Hashdex Staking

Staking is the process of committing eligible crypto assets (such as ether) to help validate transactions on a proof-of-stake blockchain. In return, the Fund earns staking rewards, typically paid in-kind in the same asset.

The purpose is to reduce the Fund’s costs and improve tracking error. Similar to how securities lending offsets expenses in traditional ETFs, staking provides an additional income stream that benefits shareholders.

1. The Fund’s gross expense ratio remains fixed at 0.25%.
2. staking rewards is first used to offset the Fund’s ordinary operating expenses (custody, administration, licensing, etc.).
3. Once those expenses are covered, staking rewards are split: 70% remains in the Fund to further offset costs, and 30% is retained by the Sponsor as a “Staking Services Fee.”
4. Effective net costs (after staking offsets) will be disclosed quarterly in the Fund’s Form 10-Q.

1. Reduced Fund’s Expenses: Staking rewards first offsets custody, administration, licensing, and other fund costs.
2. Potential cost neutrality: In some environments, staking rewards may completely cover ordinary expenses, driving the Fund’s effective costs to zero.
3. Improved tracking error: By covering the Fund’s expenses, staking rewards allows the Fund to track more closely the Nasdaq Crypto Index US.
4. Transparency: While the Fund’s gross expense ratio remains 0.25%, effective costs (after staking rewards offsets) are disclosed quarterly in the Fund’s Form 10-Q.

Yes. Regardless of staking rewards, the Fund’s headline total expense ratio (TER) will not exceed 0.25%. Staking rewards may reduce costs further, but never increase them.

Key risks include:

1. Liquidity risk: Staked assets are subject to “lock-up” or “unbonding” periods defined by each blockchain network. During these periods, assets cannot be immediately sold or redeemed, which may affect the Fund’s ability to meet redemptions.
2. Slashing Risk: Some proof-of-stake (PoS) networks impose penalties (known as slashing) for validator errors or misconduct. This may result in partial loss of staked assets.
3. Network Risk: Staking supports blockchain operations, which may be subject to security vulnerabilities or downtime. Network disruptions could negatively impact the value of staked assets.
4. Operational and Technical Risk: Staking requires specialized infrastructure. Technical failures by validators or providers could reduce rewards.
5. Tax treatment: Staking rewards are typically taxed as ordinary income and may generate UBTI for tax-exempt investors or ECI for non-U.S. investors.

1. Partnering only with established, regulated staking providers.
2. Diversifying validator exposure and monitoring performance.
3. Capping staking at 15% of Fund assets initially.
4. Maintaining liquidity buffers to support creations and redemptions.

Staking rewards vary with market conditions, validator performance, and the proportion of stakeable assets in the Fund. Based on current assumptions (e.g., 20% of assets stakeable, staking capped at 15% of Fund assets initially, etc.), staking rewards could offset ~0.25–0.30% of fund expenses annually.

Both staking and securities lending create incremental income streams used to reduce costs and improve tracking error and performance. The key difference is that in securities lending, the income comes from borrowers paying to borrow securities; in staking, the income comes from participating in blockchain validation.

1. Marketing materials will consistently show the 0.25% TER.
2. The effective net cost after staking offsets will be disclosed quarterly in the Fund’s Form 10-Q for full transparency.

The Sponsor determines staking allocations, subject to Fund guidelines and regulatory limits. Initial exposure is capped at 15% of assets, with flexibility to adjust as the regulatory environment and market evolve.

If staking rewards fall, the Fund’s net cost may be closer to the stated 0.25% TER, but will never exceed it. Investors always have certainty on the maximum TER.

Staking is available only for crypto assets that use a Proof-of-Stake consensus mechanism. Eligible assets in NCIQ will depend on index composition and regulatory approvals. Examples include:

1. Ethereum (ETH): Introduced staking in its network upgrade (“Ethereum 2.0”).
2. Solana (SOL): Uses PoS with fast block times.
3. Cardano (ADA): Allows token delegation into staking pools.

Additional assets may become eligible over time as they meet both index inclusion and listing requirements.

Both are methods for securing a blockchain network and earning rewards, but they differ in mechanics:

1. Mining (Proof-of-Work): Requires solving computational puzzles using specialized hardware and high energy consumption.
2. Staking (Proof-of-Stake): Requires locking native tokens as collateral to validate transactions and secure the network. Rewards are earned for honest participation, with lower energy costs than mining.

Validator selection is critical for both rewards and risk management. Hashdex evaluates validators based on:

1. Reputation and performance track record
2. Technical expertise and node reliability
3. Fee structures
4. Transparency in reporting
5. Security protections against hacks and downtime
6. Community governance engagement

By investing in NCIQ, investors benefit from Hashdex’s diligence and governance in validators’ selection.

Slashing is a penalty mechanism on PoS blockchains designed to discourage malicious behavior or mistakes. A validator may lose a portion of their staked collateral if they:

1. Validate conflicting blocks (double-signing).
2. Fail to remain online or follow protocol rules.

In severe cases, validators can be removed from the network. This protects the blockchain’s integrity but can reduce staking rewards.

1. Staking: Native to crypto networks. Assets are committed to secure a blockchain and earn rewards in the same asset. Risks include network downtime, slashing, and liquidity restrictions
2. Lending: Similar to traditional finance. Investors lend crypto to borrowers (exchanges, institutions) in exchange for interest. Risks include borrower default and counterparty risk.

Yes, staked assets carry risks of loss:

1. Slashing penalties if validators act maliciously or err.
2. Security breaches of the network or validator infrastructure.
3. Market risk: Even if assets are returned, their market value may have declined due to volatility.

In a catastrophic failure (e.g., protocol hack or chain shutdown):

1. Assets may be lost if the blockchain ceases operations without recovery mechanisms.
2. Some networks are designed to return assets in failure events, but this is not guaranteed.

Staking plays a central role in blockchain ecosystems by:

1. Securing networks: Aligning incentives for validators to act honestly.
2. Enabling governance: Allowing token holders to vote on proposals.
3. Improving energy efficiency: Replacing mining with a more sustainable mechanism.
4. Rewarding users: Providing income opportunities to long-term holders.
5. Supporting token economics: Balancing supply/demand and incentivizing participation in decentralized systems.