Staking via Kiln
Key Takeaways:
- Staking represents one of the safest options in DeFi for generating yield.
- Kiln is considered a secure and trustable staking service.
- The yield (APY) is derived from staking TIA tokens, which contribute to the Celestia blockchain's Proof-of-Stake consensus mechanism.
- Celestia is a blockchain project launched in 2023 (mainnet) that aims to revolutionise blockchain operations. Unlike traditional blockchains that bundle consensus and execution into a single layer, Celestia adopts a modular approach, thus offering a more scalable and flexible solution for decentralised applications (dApps). Celestia leverages a Proof of Stake (PoS) consensus mechanism to ensure the security of its network. TIA holders contribute to network security by delegating their tokens to validators.
- TIA liquid staking represents a liquidity yield-generating investment. This strategy does not have a lockup period, but a 22-day cooldown is required to unstake the asset entirely.
- Risk Checklist. In our view, the predominant risks for this strategy are as follows: - Tech risk - Project continuity risk - Liquidity risk of staking
1. Strategy Explained
The strategy involves liquid staking TIA tokens in Kiln.
Lockup period: None.
Cooldown: 22 days
2. Risks
Trust Score
Kiln is the leading enterprise-grade staking platform, enabling institutional customers to stake assets and whitelabel staking functionality into their offerings. The platform is API-first and enables fully automated validators, rewards, data, and commission management.
SwissBorg has performed its own due diligence on the protocol and considers it trustworthy.
Protocol Risks
Project Continuity Risk
Project continuity risk is low.
Kiln is a Paris-based start-up that provides a service known as “staking” for blockchains.
By locking up their tokens (i.e. stake them), users join others in validating transactions on the blockchain, which protects the network from potential attack.
In November 2022, the company raised 17 million euros in a Series A funding round from a group of investors, including crypto incubator Consensys, investment firm GSR, and crypto exchange Kraken's venture capital arm. These funds have been used to expand the ‘staking-as-a-service’ offerings.
‘Staking-as-a-service’ products make it easy for custodians, exchanges, wallets and treasury managers to commit their digital assets to the blockchain.
At the time of writing, Kiln AuM is over $6b in staked tokens.
The project is relatively new and not battle-tested, but the continuity risk should be contained, given the growth of the staking practice.
Kiln continuity risk is set to 3/10.
Counterparty Risk
Counterparty risk is deemed low.
Counterparty risk exists whenever an asset is handed over to an external provider. Any credit events involving the staking provider could affect the assets entrusted to them.
That said, staking via a 3rd party is fundamentally different from depositing funds into a lending protocol that later becomes insolvent.
In a Proof-of-Stake protocol, tokens are locked up in a validator to secure the underlying network and receive staking rewards in return. Those validators, with the assets and rewards they hold, are fully transparent and always verifiable "on-chain". This is contrary to centralised company reserves, which can be opaque and under-collateralised, as has been seen in the case of some famous crypto exchanges, which are now bankrupt.
With staking, there is no counterparty but the network itself. Validators are rewarded by operations automatically through preset ‘block reward’ rules, as well as through a share of transaction fees. There is no risk of default or bank runs.
Counterparty risk is 1/10.
Liquidity Risk
Liquidity risk is deemed low.
Funds held by the staking provider are redeemable after the required (if any) lockup and cooldown periods. In no circumstances would one expect instances of illiquidity during the redemption process.
Liquidity risk is 1/10.
Strategy Risks
Complexity
The complexity of the strategy is low.
The strategy involves depositing TIA on Kiln to perform staking. One chain (TIA), one token, and one staking service are employed, with no leverage.
The complexity risk of the strategy is 1/10.
Scalability
The scalability risk is low.
Staking is a highly scalable practice. Indeed, the more stakers participate, the higher the safety of the blockchain.
The scalability risk of the strategy is 1/10.
Sustainability
The sustainability risk is low.
The yield obtained from this strategy is fully sustainable as it comes from participating in validating TIA transactions, which is the Proof-of-Stake mechanism.
Proof-of-stake is quite energy efficient compared to Proof-of-Work chains like Bitcoin and has practically no negative impact on the environment.
The sustainability risk of the strategy is 1/10.
Yield Risk
Yield risk of the strategy is low.
Staking provides a constant stream of income with low variability.
The yield risk of the strategy is 1/10.
Slashing Risk
The slashing risk of the strategy is low.
The Proof of Stake consensus mechanism requires participants to behave responsibly for the ecosystem's overall good. For this reason, blockchains penalise validators who step out of line by slashing the value of their stake. The two most common offences are double-signing or going offline when the validator should be available to confirm a new block.
In the Celestia blockchain when a validator attests to two different blocks, it will face slashing. Stakers delegated to the slashed validator will incur a 2% reduction in their stake.
Kiln has recently achieved Systems and Organisation Controls protocol (SOC 2 Type II) and industry-leading Service Level Agreements (SLAs), with 0 penalties recorded and 99.95% effective uptime.
The slashing risk of the strategy is 1/10.
Liquidity Risk of Staking
Liquidity Risk on staking TIA is low.
Staking TIA on Kiln requires no lockup but a 22-day cooldown period. Regardless of the direction the market chooses during this time, your assets will be out of reach.
The liquidity risk is, therefore, set to 5/10.
3. Conclusions
TIA staking comes with little risk.
Staking per se is generally considered a very safe investment.
Kiln, the chosen liquid staking service provider, has been reviewed and approved by the SwissBorg tech team.
TIA staking comes with no lockup but a 22-day cooldown period. Liquidity is, therefore, readily available during this time.
The SwissBorg Risk Team ranks TIA staking as a Core investment, one for an investor with some understanding of DeFi and yielding, who is willing to take on a minimum amount of risk – while remembering that there is no free lunch! – in exchange for an acceptable reward on TIA.
