Optimal Staking and Liquid Token Holding Decisions in Cryptocurrency Markets

Abstract

We explore an optimal token holding and staking problem for cryptocurrency investors. Our investigation revolves around understanding the tradeoff between staking rewards and the consequent illiquidity that emerges from the distinct structure of blockchain platforms or Decentralized Autonomous Organizations (DAOs). We present comprehensive analytic solutions, which enable us to examine the novel implications stemming from the staking mechanism for trading and staking policies and the dynamics of risk-taking behaviors. Our model provides the insights distinguishing between token investments with staking rewards and conventional investment avenues, such as stocks and commodities.

Keywords: Optimal Staking, Portfolio Choice with Cryptocurrency, Blockchain, Defi, DAOs (Decentralized Autanomous Organizations)