has its limitations in real-life applications.
2. “Crypto Yields: A Simple Breakdown” Kraken Intelligence (https://kraken.docsend.com/view/5ppb7gzt9ih7cz6f)
3. "Crypto Yields: Deep Dive on DeFi" Kraken Intelligence (https://kraken.docsend.com/view/dg34s3izvsbfa9uh)
4. We assume that PoW tokens’ risk-free rate is zero as its consensus mechanism does not tie the issuance of new tokens
into the lending (or staking) of its tokens.
5. “Crypto Yields: A Simple Breakdown” Kraken Intelligence (https://kraken.docsend.com/view/5ppb7gzt9ih7cz6f)
6. https://cryptoquant.com/overview/btc-exchange-flows

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 19

 We appreciate your feedback!
Please visit https://surveys.kraken.com/jfe/form/SV_56Vq90mKMrsKJee to
participate in a brief survey. For all future Kraken Intelligence content, sign up here.
For comments, suggestions, or questions related to this article or future topics you’d
like to learn more about, you may also direct your communication to intel@kraken.
com or to your account manager.

Kraken provides access to 115 cryptocurrencies spanning more than 435 markets with
advanced trading features, industryleading security, and on-demand client service.
With the acquisition of Crypto Facilities, Kraken now offers seamless access to
regulated derivatives on 5 cryptocurrencies with up to 50x leverage. Sign up for a free
account in minutes at www.kraken.com/sign-up. We look forward to welcoming you.

For multi-exchange charting, trading, portfolio tracking, and high resolution

historical data, please visit https://cryptowat.ch. Create a free Cryptowatch account
today at https://cryptowat.ch/account/create.

For OTC-related execution services or inquiries, please direct your communication to

otc@kraken.com or to your account manager.

Disclaimer
The information in this report is provided by, and is the sole opinion of, Kraken’s research desk. The information is
provided as general market commentary and should not be the basis for making investment decisions or be construed
as investment advice with respect to any digital asset or the issuers thereof. Trading digital assets involves significant
risk. Any person considering trading digital assets should seek independent advice on the suitability of any particular
digital asset. Kraken does not guarantee the accuracy or completeness of the information provided in this report,
does not control, endorse or adopt any third party content, and accepts no liability of any kind arising from the use of
any information contained in the report, including without limitation, any loss of profit. Kraken expressly disclaims all
warranties of accuracy, completeness, merchantability or fitness for a particular purpose with respect to the information
in this report. Kraken shall not be responsible for any risks associated with accessing third party websites, including
the use of hyperlinks. All market prices, data and other information are based upon selected public market data, reflect
prevailing conditions, and research’s views as of this date, all of which are subject to change without notice. This report
has not been prepared in accordance with the legal requirements designed to promote the independence of investment
research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Kraken and
its affiliates hold positions in digital assets and may now or in the future hold a position in the subject of this research.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of, or
located in a jurisdiction where such distribution or use would be contrary to applicable law or that would subject Kraken
and/or its affiliates to any registration or licensing requirement. The digital assets described herein may or may not be
eligible for sale in all jurisdictions.

February 2022 For more Kraken Intelligence content: kraken.com/subscribe/intelligence Page 20