About 60.6% of respondents use third-party staking platforms and they tend to prefer large, integrated platforms.
By Tricia Lin and Daniel Shapiro
Translated by TechFlow
Key Findings
The survey shows that the majority of respondents (69.2%) are currently staking Ethereum (ETH), with 78.8% being investment firms or asset management companies. This indicates that institutional participation in ETH staking has reached a certain scale, driven mainly by returns and contributions to network security.
About 60.6% of respondents use third-party staking platforms and they tend to prefer large, integrated platforms. These platforms can address issues such as low capital efficiency and technical complexity that arise when staking individually.
Liquid staking tokens (LSTs) are gaining popularity as they improve capital efficiency, keep staked ETH liquid, and enable participation in decentralized finance (DeFi) strategies. 52.6% of respondents hold LSTs and 75.7% are willing to stake ETH through decentralized protocols.
Distributed validators (DVs) are becoming increasingly popular among institutional participants due to their enhanced security and fault tolerance. Over 61% of respondents are willing to pay additional fees for the security advantages provided by DVs.
Introduction
As the cryptocurrency industry continues to evolve, staking has become an important way for institutional investors to generate returns and enhance network security. However, institutional investors still face a complex landscape when it comes to staking.
This research report provides a comprehensive analysis of staking behavior among institutional token holders, with a specific focus on the Ethereum ecosystem. Our main research objectives are to uncover the current state of institutional staking, explore the motivations and challenges of market participants. By collecting survey data from various types of institutional stakers such as exchanges, custodians, investment firms, asset management companies, wallet providers, and banks, we aim to provide valuable insights for the market of distributed validators and multi-validator models, enabling both newcomers and mature participants to better understand the complexities of this rapidly evolving field.
The survey consisted of 58 questions covering Ethereum staking, liquid staking tokens (LSTs), and related topics. We utilized various question formats including multiple-choice, Likert scale, and open-ended questions, allowing respondents to selectively skip certain questions. The survey results reveal:
The majority of respondents (69.2%) are currently staking ETH.
Most respondents are institutional participants:
78.8% are investment firms or asset management companies.
Within these institutions, approximately 75% focus on investing in crypto assets.
9.1% are custodians.
9.1% are exchanges or wallet providers.
12.1% are blockchain networks or protocols.
4.2% are market makers or trading firms.
0.8% belong to other categories.
Respondents demonstrate a wide knowledge of staking economics and generally have a high self-awareness of staking concepts and associated risks.
Respondents and node operators exhibit geographic diversity: While specific locations were not provided, many respondents emphasized the importance of geographic diversity among node operators.
Current State of ETH Staking
Since the Ethereum network upgraded to proof-of-stake (PoS), the environment for ETH staking has undergone significant changes in what is known as “The Merge”. It is worth noting that the number of validators and the total amount of ETH staked have been continuously increasing. Currently, there are nearly 1.1 million validators on the network staking 34.8 million ETH.
Following The Merge, early ETH staking was locked in to ensure a smooth transition to PoS. Network participants can only withdraw their ETH after the Shanghai and Capella upgrades (referred to as Shapella) in April 2023. After a brief initial withdrawal period, the network has observed a consistent net inflow of staked ETH, indicating strong demand for staking.
So far, approximately 28.9% of the total supply has been staked, forming a robust staking ecosystem worth over $115 billion. This makes Ethereum the network with the highest value staked in USD terms and also presents significant growth potential.
As users pursue rewards from participating in network validation, the staking ecosystem continues to expand. The annualized actual issuance rate is dynamic, decreasing as more ETH is staked, as explained in the early whitepaper “Internet Bonds” by Collin Myers and Mara Schmiedt from Obol and Alluvial.
The staking reward rate typically hovers around 3%, but validators can also earn additional rewards through priority transaction fees, which increase during periods of high network activity.
To earn these rewards, one can choose to stake ETH as an independent validator or delegate ETH to third-party staking service providers.
Independent validators need to deposit at least 32 ETH to participate in network validation. This number is chosen to strike a balance between security, decentralization, and network efficiency. Currently, approximately 18.7% of network participants are independent validators. Unidentified stakers are typically considered independent validators.
Over time, the attractiveness of independent staking has decreased for several reasons. Firstly, there are few individuals who can afford to hold 32 ETH and possess the technical capabilities to run independent validators, limiting widespread independent participation.
Another significant reason is the low capital efficiency of staked ETH. ETH locked in staking cannot be used for other financial activities within the DeFi ecosystem. This means no liquidity can be provided to various DeFi projects or ETH cannot be collateralized for loans. This presents an opportunity cost for independent stakers, who must also consider the dynamic reward rate of staked ETH to ensure optimal risk-adjusted returns.
These two issues have led to the rise of third-party staking platforms, primarily dominated by centralized exchanges and liquid staking protocols.
Staking platforms offer ETH holders the opportunity to delegate their ETH to other validators for staking and charge a fee for the service. Despite some trade-offs, this method has quickly become the preferred choice for most network participants.
Source: Endgame Staking Economics
The survey results confirm the following:
69.2% of respondents state that their companies are currently staking ETH.
60.6% of respondents state that they use third-party staking platforms.
48.6% of respondents prefer staking ETH on integrated platforms such as Coinbase, Binance, and Kiln.
The main reasons for choosing a staking provider include:
Reputation.
Supported networks.
Pricing.
Ease of onboarding process.
Competitive fees.
Expertise and scalability.
Lastly, respondents provided the following allocation of ETH or staked ETH in their portfolios:
Liquid Staking Protocols
To address the challenges faced by independent staking, the market for third-party staking platforms has rapidly developed in recent years. This growth is primarily driven by breakthroughs in liquid staking technology.
Liquid staking refers to the process of receiving a user’s ETH through a smart contract protocol, staking it, and returning a liquid staking token (LST) to the user as proof of their staked ETH. LST represents the underlying asset (ETH), is fungible, and typically automatically generates staking rewards, providing users with an easy way to earn returns. Users can convert their LST back to native ETH at any time, although there may be delays due to the withdrawal restrictions implemented in the Cancun/Deneb upgrade for Ethereum PoS. The Liquid Collective provides detailed documentation on deposit and redemption buffers to ensure a smooth user experience.
Deposit and redemption system architecture. Source: Liquid Collective
Liquid staking protocols typically consist of code deployed on-chain and a decentralized set of professional validators, often chosen through DAO governance. Factors considered when selecting validators may include technical capabilities, security practices, reputation, geographic diversity, or hardware diversity. Users’ ETH deposits are managed centrally and then allocated to the validator set to reduce slashing risks and centralization.
Due to the popularity of liquid staking, many DeFi applications within the on-chain ecosystem have adopted liquid staking tokens, further enhancing their utility and liquidity. For example, many decentralized exchanges (DEXs) have adopted LSTs, enabling holders to provide liquidity for their LSTs immediately or exchange them for other tokens.
Integration with decentralized exchanges (DEXs) becomes particularly important due to potential withdrawal delays. While users can convert their liquid staking tokens (LSTs) back to ETH at any time, the price of LSTs may deviate from the price of ETH during periods of market stress or high liquidity demand due to redemption queues. This is due to the queuing of redemptions. Users who wish to access liquidity immediately and are willing to exchange their LSTs for ETH at a discounted price on DEXs drive this price deviation. Redemption queues are typically less prevalent during stable market conditions.
When LST has sufficient liquidity and its price can be aligned with ETH, it can be adopted by DeFi money markets, further enhancing its value. Leading DeFi money markets such as Aave and Sky (previously known as MakerDAO) have already integrated LSTs, allowing users to borrow other assets without selling their staked ETH. This enables higher returns as users can earn additional income through the use of LSTs in DeFi strategies while receiving Ethereum PoS rewards.
Ultimately, LSTs enhance the accessibility of ETH staking, maximize capital efficiency, and enable new revenue generation strategies.
The survey shows that respondents have a positive attitude towards LSTs.
52.6% of respondents hold LSTs.
75.7% are willing to stake ETH through decentralized protocols.
Finally, we asked respondents how their companies utilize LSTs.
Advanced Staking Technologies
Distributed Validators (DVs)
Liquid staking protocols have found market fit in their current form, attracting retail investors, DeFi users, and crypto funds. However, to attract significant institutional capital inflows, the implementation of Distributed Validators (DVs) may be necessary.
Distributed Validators, pioneered by Obol, enhance the security, fault tolerance, and decentralization of the staking network. The core problem Obol solves is the risk of centralized failure points in traditional staking setups. For example, if a validator node goes offline due to hardware failure or software error, it incurs offline penalties. Additionally, validator keys can be duplicated and run simultaneously on two nodes, resulting in the risk of “double signing” transactions and triggering slashing penalties. This poses a significant risk for institutional participants who require high security and assurance for their delegated ETH staking.
Single-node validators present various issues and risks:
No protection against machine failures.
Difficult to effectively implement active-passive redundancy setups. Configuration errors, software failures, or lack of monitoring can lead to duplicate validation of the same validator key, resulting in slashing penalties.
The hot keys used by validators are susceptible to attacks.
Economies of scale in validator infrastructure can lead to client-side centralization, increasing associated risks for end-users.
Obol’s Distributed Validators address these issues through multi-node validation technology, achieving trust-minimized staking. By distributing the responsibilities of validators across multiple nodes, this distributed validator setup can maintain the normal operation of a “single” validator even if a node in the cluster goes offline. Specifically, as long as two-thirds of the nodes in the cluster are functioning properly, the validator remains operational. Distributed validators also allow for diversification in client software, hardware, and geographic location within the same validator, as each node can run different hardware and software configurations. Both the individual validator and the entire network can achieve high levels of diversification in these aspects.
Obol DV architecture. Source: Obol (DV Labs)
The survey shows that respondents have a very positive attitude towards Distributed Validators.
65.8% of respondents are familiar with Distributed Validators.
61.1% are willing to pay higher fees for enhanced security, stability, decentralization, and fault tolerance.
Overall, there is a high awareness of Distributed Validators (DVs), with only 2.6% of respondents indicating no familiarity with them.Percentage of People Who Are Completely Unfamiliar with this Technology
None of the respondents believed that DVs posed a significant risk to their staking operations, while 5.6% believed there was no risk at all.
These findings support the view that institutional capital allocators are more inclined to choose DVs as the optimal solution for staking.
The Potential and Risks of Re-staking
In addition to DVs, re-staking is also an important technological innovation that brings new income opportunities to stakers. Re-staking allows validators to use their staked ETH or Liquid Staking Tokens (LST) to provide security support to multiple protocols simultaneously, potentially earning additional rewards.
However, this also comes with additional risks. Using re-staked assets to secure multiple protocols means that any malicious behavior or operational mistakes could result in slashing penalties and losses. Re-staking also introduces other risks, including centralization of staking, protocol-level vulnerabilities, and network instability.
EigenLayer has already supported Liquid Collectives’ LsETH, which will allow LsETH holders to earn protocol fees and rewards through the EigenLayer protocol while holding LsETH and also receive ETH network rewards.
Symbiotic also offers support for LsETH holders, who can now earn additional protocol fees and rewards from the Symbiotic protocol while holding LsETH and also receive ETH network rewards.
The survey results show that respondents generally have a positive attitude towards re-staking and a strong understanding of its risks.
55.3% of respondents expressed interest in re-staking ETH.
74.4% of respondents stated that they understand the risks of re-staking.
However, respondents generally believe that re-staking carries some level of risk.
Our survey shows that 55.9% of respondents are interested in re-staking ETH, while 44.1% are not interested. Considering that 82.9% of respondents indicated that they understand the risks of re-staking, this suggests a positive attitude towards re-staking. However, overall, there is still a perception that re-staking inherently carries risks.
Decentralization and Network Health
Liquid Staking Tokens (LSTs) exhibit the characteristics of a “winner-takes-all” market, which is driven by strong network effects resulting from multiple factors. As LSTs evolve, they offer better liquidity, lower fees, and more integration with decentralized finance (DeFi) protocols. This widespread adoption deepens liquidity pools and makes the tokens more attractive for trading and other DeFi applications. Large LSTs also benefit from economies of scale: they attract more operators as they generate more fees. This, in turn, enhances security as more operators can allocate staking. Currently, over 40% of ETH is staked by Lido and Coinbase.
Large LSTs may also benefit from better brand promotion, which was identified as an important factor by respondents in the survey.
The survey further confirms the concentration of third-party staking platforms, with over half of the respondents holding stETH.
This concentration leads to a concentration of staking power in a few LST or centralized exchange hands, and in some cases, large staking pools often rely on a limited number of node operators. This concentration not only goes against the core decentralization principles of Ethereum but also poses security risks and censorship attack risks to the network’s consensus mechanism.
The survey shows that respondents are very concerned about centralization issues, with 78.4% expressing concerns about the centralization of validators and generally considering the geographical location of node operators to be very important in choosing third-party staking platforms. The survey results indicate that the market may be seeking more decentralized alternatives to the current market leaders.
Custody and Operational Practices
The majority of respondents (60%) use qualified custody services to manage their ETH. Hardware wallets are also popular, with 50% of respondents choosing to use them. In contrast, centralized exchanges (23.33%) and software wallets (20%) are less commonly used for custody purposes.
Respondents generally indicated a high level of familiarity with node operations, with a majority (65.8%) agreeing or strongly agreeing that they are familiar with node operations, 13% remaining neutral, and 21% disagreeing or strongly disagreeing.
In terms of client diversity, which involves using different software to run Ethereum validators to reduce single points of failure, maintain decentralization, and optimize network performance, respondents generally have a high level of awareness. 50% of respondents indicated that they are familiar with this concept, with 31.6% strongly agreeing. Only 2.6% of respondents are unfamiliar with client diversity. Overall, 81.58% of respondents are familiar with the concept of client diversity.
Liquidity was seen as a very important factor by respondents. On a scale of 1 to 10, with 10 being the most important, the average score for the importance of liquidity was 8.5, second only to the importance of protecting assets from loss (9.4). Clearly, liquidity is a key consideration for many institutional participants in the ETH staking ecosystem. Additionally, 67% of respondents indicated that the source of liquidity is very important in choosing a liquid staking token (LST), with a preference for decentralized exchanges such as Curve, Uniswap, Balancer, and PancakeSwap, as well as aggregators like Matcha or on-chain swap platforms like Curve, Uniswap, and Cowswap.
Finally, respondents demonstrated a moderate to high level of confidence in their ability to withdraw staked ETH during market fluctuations, with a majority (60.5%) expressing confidence in their ability to withdraw during volatility, but 21.1% expressing some concerns. These confidence levels indicate that while most feel secure about their ability to withdraw funds, a considerable portion still holds doubts about the security of the withdrawal process during turbulent market periods.
Risk Management and Security
Institutions face various risks when staking Ethereum:
Slashing Mechanism: Triggered when validators produce faulty proofs, propose invalid blocks, or engage in double-signing, slashing events can result in validators losing a portion of their staked ETH and staking institutions potentially suffering significant financial losses. Additionally, penalties are imposed for downtime or inactivity of validators. While slashing is an irreversible consequence of malicious behavior, downtime penalties are typically smaller and recoverable.
Liquidity Risk: Institutions may have difficulty quickly exiting large positions if their staked ETH is locked or if there is insufficient liquidity for the Liquid Staking Tokens (LSTs). Additionally, fluctuations in the ETH-to-LST exchange rate can result in losses. 71.9% of respondents expressed concerns about liquidity.
Regulatory Uncertainty: With the global regulatory environment still evolving, institutions need to stay informed about the latest developments regarding the classification of staking rewards by regulatory authorities, compliance requirements for validator infrastructure, and the tax implications of staking income. Despite regulatory uncertainty, over half (58.9%) of respondents are still willing to stake their ETH, but 17.7% choose to wait and see.
Similarly, 55.9% of people do not participate in liquid staking protocols due to a lack of regulatory clarity, and 20% remain cautious.
Overall, regulatory factors influence the decision-making of 39.4% of respondents when selecting ETH staking service providers, with 24.3% indicating that they do not consider regulatory factors in their selection. This may be due to the evolving regulatory framework for staking, leading these institutions to focus more on other operational risks they consider more important.
Operational Risks: Over 90% of respondents indicated that they are very familiar with the withdrawal process for ETH staking, indicating awareness among institutions that delays in the withdrawal process could lead to significant deviations in LST prices. However, respondents displayed varying levels of confidence in their ability to withdraw staked ETH during volatile market conditions, with almost equal distribution between having confidence, being neutral, and lacking confidence.
Our survey shows that ensuring high uptime and performance of multiple validators, protecting private keys, and promptly patching software vulnerabilities are key operational challenges that respondents are concerned about. Among the various metrics used to monitor staking activities, Annual Percentage Rate (APR) and validators’ uptime were identified as the most important, followed by total rewards paid, slashing rate, and liquidity.
* Some survey respondents chose not to answer this question due to proprietary and regulatory considerations.
The monitoring tools most commonly used by surveyed institutions to monitor staking operations include internal monitoring tools generated by proprietary risk management systems, reports and dashboards provided by staking providers, and Dune.
* Some survey respondents chose not to answer this question due to proprietary and regulatory considerations.
Additionally, there is a divergence among respondents regarding the importance of pursuing above-average staking returns versus benchmark returns.
In the decision to participate in Liquid Staking Tokens (LSTs), respondents also show a divergence, with 44.4% expressing concerns about regulation and compliance.
Some asset management firms mentioned that custody of LSTs is a concern due to the imbalance between risk and perceived return. One respondent stated, “We hold PoS tokens, but they are not mature. We don’t know where to start in terms of dealing with staking, rewards, etc. Our team is small. We would like to do it in a regulatory-compliant manner and limit the risk.” Another respondent believed, “LSTs are not staking. They are DeFi disguised as staking.”
It is worth noting that banks mentioned in the survey that the custody of ETH owned by staking clients and held by them would impact disclosures to clients and regulatory authorities, introducing new capital requirements and operational risks resulting from the liquidity or lack thereof of LSTs.
Key Trends and Insights
From the survey results, we have gathered several key points. The data indicates that liquidity and regulatory transparency are crucial in influencing institutional participation in ETH staking, and many institutions remain cautious. Overall, the report reveals a complex but promising institutional ETH staking landscape as enterprises explore in an ever-changing market:
Institutions are actively participating in ETH staking, but the extent and manner of their involvement vary.
Despite the risks, there is a growing interest in decentralized validators (DVs) and re-staking technology.
Decentralization remains an important consideration, influencing providers’ choices.
Liquidity is a key factor of concern for institutional stakers, influencing their choice of liquid staking tokens (LSTs) and staking methods.
Due to regulatory uncertainty, institutions are taking different approaches, with some opting for caution while others are less concerned.
Participants from institutions have a high level of awareness of the operations and risks of staking.
Despite the risks and challenges of Ethereum staking, LSTs, and re-staking, these technologies offer attractive opportunities for institutional investors as they can generate returns. In a traditional fixed-income investment market with lower returns, Ethereum staking provides relatively stable and predictable income. Currently, the annualized return for ETH staking is around 3-4%, and participants may also receive additional rewards from priority fees. Additionally, LSTs improve capital efficiency by allowing staked ETH to be used in decentralized finance (DeFi) applications, enabling institutions to earn staking rewards while utilizing their assets to generate additional income.
Overall, LSTs’ widespread adoption in DeFi protocols creates new market opportunities. With 39.3% of respondents mentioning the use of LSTs in DeFi applications, this trend is likely to continue, increasing the liquidity and utility of these tokens. While regulatory issues still exist, adaptability to the regulatory framework for staking seems to be improving.
Participating in staking allows institutional investors to align with the long-term development of the Ethereum network, potentially providing financial returns and strategic advantages within the blockchain ecosystem. Despite the challenges, for many institutions, the potential returns from staking, LSTs, and re-staking seem to outweigh the risks. As the ecosystem matures and the proportion of staked ETH significantly increases, these technologies may become an increasingly attractive part of institutional crypto strategies.
