Treasury Solutions Part I: Income Solutions

Introduction

In Part 1 of this article series covering Options, Income, and Risk Hedging solutions in crypto, we explore income solutions for project treasuries. There are a variety of ways to generate additional yield on one’s treasury, but the appropriate choice depends on a variety of factors including the type of investor – individual, institutional, or even token projects / foundations – as well as appetite for risk and the composition of holdings, among other things.

How to Manage Your Garden

Structured products in crypto, such as covered calls and call spreads, are like planting specialized cash crops in your garden. Unlike the predictable but slower yields from staple crops, these high-value plants—like saffron or truffles—demand precise timing, market expertise, and careful planning. You decide when to plant (selling options) and set expectations for the harvest (strike prices), knowing that some seasons may yield less if market conditions (prices) rise too high or fail to align. 

While they require more effort and knowledge to manage, these crops can turn otherwise idle or less fertile parts of your garden (altcoins) into productive, income-generating assets. It’s a strategy for teams who want to maximize output from every corner of their land without permanently selling off their prized plots.

Before looking at the various options available to investors, let’s first consider why one might need treasury solutions – although a seemingly obvious question, there may be a variety of reasons for doing so. By leveraging various yield-generating strategies, individuals, projects and institutions can enhance their capital efficiency, transforming static holdings into active contributors to growth.

1. For a VC: the ultimate goal could be to maximise return multiples on invested capital.
2. For a project or foundation: generating additional yield on idle capital could
   1. be a strategic effort to build up funds for future investments into new initiatives, products, or services.
   2. fund recurring operational expenses like utilities, software subscriptions, and even employee salaries – each of which are notably still paid in fiat currencies.

Regardless of the ultimate goal, it is clear that finding new and sustainable sources of income in general creates many possibilities and serves to enhance overall financial stability for an investor, particularly during times of turbulence (which, historically, is a persistent characteristic of the crypto market).

With this in mind, let’s review some of the key avenues that exist for investors to generate additional yield – beyond simply selling (blocks of) tokens directly into the market or to another investor – along with the key considerations within each to determine the most appropriate choice.

Traditional Yields

Staking

If an investor’s portfolio consists primarily of major cryptocurrencies (ETH, BTC, etc.) then there are many direct options to generate yield. The most obvious would be through staking, either as a solo staker or via a staking-as-a-service (STaaS) provider such as Figment, EverStake, or Blockdaemon.

In general, staking is a relatively safe and sustainable source of additional yield on one’s holdings, so it can be a great option to monetise idle capital. However, there are some risks to consider.

• Slashing Risk – Slashing occurs when a portion of staked assets is forfeited due to validator misbehavior or failure to maintain proper network performance. This risk arises when the node or validator the investor is staking with acts dishonestly or suffers downtime, leading to penalties that result in a loss of staked funds.
• Custody Risk – the security of an investors staked assets depends on the provider’s infrastructure and security practices. If the provider experiences a security breach, hack, or operational failure, the investor’s staked funds could be at risk.
• Market Risk – Market risk refers to the potential for fluctuations in the value of the cryptocurrency an investor are staking. Even if staking rewards are earned, a significant drop in the market price of the asset could reduce the overall value of an investor’s holdings, potentially offsetting the benefits of staking. Lockup periods may also impact one’s ability to withdraw funds quickly, if necessary.
• Smart Contract Risk – Smart contract risk refers to the vulnerabilities within the blockchain network’s underlying code that could potentially compromise an investor’s staked assets. If there is a flaw in the blockchain’s smart contracts—such as coding errors or security vulnerabilities—it could be exploited by attackers, leading to loss of funds. These risks are inherent in the decentralized nature of blockchain networks, and while audits can help, they cannot fully eliminate the potential for issues in the code.

Traditionally, there is only one requirement for staking which is that the tokens are part of a proof-of-stake (PoS) blockchain, since otherwise no staking mechanism exists (see this article for more context on PoS vs PoW blockchains). However, with the emergence of protocols such as Babylon, BTC staking (whereby BTC is used to improve the security of PoS blockchains) is also becoming possible.

To get a sense of the possible rewards for staking, see the table below:

Figure 1. 7-day average Staking Reward Returns (SRR) from **Figment* (updated Oct 2024). Note that the amount of yield can vary according to a number of factors, as described in Figment’s article covering how staking rewards are calculated.*

As a final note, it is worth mentioning that with the rise of restaking from the likes of EigenLayer and Symbiotic, there may even be further possibilities beyond direct staking to generate yield on the same underlying capital by restaking liquid staking tokens.

Lending

Next to staking, another possible avenue to generate additional yield on one’s holdings is through lending, especially if the composition is primarily made up of stablecoins and major cryptocurrencies. Lending can be done via DeFi protocols such as Aave, Compound, or Solend. The specific avenues available depends on the tokens an investor seeks to lend, such as Aave for Ethereum, or Solend for Solana.

As with staking, applicable lending yields vary between different tokens. In general, yields are higher for stablecoins since these are more easily deployable across different use cases.

Figure 2: APYs available on Aave’s lending markets for a selection of popular tokens (updated October 2024).

Similarly to staking, there are a number of associated risks to consider when engaging in lending (or borrowing):

• Smart Contract Risk – Smart contract risk relates to the technical security of a token or protocol, which is determined by its underlying code. If any of the supported currencies in a lending market are compromised, it can impact collaterals and jeopardize the protocol’s solvency. While bug bounties can provide some protection, the risk can never be completely eliminated.
• Counterparty Risk – Counter-party risk evaluates the governance structure of a currency, including who controls it and how. Different levels of decentralization can affect direct control over funds (such as backing) or create vulnerabilities in the governance framework that may expose both control and funds to potential attacks. This risk can be assessed based on the degree of centralization, which relates to the number of entities managing the protocol, the number of holders involved, and the level of trust in the entity, project, or governing processes.
• Market Risk – Market risks are associated with the size of the market and fluctuations in supply and demand. These risks are especially important for the protocol’s assets, such as collateral. If the collateral’s value drops, it may hit the liquidation threshold, triggering its liquidation. The market must then have enough volume to handle these liquidations, but such sales can drive down the price of the asset due to slippage, which impacts the amount of value recovered.
• Other Risks: Oracle, Collateral, Network, and Bridge Risks

Regardless of the method an investor chooses when seeking to generate additional yield on capital, always be sure to DYOR before committing funds to any method, platform, or protocol.

Structured Products

While there are a variety of accessible and relatively straightforward yield-generating activities for stablecoins and major cryptocurrencies, fewer avenues exist for altcoins.  Staking may not be possible or too risky, and there may not be adequate liquidity within lending markets. This is problematic for anyone holding a significant proportion of altcoins in their portfolio, but particularly for crypto projects and founders who are likely to hold a substantial number of their own native tokens (and don’t wish to sell them). In these cases in particular, structured products offer a flexible solution.

Options trading strategies are a bit more complex, but offer altcoin holders a number of benefits that can be tailored specifically to their needs and risk profiles. Generally, strategies could be separated into two categories: yield generating and risk hedging. For now, we’re focused on the former, but we’ll cover the latter in detail in Part 3 of this article series.

Covered Calls

Covered calls are a type of options trading strategy that involves selling a call option on inventory an investor currently owns. This especially makes sense when an investor is holding a lot of a given asset and doesn’t expect the price to increase substantially. In this case, the investor can sell a call option to another party, giving up some of the potential upside of their holdings, and in exchange receive a premium. Covered calls are also a great option for altcoins, where staking and lending may not be possible but the investor would still like to earn a return on their idle holdings.

The time to maturity is a key factor in the pricing of covered calls, and accordingly in the yield a sell-side investor can receive. By working with a financial services partner, such as Caladan, it is possible to structure an agreement to continuously sell call options at set intervals over a longer period of time (i.e. roll & restrike), thereby creating a recurring income stream, potentially unlocking a substantial amount of additional value on otherwise idle capital. When an investor don’t have immediate liquidity needs, this is an attractive alternative to selling larger blocks of tokens, which would typically be done at a notable discount.

One great benefit of selling call options is that, as long as the price of the asset is below the strike price at the end of the contract duration – therefore expiring out-of-the-money (OTM) – an investor keeps hold of their inventory. Of course, when this is done over time, occasionally the market price may rise above the strike price and the option will expire in-the-money (ITM), meaning the investor is obliged to sell the underlying inventory at the agreed strike price. However, when managed properly, the expectation is that ITM expiries occur less often that OTM expiries, and the investor ultimately enjoys a recurring stream of additional income on holdings.

To illustrate the possible returns on covered calls, see the table below which includes a variety of tenors and strike prices across both major cryptocurrencies and altcoins.

Call Spread

Another type of options strategy is a call spread. A call spread involves selling a call option at a certain strike price while simultaneously purchasing another call option at a higher strike price, where both call options have the same maturity date. Unlike a covered call, in which upside is entirely capped beyond the set strike price of the contract, a call spread enables an investor to sell a portion of upside within a specified price range. This strategy makes sense when an investor is willing to give up some upside potential on their holdings, but still wishes to benefit from positive price improvements if the price rises beyond a certain level.

Call spreads enable investors to collect a net premium – the difference between the sold and purchased option prices – while still benefiting from increases in the market price should the price rise beyond the higher strike price. However, the effect of this is also a reduced level of income for the investor compared to a standard covered call.

Conclusion

In summary, crypto investors and project teams have diverse options to generate yield, from traditional methods like staking and lending to advanced strategies like covered calls and call spreads. Each approach aligns with different risk appetites and goals, offering ways to transform idle assets into active income streams. By choosing strategies suited to their unique needs, capital efficiency and resilience can be massively enhanced. 

This foundation prepares us for Part 2, where we’ll explore advanced techniques for balancing risk and maximizing returns.