Coin World Report:
Approximately 60.6% of respondents use third-party staking platforms, and they are more inclined to choose large, integrated platforms.
Written by: Tricia Lin, Daniel Shapiro
Translation: Deep Tide TechFlow
Main Findings:
The survey shows that the majority of respondents (69.2%) are currently staking Ethereum (ETH), of which 78.8% are investment or asset management companies. This indicates that institutional participation in ETH staking has reached a certain scale, driven primarily by returns and contributions to network security.
Approximately 60.6% of respondents use third-party staking platforms, and they are more inclined to choose large, integrated platforms. These platforms can address issues such as low capital efficiency and technical complexity encountered when staking individually.
Liquid Staking Tokens (LSTs) are becoming increasingly popular as they can improve capital efficiency, keep staked ETH liquid, and be used for decentralized finance (DeFi) strategies. 52.6% of respondents hold LSTs, and 75.7% of respondents 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 capabilities. Over 61% of respondents are willing to pay additional fees for the security advantages provided by DVs.
Introduction:
As the cryptocurrency industry continues to develop, staking has become an important way for institutional investors to generate returns and enhance network security. However, institutional investors still face a complex environment when it comes to staking.
This research report provides a comprehensive analysis of staking behavior among institutional token holders, with a particular focus on the Ethereum ecosystem. Our main research objectives are to reveal the current state of institutional staking, explore the motivations and challenges faced by market participants. By collecting survey data from various types of institutional stakers such as exchanges, custodians, investment companies, asset management companies, wallet providers, and banks, we hope 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 topics related to ETH staking, Liquid Staking Tokens (LSTs), and related subjects. We used various question formats, including multiple-choice, Likert scale, and open-ended questions, and allowed respondents to selectively skip certain questions. The survey results show:
The majority of respondents (69.2%) are currently staking ETH.
The majority of respondents are institutional participants:
– 78.8% are investment companies or asset management companies.
– Among 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 companies.
– 0.8% belong to other categories.
Respondents displayed a wide knowledge of staking economics and generally had a high self-awareness of staking concepts and related risks.
Respondents and node operators are geographically diverse: While specific locations were not provided, many respondents emphasized the importance of geographical diversity of 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, known as The Merge. It is worth noting that the number of validators and the total amount of ETH staked have been increasing. Currently, there are nearly 1.1 million validators on the network, staking 34.8 million ETH.
After The Merge, early ETH staking was locked in to ensure a smooth transition to PoS. Network participants will only be able to withdraw their ETH after the Shanghai and Capella upgrades in April 2023 (referred to as Shapella). After a brief initial withdrawal period, the network has observed a continuous net inflow of staked ETH, indicating a strong demand for staking ETH.
So far, approximately 28.9% of the total supply has been staked, creating a robust staking ecosystem worth over $115 billion. This makes Ethereum the network with the highest value staked in USD terms and also has significant growth potential.
As users seek rewards from participating in network validation, the staking ecosystem continues to expand. The annualized realized issuance rate is dynamic and decreases 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 their ETH to third-party staking service providers.
Independent validators need to stake a minimum of 32 ETH to participate in network validation. This quantity is meant to strike a balance between security, decentralization, and network efficiency. Currently, approximately 18.7% of network participants are independent validators. Unidentified stakers are generally considered independent validators.
Over time, the appeal of independent staking has diminished for several reasons. First, there are few individuals who can afford to stake 32 ETH and have 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 in the DeFi ecosystem. This means that it cannot provide liquidity for various DeFi projects or be collateralized to obtain loans. This presents an opportunity cost for independent stakers, who must also consider the dynamic reward rate of staked ETH to ensure they achieve 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 provide ETH holders with the opportunity to delegate their ETH to other validators for staking and charge a fee for this service. Despite some trade-offs, this approach has quickly become the preferred choice for the majority of 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 to stake ETH on comprehensive platforms such as Coinbase, Binance, and Kiln.
The main reasons respondents choose staking providers include:
– Reputation.
– Supported networks.
– Price.
– Convenient onboarding process.
– Competitive fees.
– Professional expertise and scalability.
Lastly, respondents were asked how they allocate ETH or staked ETH in their investment 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, driven by breakthroughs in liquid staking technology.
Liquid staking refers to the process of receiving a user’s ETH through a smart contract protocol for staking 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 usually 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 limitations implemented in the Cancun/Deneb upgrade of Ethereum PoS. 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 on-chain code and a decentralized set of professional validators, which are often selected through DAO governance. Various factors such as technical capabilities, security practices, reputation, geographical diversity, or hardware diversity may be considered when selecting validators. Users’ ETH deposits are managed centrally and then allocated to the validator set, reducing the risks of slashing and centralization.
Due to the popularity of liquid staking, many DeFi applications in the on-chain ecosystem have adopted liquid staking tokens, further enhancing their utility and liquidity. For example, many decentralized exchanges (DEXs) have already adopted LSTs, allowing 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 users who want immediate liquidity and are willing to exchange their LSTs for ETH at a discounted price on DEXs, driving this price deviation. Redemption queues are typically less prevalent during stable market conditions.
When LSTs have sufficient liquidity and their price is in line with ETH, they can be adopted by DeFi money markets, further enhancing their value. Leading DeFi money markets such as Aave and Sky (formerly MakerDAO) have integrated LSTs, allowing users to borrow other assets without selling their staked ETH. This approach can increase returns as users can earn additional income by using 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 use LSTs.
Advanced Staking Technology:
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 a significant inflow of institutional capital, the adoption of Distributed Validators (DVs) may be necessary.
DVs, pioneered by Obol, enhance the security, fault tolerance, and decentralization of staking networks. The core problem that Obol addresses 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 errors, it is subject to offline penalties. Additionally, validator keys can be duplicated and run on two nodes simultaneously, leading to the risk of “double signing” of transactions and subsequent slashing penalties. This poses a significant risk for institutional participants who require high security and assurance in delegated ETH staking.
Single-node validators have various issues and risks:
– There is no protection against machine failures.
– It is challenging to effectively implement active-passive redundancy setups. Configuration errors, software failures, or lack of monitoring can result in the same validator key being duplicated, leading to slashing penalties.
– The hot keys used by validators are vulnerable to attacks.
– Economies of scale in validator infrastructure can lead to centralization of clients, increasing end-user correlation risks.
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 continue to operate normally 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 can remain operational. Distributed Validators also allow for diversification in terms of client software, hardware, and geographical locations within a single validator, as each node can run different hardware and software configurations. Both individual validators and the entire network can achieve a high degree 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 professional features such as enhanced security, stability, decentralization, and fault tolerance.
Overall, there is a high level of awareness of Distributed Validators (DVs), with only 2.6% of respondents being unfamiliar with them.Percentage of People Completely Unfamiliar with the Technology
None of the respondents considered DVs to be highly risky for their staking operations, while 5.6% believed that there was absolutely no risk.
These feedbacks support the view that institutional capital allocators are more inclined to choose DVs as the best option 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 for stakers. Re-staking allows validators to use their staked ETH or Liquid Staking Tokens (LST) to provide security support for multiple protocols simultaneously, potentially earning additional rewards.
However, this also comes with additional risks. Re-staked assets being used 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, as well as receiving ETH network rewards.
Symbiotic also provides support for LsETH holders, who can now earn additional protocol fees and rewards from the Symbiotic protocol while holding LsETH, as well as receiving 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 stated that they understand the risks of re-staking, this indicates a positive attitude towards re-staking. However, overall, it is still believed that re-staking inherently carries risks.
Decentralization and Network Health
Liquid Staking Tokens (LSTs) exhibit the “winner-takes-all” characteristics of the market, which is due to strong network effects formed by multiple factors. With the development of LSTs, they provide better liquidity, lower fees, and more integrations with decentralized finance (DeFi) protocols. This widespread adoption makes liquidity pools deeper and 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 there are more operators to allocate stakes. Currently, over 40% of ETH is staked by Lido and Coinbase.
Large LSTs can 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: over half of the respondents hold stETH.
This situation leads to the concentration of staking power in the hands of a few LSTs or centralized exchanges, 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 principle of Ethereum but also poses security risks and censorship attacks 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 geographic location of node operators to be very important when choosing a third-party staking platform. 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 custodial 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 the majority (65.8%) agreeing or strongly agreeing that they are familiar with node operations, 13% 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 demonstrated 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 rating for the importance of liquidity was 8.5, second only to the importance of protecting assets from losses (9.4). Clearly, liquidity is a key consideration for many institutional participants in the ETH staking ecosystem. Additionally, 67% of respondents stated that the source of liquidity is very important when selecting a liquid staking token (LST), with a tendency to choose 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 displayed a moderate to high level of confidence in their ability to withdraw staked ETH during market fluctuations, with the majority (60.5%) expressing confidence in their ability to withdraw during volatility, but with 21.1% expressing some concerns. These levels of confidence indicate that while most people feel secure about their ability to withdraw their funds, there is still a considerable portion of respondents who hold doubts about the security of the withdrawal process during market turmoil.
Risk Management and Security
Institutions face various risks when staking Ethereum:
Slashing Mechanism: Triggered when validators produce incorrect proofs, propose incorrect blocks, or double-sign. This results in validators losing a portion of their staked ETH due to violating protocol rules, and staking institutions may suffer significant financial losses as well. 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 find it difficult to exit large positions quickly if their staked ETH is locked or if there is insufficient liquidity for the liquid staking tokens (LSTs). Furthermore, fluctuations in the exchange rate between ETH and LSTs can also result in losses. 71.9% of respondents expressed concerns about liquidity.
Regulatory Uncertainty: As the global regulatory environment is still evolving, institutions need to pay attention to the latest developments regarding regulatory classification of staking rewards, compliance requirements for validator infrastructure, and tax implications of staking income. Despite regulatory ambiguity, more than half (58.9%) of respondents are still willing to stake their ETH, but 17.7% choose to adopt a wait-and-see approach.
Similarly, 55.9% of people do not participate in liquid staking protocols due to a lack of regulatory clarity, while 20% take a wait-and-see approach.
Overall, regulatory factors influence the decision-making of 39.4% of respondents when choosing ETH staking service providers, while 24.3% stated that they do not consider regulatory factors when making their choices. This may be because the regulatory framework for staking is still developing, leading these institutions to focus more on other operational risks that they deem more important.
Operational risks: Over 90% of respondents indicated that they are very familiar with the withdrawal process for ETH staking, indicating an awareness among institutions that delays in the withdrawal process could result in significant deviations in LST prices. However, respondents displayed varying levels of confidence in their ability to withdraw staked ETH during market volatility, with almost an equal distribution between confidence, neutrality, and lack of 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 various metrics used for monitoring staking activities, Annualized Percentage Rate (APR) and validator uptime were identified as the most important, followed by total rewards paid, slashing rate, and liquidity.
* Due to proprietary and regulatory considerations, some survey respondents chose not to answer this question.
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.
* Due to proprietary and regulatory considerations, some survey respondents chose not to answer this question.
In addition, there is a divergence among respondents regarding the importance of pursuing above-average staking returns versus benchmarking.
There is also a divergence among respondents in the decision to participate in liquid staking tokens (LSTs), with 44.4% expressing concerns about regulations and compliance.
Some asset management firms mentioned that custody of LSTs is a concern due to the imbalance between risks, awareness, and return on investment. One respondent stated, “We hold PoS tokens, but they are not mature. We do not know where to start dealing with staking, rewards, etc. Our team is small. We want to do it in a regulatory compliant way 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 affect disclosures to clients and regulatory authorities, and introduce new capital requirements and operational risks stemming from the liquidity or lack thereof of LSTs.
Key Trends and Insights
From the survey results, we have identified several key points. The data suggests that liquidity and regulatory transparency are critical in influencing institutional participation in ETH staking, with many institutions still exercising caution. Overall, the report reveals a complex but promising institutional ETH staking landscape as enterprises explore in a rapidly evolving market:
Institutions are actively participating in ETH staking, but the level and manner of involvement vary.
Despite the risks, there is growing interest in decentralized validation (DVs) and re-staking technologies.
Decentralization remains an important consideration that influences provider choices.
Liquidity is a key factor of concern for institutional stakers, influencing their choices of liquid staking tokens (LSTs) and staking methods.
Due to regulatory uncertainties, institutions adopt different strategies, with some being cautious while others are less concerned.
Institutional participants have a high level of understanding of staking operations and risks.
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 market with low returns, Ethereum staking provides relatively stable and predictable income. Currently, the annualized staking yield for ETH is around 3-4%, and participants may also receive additional rewards from priority fees. Additionally, LSTs enhance capital efficiency by allowing staked ETH to be used in decentralized finance (DeFi) applications, enabling institutions to earn staking rewards while leveraging their assets for 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 staking regulatory environment seems to be improving.
Participating in staking allows institutional investors to align with the long-term development of the Ethereum network, potentially bringing financial returns and strategic advantages within the blockchain ecosystem. Despite the challenges, the potential returns from staking, liquid staking tokens (LSTs), and re-staking seem to outweigh the risks for many institutions. As the ecosystem matures and the proportion of ETH staked increases significantly, these technologies may become increasingly attractive parts of institutional crypto strategies.
