How to generate sustainable yield in digital asset portfolios

• Holders of cryptocurrencies are no longer satisfied by capital appreciation alone but increasingly seek income from staking and lending

• Holders whose investment mandate, liquidity needs, operational capabilities and risk profile permit staking and lending should nevertheless proceed cautiously

• While the risk of “slashing” is exaggerated, research into counterparty, custody and cyber-attack risks will earn rewards for institutional investors

Unlike stocks and bonds and real estate, cryptocurrencies do not generate income through dividends or interest payments or rent. Investors generally hold them for capital appreciation – with value driven primarily by the ebb and flow of money in and out of the asset class.

Yet even the purest cryptocurrency, Bitcoin, can and does generate income. The first Bitcoin “miners” were paid in January 2009, just two months after Satoshi Nakamoto published his famous paper on 31 October 2008. But Bitcoin mining is not an option for most investors, especially with energy costs squeezing margins.

The Ethereum transition from Proof of Work (mining) to lower-cost Proof of Stake validation from 2015 democratised income from cryptocurrency. Today, a relatively mature cryptocurrency eco-system is generating yield not just through Staking but through Lending.

Institutional holders of cryptocurrencies are increasingly interested in capitalising on this eco-system. Which is why AMINA Bank sponsored a webinar aimed at institutions, and invited experts from Franklin Templeton, P2P.org and Bitwise to discuss how institutions can best access the cryptocurrency yield markets safely.

Early returns on Ethereum were exceptional (such as 20,000 per cent) but they have compressed as the number of investors that stake has increased, falling to 2.7-2.8 per cent on staking Ethereum today. At busy times, yield rises because holders are willing to pay more to obtain validation sooner.

On the lending side, Stablecoins are borrowed against cryptocurrencies as collateral, enabling holders to lend Stablecoins to counterparties that need liquidity in return for yield. There are strong expectations that tokenised equities, bonds and funds will increasingly be used as collateral in the same way.

The market is becoming more diverse in terms of the cryptocurrencies that offer yield. Ethereum continues to dominate the staking market, but Solana is growing. Some cryptocurrencies are less liquid than others, offering higher yield for greater risk. But the market is still concentrated, making diversification difficult.

Since MakerDAO launched in 2014, and especially since the DeFi boom of 2018 spawned Decentralised Finance (DeFi) apps such as Compound and Uniswap, an eco-system of lending protocols, liquidity pools, Decentralised Exchanges (DEXs) and automated market makers (AMMs), has emerged to generate income.

However, engagement with DeFi apps has tended to be largely retail. Institutional money has entered the cryptocurrency markets via regulated investment vehicles such as exchange traded funds (ETFs) rather than direct ownership. But a lot of institutions also want income as well as capital appreciation.

Not all cryptocurrency ETFs offer income but the BlackRock iShares Staked Ethereum Trust ETF (ETHB), for example, provides staking revenue (via Coinbase) as well as spot Ethereum exposure. Corporate treasuries (including the Ethereum Foundation) participate in staking to turn passive assets into income producers.

Institutional demand for income-producing crypto-assets is evident in the tokenisation of money market funds. Unlike (most) Stablecoins, which pay interest to issuers rather than investors, tokenised money market funds are becoming the institutional instrument of choice for holding cash.

Tokenisation of traditional instruments, such as bonds, is being encouraged by developments such as the No Action letter issued by the Securities and Exchange Commission (SEC) to the Depository Trust Company (DTC) in December 2025. Though starting as digital twins, these tokenised assets will be native eventually.

There is a strong likelihood that tokenised, income-producing assets will pay yield intra-day. On the BENJI platform, the Franklin OnChain U.S. Government Money Fund is already accruing interest second-by-second instead of daily or weekly or monthly, ensuring investors are paid for the exact period they hold the asset.

Arguments against seeking yield on cryptocurrencies are threadbare. Non-engagement means leaving risk-free returns uncollected. In addition, stressed markets increase returns: unlike traditional investments (when central banks cut interest rates) yields go up. Returns can be further increased with “looping” strategies.

Yet two out of three registrants for the webinar (see Chart 1) were not staking or lending. To participate, they need to review their investment mandate (Does this fit?), their liquidity needs (Am I long-term holder?) their operational capabilities (Can we do this?)  and their risk profile (Do I want to engage in riskier “looping” strategies?).

Chart 1

If they do decide to participate, and not everyone should, they should research the market, trade enough to get comfortable with the asset class, be bold enough to remain open to opportunities and then increase their exposure steadily – eventually into in sophisticated “looping” strategies - as their knowledge grows.

It is crucial to understand the risks, so they can be mitigated. The risk of “slashing” (confiscations for bad behaviour) is exaggerated, because reputable and experienced validators never behave badly. The fact only one in 25 registrants to the webinar poll named “slashing” as a major risk (see Chart 2) indicates this is well understood.

Chart 2

Lending into DeFi protocols is riskier, due to smart contract vulnerabilities and off-chain hacks. Assets have been stolen and not recovered. Which is why two out of five registrants were right to see cyber-threats as a concern. The threat of AI tools (such as Mythos) exploiting coding vulnerabilities has increased the level of fear.

Service provider risk is seen by registrants as real, with a third of registrants to the poll naming platform or provider failure, or non-segregation of assets by a provider, as a source of anxiety. Which is why registrants also named various aspects of custody as the most effective risk mitigants.

In the poll, two thirds of registrants emphasised either custody technologies, or custodial processes and procedures, or independent custody, or self-custody, or custody insurance, as the most effective way to reduce the risks of cryptocurrency staking and lending (see Chart 3). This is an understandable approach.

Chart 3

Since staking is non-custodial, there is no risk if service providers fail. But if assets are with a third-party custodian that fails, the financial strength and insurance of the custodian matters. Most digital asset custodians and self-custody providers understand that their business requires them to be fanatical about asset safety.

Holders should nevertheless conduct the same due diligence on a digital asset custodian as a traditional custodian, especially on operational disciplines such as asset segregation and transfer controls. Another useful discipline for self-custodying holders is to revoke permissions given to smart contracts.

Counterparty due diligence is the second most important risk mitigant named by registrants in the poll, but the nature of the counterparty will vary by the route to market chosen by the holder. It could be a cryptocurrency exchange, a service provider, a DeFi app, a bank or non-bank custodian, or even the protocol itself.

Counterparty due diligence and credit analysis is fundamental in any market. DeFi apps are unusual because they are trustless and permissionless, making accountability hard to trace and further risks (such as inadvertently trading with a sanctioned counterparty) higher. As a result, over-collateralisation is essential. 

For this reason, the anonymous “curated” vaults, in which smart contracts generate yield on tokenised assets for retail investors, are unlikely to appeal to institutional holders. They cannot afford the risk of trading inadvertently with criminals and sanctioned entities, so must insist on transparency.

In markets as volatile as cryptocurrencies, it is not surprising that the poll records a fear that asset values collapse while assets cannot be retrieved for trading because they are staked or lent. An associated risk is that 24/7 trading generates a risk that bad actors manipulate the market at times when liquidity is low.

However, the benefits of being able to exploit or hedge 24/7 will become easier to capture as trading gravitates to agentic AI. It is a trend too. Exchanges (NYSE Arca and Nasdaq will both open 23/5), platforms (Ondo Finance trades tokenised stocks 24/7) and brokers (such Alpaca) are all moving towards 24/7 trading.