CoinJiawang.com report:
Authors: Tricia Lin, Daniel Shapiro, Blockworks; Translation: Baishui
Summary
The majority (69.2%) of surveyed respondents currently hold Ethereum (ETH), with 78.8% being investment firms or asset management companies. This indicates that institutional participation in ETH staking has reached a critical point, driven by revenue generation and network security contributions.
Approximately 60.6% of respondents use third-party staking platforms, with a preference for large integrated platforms. These platforms address challenges associated with individual staking, such as low capital efficiency and technical complexity.
Liquidity Staking Tokens (LST) have gained popularity due to their ability to improve capital efficiency, allowing staked ETH to remain liquid and available for DeFi strategies. 52.6% of respondents hold LST, and 75.7% are willing to stake ETH through decentralized protocols.
Distributed Validators (DV) are becoming increasingly popular among institutional participants due to enhanced security and fault tolerance. Over 61% of respondents are willing to pay additional fees for the security advantages provided by DV.
Introduction
As the cryptocurrency industry continues to mature, staking has become a primary avenue for institutional investors to generate returns and contribute to network security. However, the staking landscape for institutional investors remains complex.
This research report provides a comprehensive analysis of staking behaviors among institutional token holders, with a particular focus on the Ethereum ecosystem. Our main objective is to reveal the current state of institutional staking, explore the motivations and obstacles faced by market participants. By collecting survey data from various institutional stakeholders such as exchanges, custodians, investment firms, asset management companies, wallet providers, and banks, we seek to provide valuable insights for the distributed validator and multi-validator model market, enabling both new and seasoned participants to have a broader understanding of this rapidly evolving field.
The survey consisted of 58 questions covering various aspects of ETH staking, liquidity staking tokens (LST), and related topics. We used various question formats, including multiple-choice, Likert scale, and open-ended questions, with the option to leave some questions blank. Among the respondents:
The majority of respondents (69.2%) currently hold ETH.
Most of them are institutional participants:
78.8% are investment firms or asset management companies.
Within this group, approximately 75% are companies or funds specifically focused on investing in crypto assets.
9.1% are custodians.
9.1% are exchanges or wallet providers.
12.1% are blockchain networks/protocols.
4.2% are market makers or trading firms.
0.8% are others.
People demonstrated a broad knowledge of stake economics, and they generally self-reported a high understanding of stake concepts and associated risks.
The respondents and node operator locations exhibited geographical diversity: while specific locations were not provided, many respondents highlighted the importance of geographical diversity in node operators.
Current ETH Staking Landscape
Since the network upgraded to Proof of Stake (PoS), there have been significant changes in the ETH staking landscape, as well as the activity known as “the merge.” It is worth noting that over time, we have consistently seen an increase in the number of validators and the total amount of ETH staked. Currently, nearly 1.1 million on-chain validators have staked 34.8 million ETH.
After the merge, early ETH stakes were locked to ensure a smooth transition to PoS. It was only after the Shanghai and Capella upgrades in April 2023, known as Shapella, that network participants could freely withdraw ETH. Following a brief initial withdrawal, the network has seen a sustained net positive flow of staked ETH. This indicates strong demand for ETH staking.
Currently, 28.9% of the total ETH supply is staked, creating a robust $115B+ staking ecosystem. This makes it the network with the highest staking amount and the greatest growth potential.
As users pursue rewards associated with network validation, the staking ecosystem continues to evolve. As explained in the early whitepaper titled “Internet Bonds” by Obol and Alluvial CEOs Collin Myers and Mara Schmiedt, the annualized actual issuance yield is dynamic and decreases as more ETH is staked.
Staking rewards typically hover around 3%, although validators can earn additional rewards in the form of priority transaction fees, which increase during periods of high network activity.
To earn these rewards, individuals can stake ETH as solo validators or delegate their ETH to third-party staking providers.
Solo validators must deposit at least 32 ETH to participate in network validation. The choice of this number is to balance security, decentralization, and network efficiency. Currently, approximately 18.7% of individuals in the network are solo validators. Please note that unidentified stakers are assumed to be solo validators.
Motivations for solo staking have decreased over time for several reasons. Firstly, few can afford 32 ETH and possess the technical capability to run independent validators, limiting widespread independent participation in network validation.
Another key reason is the low capital efficiency of staked ETH. Once staked, ETH cannot be used for other financial activities within the entire DeFi ecosystem. This means individuals cannot provide liquidity to various DeFi primitives or collateralize their ETH for loans. This presents an opportunity cost for solo stakers, who must also consider the dynamic network reward rate for staked ETH to ensure they maximize their risk-adjusted return potential.
These two issues have led to the rise of third-party staking platforms, the majority of which are dominated by centralized exchanges and liquidity staking protocols.
Staking platforms offer ETH holders the opportunity to delegate their ETH to other validators and have other validators stake on their behalf for a fee. While this entails trade-offs, it quickly became the preferred method for most network participants.
Surveyed respondents confirmed this:
69.2% of respondents indicated that their companies currently hold ETH.
60.6% of respondents stated that they use third-party staking platforms.
48.6% prefer staking ETH through an integrated platform (Coinbase, Binance, Kiln, etc.).
Surveyed respondents cited the following main reasons for choosing a staking provider:
Reputation.
Supported network range.
Price.
Easy onboarding/training.
Competitive costs.
Expertise and scalability.
Finally, we asked respondents how their companies utilize LST.
Advanced Staking Technologies
Distributed Validators (DV)
While liquidity staking protocols have found a product-market fit for the current form, attracting retail investors, DeFi users, and crypto-native funds, they may need to implement Distributed Validators (DV) to enable significant institutional capital inflows.
DV, pioneered by Obol, enhances the security, fault tolerance, and decentralization of the staking network. The core problem Obol seeks to address is the inherent risks associated with centralized failure points in traditional staking configurations. If a validator node goes offline, for example due to hardware failure or client error, it incurs offline penalties. Additionally, the possibility of validator keys being duplicated and run simultaneously on two nodes introduces the risk of transaction “double-signing,” which results in severe penalties. This poses significant risks for institutional participants, as they need the maximum security and assurance around their delegated ETH stakes.
Single-node validators present various issues and risks:
Single-node validators lack protection against machine failures.
It is challenging to adopt an effective active-passive setup (used for redundancy). Misconfigurations, software errors, or lack of monitoring can lead to simultaneous proofs within the same validator, resulting in slashing events.
The validator’s hotkey may be compromised.
Validator infrastructure exhibits economies of scale, leading to client centralization and associated risks.
Obol’s Distributed Validators address these issues by achieving trust-minimized staking through multi-node validation. By dispersing the responsibilities of validators across a cluster of nodes (referred to as a distributed validator), this setup allows a “single” validator to remain operational even if nodes within the distributed cluster fail. Specifically, as long as two-thirds of the nodes in the cluster are functioning properly, the validator remains operational. DV also enables client software, hardware, and geographical diversity within the same validator, as each node can run a unique hardware and software stack. The individual validator and the larger network itself achieve high diversity across each centralizing vector.
Surveyed respondents highly favor DV:
65.8% of respondents are familiar with DV.
61.1% are willing to pay a premium for professional features such as enhanced security/uptime, decentralization, and fault tolerance.
Overall, there is a high level of awareness about DV, with only 2.6% of respondents indicating a complete unfamiliarity with the technology:
0% of respondents believe that there is a high risk of collateral operation for DV, while 5.6% of respondents say there is no risk at all.
These responses reinforce the argument that institutional capital allocators favor DV as the best choice for collateral.
Re-collateralization
Similar to DV, re-collateralization is another key technique that can create new sources of income for collateral providers. Re-collateralization allows validators to use collateralized ETH or LST to provide security for multiple protocols, potentially earning additional income.
However, this is not without additional risks. Re-collateralizing assets for the protection of multiple protocols may result in significant penalties and losses for validators in the event of individual malicious behavior or operational failures. Re-collateralization also brings other risks, including centralization of power, protocol-level vulnerabilities, and network instability.
EigenLayer has added support for Liquid Collectives LsETH. This will allow LsETH holders to earn protocol fees and rewards from the EigenLayer protocol, while also receiving ETH network rewards through holding LsETH.
Symbiotic has also added support for LsETH holders, who can now earn additional protocol fees and rewards from the Symbiotic protocol, while only needing to hold LsETH to receive ETH network rewards.
Survey respondents indicated a general preference for re-collateralization and a deep understanding of the risks involved.
55.3% of respondents expressed interest in re-collateralizing ETH.
74.4% of respondents indicated that they are aware of the risks of re-collateralization.
Nevertheless, respondents generally consider re-collateralization to be risky.
Our survey shows that 55.9% of respondents are interested in re-collateralizing ETH, while 44.1% are not interested. Considering that 82.9% of respondents indicated their awareness of the risks of re-collateralization, this suggests a favorable trend towards re-collateralization. However, the distribution slightly leans towards viewing re-collateralization as inherently risky.
Decentralization and Network Health
Due to various factors, LST exhibits winner-takes-all market characteristics. As LST evolves, they provide better liquidity, lower fees, and more integration with DeFi protocols. This increased adoption leads to deeper liquidity pools, making the tokens more attractive for trading and use in other DeFi applications. Over 40% of ETH is collateralized by Lido and Coinbase.
Large LST holders can also benefit from better branding, as it is an important factor for surveyed respondents.
The survey further confirms the concentration of third-party collateral platforms: over half of respondents hold stETH.
This dynamic results in concentration of collateral power in the hands of a few LST or centralized exchange operators, where in some cases, large collateral pools often rely on a limited number of node operators. This centralization not only goes against Ethereum’s core principles but also introduces security vulnerabilities to the consensus mechanism and censorship attack vectors.
The majority of surveyed respondents expressed concerns over centralization, with 78.4% expressing concerns about validator centralization and a general belief in the importance of the geographical location of node operators when choosing third-party collateral platforms. The survey indicates that the market may be looking for more decentralized alternatives to replace current market leaders.
Custodial and Operational Practices
The majority of respondents (60%) use qualified custodians to hold their ETH. Hardware wallets are also popular, with 50% of respondents using them. Centralized exchanges (23.33%) and software wallets (20%) are less commonly used for custody purposes.
Respondents generally indicate 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% being neutral, and 21% disagreeing or strongly disagreeing.
People generally have a high awareness of client diversity, or the use of different software implementations to run Ethereum validators to reduce single points of failure, maintain decentralization, and optimize overall network performance. 50% of respondents indicated their familiarity with this concept, with 31.6% strongly agreeing. Only 2.6% are unfamiliar with client diversity. Overall, this suggests that 81.58% of respondents are familiar with the concept of client diversity.
Respondents place high importance on liquidity. The average rating for the importance of liquidity, on a scale of 1-10 (with 10 being the most important), is 8.5, second only to protecting assets from loss (9.4): clearly, liquidity is a key factor for many institutional participants in the ETH collateral ecosystem. Additionally, 67% of respondents indicated that all available sources of liquidity are important when considering LST, with a strong bias towards decentralized exchanges such as Curve, Uniswap, Balancer, and PancakeSwap, as well as DEX aggregators (Matcha) or on-chain exchange platforms (Curve, Uniswap, Cowswap).
Lastly, respondents show a moderate to high level of confidence in their ability to withdraw collateralized ETH during market fluctuations, with 60.5% expressing confidence in their ability to withdraw collateralized ETH during volatile periods, while a significant proportion (21.1%) have some concerns. These confidence levels indicate that while most feel secure in their ability to access their funds, a significant portion still have reservations about the security of the withdrawal process during turbulent market conditions.
Risk Management and Security
Institutions face various risks when collateralizing Ethereum:
Slashing:
Slashing events can occur when there are incorrect proofs or improper block proposals or double-signing. As a result, validators may lose a portion of their collateralized ETH for violating protocol rules, and collateral providers may suffer significant financial losses. Penalties also occur for validator downtime or inactivity. While slashing is an irreversible consequence for malicious behavior, downtime penalties are typically smaller and recoverable.
Liquidity:
Institutional investors may have difficulty exiting large positions quickly if collateralized ETH is locked or if LST lacks deep liquidity. Additionally, the decoupling of market rates between ETH and LST can result in losses. 71.9% of respondents are concerned about liquidity for all available sources.
Regulatory Uncertainty:
Given the ongoing development of the global regulatory environment, institutions should monitor regulatory agencies’ evolving classifications of collateral rewards, compliance requirements for operating validator infrastructure, and tax implications of collateral income. Due to regulatory ambiguity, over half (58.9%) would collateralize their ETH without hesitation, while 17.7% remain cautious.
Similarly, due to regulatory ambiguity, 55.9% refrain from participating in liquidity collateral protocols, while 20% are undecided.
Overall, 39.4% of respondents believe regulations will impact their choice of ETH collateral providers, with 24.3% strongly agreeing that regulations will not factor into their choice of ETH collateral providers. With the regulatory collateral environment still evolving, these institutions may focus on other operational risks they consider more important.
Operational: Over 90% of respondents are very/fairly familiar or somewhat familiar with the ETH collateral withdrawal process, highlighting the awareness among institutions that a lag in the withdrawal process could result in significant price discrepancies for LST. However, our respondents are divided on their confidence in their ability to withdraw collateralized ETH during unstable collateral conditions, with confidence, neutrality, and lack of confidence almost evenly split.
As our survey shows, large-scale validator infrastructure requires normal operation and performance of multiple validators, protection of private keys, and software vulnerability patching. Operational challenges remain the top concern for our respondents, with various metrics used to monitor collateral activities primarily being annualized rate of return and validator uptime, followed by total rewards paid, slashing rate, and liquidity.
Internal monitoring tools generated by proprietary risk management systems, reports and dashboards provided by collateral providers, and Dune are the most cited tools used by surveyed institutions for monitoring collateral operations.
Furthermore, respondents are divided on the importance of achieving above-average collateral returns and the importance of achieving above-average collateral returns. It serves as a benchmark for them.
There is still disagreement among respondents on whether to participate in LST, with 44.4% mentioning regulatory and compliance issues.
Several asset management firms mentioned that custodial of LST poses an issue, with a perceived imbalance between risks and the effort of awareness with rewards. One respondent mentioned, “We hold PoS tokens, but it’s not mature. We don’t know where to start solving/thinking about staking, yield, etc. Our team is small. We would like to go through the regulatory approval route and limit risks.” Another respondent stated, “LST is not staking. They are DeFi imposters.”
It is worth noting that the banks surveyed mentioned that collateralizing ETH held by clients would impact disclosures to clients and regulatory bodies, as well as impose new requirements for capital impact and operational risks arising from LST liquidity or lack thereof.
Key Trends and Insights
Several key points stand out from the overall results of the survey. Our data highlights the importance of liquidity and regulatory clarity in shaping institutional participation in ETH collateral, with a significant proportion remaining cautious. Overall, the survey results of this report showcase the complex yet promising outlook for institutional ETH collateral growth as companies continue to navigate evolving market conditions:
Institutions are actively participating in ETH collateral, but the extent and methods of participation vary.
Despite associated risks, there is increasing interest in advanced collateral techniques such as DV and re-collateralization.
Decentralization remains an important issue, influencing provider choices.
Liquidity is a key factor for institutional collateral providers, influencing their choices of LST and collateral methods.
Regulatory uncertainty leads to different attitudes, with some institutions proceeding cautiously while others are less concerned.
Institutional participants have a high awareness of operational aspects and risks related to collateral.
Despite the presence of risks and challenges associated with Ethereum collateral, liquidity collateral tokens (LST), and re-collateralization, these technologies offer compelling opportunities for financial returns and strategic positioning within the blockchain ecosystem for institutional investors: Ethereum collateral provides relatively stable and predictable returns in a traditional market where income investments typically have lower returns. Currently, ETH collateral offers an annualized reward rate of around 3-4%, and participants can also earn additional rewards through priority fees. Additionally, LST can increase capital efficiency by allowing collateralized ETH to be used in DeFi applications, enabling institutions to earn collateral rewards while leveraging their assets for additional income opportunities.
Overall, the increasing popularity of LST in DeFi protocols creates new market opportunities. As 39.3% of respondents discuss their use of LST in DeFi applications, this trend may continue, leading to increased liquidity and utility for these tokens. Furthermore, despite regulatory concerns, people’s comfort with the regulatory environment surrounding collateral seems to be growing.
Finally, participating in collateral aligns institutional investors with the long-term success of the Ethereum network, potentially providing financial returns and strategic positioning within the blockchain ecosystem. Despite ongoing challenges, the potential benefits of collateralization, LST, and re-collateralization seem to outweigh the risks for many institutions. As the ecosystem matures and the proportion of ETH collateral increases significantly, these technologies may become increasingly attractive components of institutional crypto strategies.
