Coin World Report:
Approximately 60.6% of respondents use third-party staking platforms, and they tend to prefer large, integrated platforms.
Authors: Tricia Lin, Daniel Shapiro
Translation: Deep Tide 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 primarily by returns and contributions to network security.
Approximately 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 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 gaining popularity 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 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 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 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 complexity of this rapidly evolving field.
The survey consisted of 58 questions covering topics such as ETH staking, Liquid Staking Tokens (LSTs), and related subjects. We used a variety of question formats, including multiple-choice, Likert scale, and open-ended questions, allowing respondents to selectively not answer certain questions. The survey results show that:
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, about 75% focus on crypto asset investments.
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 show geographical diversity: While specific locations were not provided, many respondents emphasized the importance of geographical 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, 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 to ensure a smooth transition to PoS. Network participants can only withdraw their ETH after the Shanghai and Capella upgrades in April 2023 (referred to as Shapella). Following a brief initial withdrawal period, the network has observed a continuous net inflow of staked ETH. This indicates a strong demand for staking ETH.
So far, 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 of staked assets in USD terms, with significant growth potential.
As users pursue rewards from participating in network validation, the staking ecosystem continues to expand. The annualized real issuance yield is dynamic and decreases with more ETH staked, as explained in the early whitepaper “Internet Bonds” by Collin Myers and Mara Schmiedt of Obol and Alluvial.
The staking reward rate is typically 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 stake at least 32 ETH to participate in network validation. This quantity is a balance between security, decentralization, and network efficiency. Currently, about 18.7% of network participants are independent validators. Unidentified stakers are typically considered independent validators.
Over time, the appeal of independent staking has decreased for several reasons. Firstly, there are few individuals who can afford to hold and operate independent validators with 32 ETH, 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 liquidity cannot be provided to various DeFi projects and ETH cannot be used as collateral for obtaining loans. This brings opportunity costs 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, 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 fees for their services. Despite some trade-offs, this approach 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 use third-party staking platforms.
48.6% of respondents prefer staking ETH on integrated platforms such as Coinbase, Binance, Kiln, etc.
The main reasons respondents choose staking providers include:
Reputation.
Supported networks.
Price.
Ease of onboarding process.
Competitive fees.
Professional expertise and scalability.
Finally, respondents allocate ETH or staked ETH in their investment portfolios as follows:
Liquid Staking Protocols:
To address the challenges faced by independent staking, the third-party staking platform market has rapidly evolved over the past few years. This growth has been primarily driven by breakthroughs in liquid staking technology.
Liquid staking refers to the process of receiving users’ ETH through smart contract protocols, staking it, and returning a Liquid Staking Token (LST) to the users as proof of their staked ETH. LST represents the underlying asset (ETH), is fungible, and typically generates staking rewards automatically, 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 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 the blockchain and a decentralized set of professional validators, often chosen through DAO governance. 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 a set of validators to reduce the risk of slashing 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, allowing holders to provide liquidity immediately for their LSTs or exchange them for other tokens.
Integration with decentralized exchanges (DEXs) is 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 LST may deviate from the price of ETH in times of market stress or high liquidity demand. This is due to redemption queues. Users who want immediate liquidity and are willing to exchange their LSTs for ETH at a discount on DEX will drive this price discrepancy. Redemption queues are usually less common during stable market conditions.
When LST has sufficient liquidity and the price can stay in line with ETH, it can be adopted by DeFi money markets, further enhancing its value. Leading DeFi money markets such as Aave and Sky (formerly MakerDAO) have integrated LST, allowing users to borrow other assets without selling their staked ETH. This allows for increased yield as users can earn additional returns through using LST in DeFi strategies while receiving Ethereum PoS rewards.
Ultimately, LST enhances the accessibility of ETH staking, maximizes capital efficiency, and enables new revenue generation strategies.
The survey shows that respondents have a positive attitude towards LST.
52.6% of respondents hold LST.
75.7% are willing to stake ETH through decentralized protocols.
Finally, we asked respondents how their companies use LST.
Advanced Staking Technology:
Distributed Validators (DVs)
Liquid staking protocols have found market fit in their current forms, attracting retail investors, DeFi users, and crypto funds. However, to attract a large influx of institutional capital, the implementation of Distributed Validators (DVs) may be needed.
DVs, pioneered by Obol, enhance the security, fault tolerance, and decentralization of the staking network. The core problem 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 error, it is subject to offline penalties. Additionally, validator keys can be duplicated and run on two nodes simultaneously, resulting in the risk of “double signing” of transactions, leading to slashing penalties. These are significant risks for institutional participants who require high security and assurance for 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 vulnerable to attacks.
Economies of scale in validator infrastructure can lead to centralization of clients, increasing end-user associated 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, the setup of Distributed Validators can maintain the normal operation of a “single” validator even if a node in the cluster fails. Specifically, as long as two-thirds of the nodes in the cluster are functioning properly, the validator can continue to operate. Distributed Validators also allow for diversification of client software, hardware, and geographical locations within the same validator, as each node can run different hardware and software configurations. Both individual validators 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 being unaware of them.Percentage of People Completely Unfamiliar with the Technology
None of the respondents considered DVs to pose a significant risk to their staking operations, while 5.6% believed there was no risk at all.
These feedbacks support the view that institutional capital allocators tend 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 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 comes with additional risks. Re-staking assets being used to secure multiple protocols means that any malicious behavior or operational mistakes could lead to 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 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 and also 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 understood the risks of re-staking.
Nevertheless, respondents generally believe that re-staking carries some degree of risk.
Our survey shows that 55.9% of respondents are interested in re-staking ETH, while 44.1% are not. Considering that 82.9% of respondents stated that they understood the risks of re-staking, this indicates a positive attitude towards re-staking. However, overall, it is still perceived as having inherent risks.
Decentralization and Network Health
Liquid Staking Tokens (LSTs) exhibit characteristics of a “winner-takes-all” market, driven by strong network effects resulting from various factors. As LSTs gain more adoption, they offer better liquidity, lower fees, and more integrations with decentralized finance (DeFi) protocols. This widespread adoption deepens the liquidity pool and makes the tokens more attractive for trading and other DeFi applications. Large LSTs also benefit from economies of scale, as they attract more operators who can generate more fees. This, in turn, enhances security as more operators can distribute 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 the respondents in the survey.
The survey further confirms the concentration of third-party staking platforms, with over half of the respondents holding stETH.
This situation leads to a concentration of staking power in the hands of a few LST or centralized exchange providers, where in some cases, large staking pools heavily rely on a limited number of node operators. This concentration not only goes against the core decentralization principles of Ethereum but also introduces security risks and censorship attacks to the network’s consensus mechanism.
The survey shows that respondents are highly concerned about centralization, with 78.4% expressing concerns about the centralization of validators and considering the geographical location of node operators to be important when selecting third-party staking platforms. The survey results suggest 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 expressed 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% remaining neutral, and 21% disagreeing or strongly disagreeing.
In terms of client diversity, which refers to 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 aware of the concept of client diversity.
Liquidity is considered a highly important factor by the 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 stated that the source of liquidity is very important when 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 such as Curve, Uniswap, and Cowswap.
Finally, respondents showed a moderate to high level of confidence in their ability to withdraw staked ETH during market volatility, with the majority (60.5%) expressing confidence in their ability to withdraw during volatility, but with 21.1% expressing some concerns. These confidence levels indicate that while most feel secure in their ability to withdraw their funds, there is still a significant portion of respondents who have doubts about the security of the withdrawal process during market turbulence.
Risk Management and Security
Institutions face various risks when staking Ethereum:
Slashing Mechanism: When validators produce incorrect proofs, propose incorrect blocks, or engage in double signing, it can trigger slashing events. This means that validators lose a portion of their staked ETH due to violating protocol rules, and staking institutions may suffer significant financial losses. Additionally, penalties are imposed for validator downtime or inactivity. While slashing is an irreversible consequence for malicious behavior, downtime penalties are typically smaller and recoverable.
Liquidity Risk: If staked ETH is locked or if there is insufficient liquidity for the Liquid Staking Tokens (LSTs), institutions may have difficulty exiting large positions quickly. Additionally, fluctuations in the exchange rate between ETH and LSTs can result in losses. 71.9% of respondents expressed concerns about liquidity.
Regulatory Uncertainty: With the global regulatory landscape still evolving, institutions need to stay informed about the latest developments regarding the classification of staking rewards by regulatory bodies, compliance requirements for validator infrastructure, and the tax implications of staking income. Despite regulatory uncertainty, more than half (58.9%) are still willing to stake their ETH, but 17.7% choose to wait and see.
Likewise, 55.9% of respondents 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 an ETH staking service provider, with 24.3% stating that they do not consider regulatory factors when making their selection. This may be because the regulatory framework for staking is still evolving, causing these institutions to focus more on other operational risks 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 a delay in the withdrawal process can result in significant deviations in LST prices. However, respondents have varying levels of confidence in their ability to withdraw staked ETH during volatile market conditions, with almost an equal distribution between having confidence, remaining neutral, and lacking confidence.
Our survey shows that ensuring high uptime and performance of multiple validators, protecting private keys, and timely patching of software vulnerabilities are key operational challenges that respondents are concerned about. Among various metrics used for monitoring staking activities, annualized percentage return (APR) and validator uptime are considered the most important, followed by total rewards paid, attestation rate, and liquidity.
* Some survey respondents chose not to answer this question due to proprietary and regulatory considerations.
The most commonly used tools for monitoring staking operations among surveyed institutions 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 benchmarking.
There is also a divergence among respondents when it comes to the decision of whether or not to participate in Liquid Staking Tokens (LSTs), 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 risks and the required cognitive and operational efforts. One respondent stated, “We hold PoS tokens, but it’s not mature enough. We don’t know where to start with dealing or considering staking, returns, etc. Our team is small. We want to do it in a compliant manner and limit risks.” Another respondent believes, “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 held by staking clients and managed by them would impact 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, several key points can be summarized. The data suggests that liquidity and regulatory transparency are crucial factors influencing institutional participation in ETH staking, with many institutions still approaching it cautiously. Overall, the report reveals a complex but promising institutional ETH staking landscape as enterprises explore in an ever-changing market environment:
Institutions are actively participating in ETH staking but to varying degrees and in different ways.
Interest in decentralized validators (DVs) and re-staking technologies is growing despite the risks involved.
Decentralization remains an important consideration, influencing the choice of providers.
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 adopt different strategies, with some being cautious while others are less concerned.
Participants have a high level of awareness and understanding of staking operations and risks.
Despite the risks and challenges of Ethereum staking, re-staking, and Liquid Staking Tokens (LSTs), these technologies offer attractive opportunities for institutional investors as they can generate returns. In a traditional fixed-income market with lower returns, Ethereum staking provides relatively stable and predictable income. Currently, the annualized return for ETH staking is approximately 3-4%, and participants can 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 also utilizing their assets to generate additional income.
Overall, LSTs’ wide 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. Despite ongoing regulatory issues, the adaptability to the staking-related 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 staked ETH significantly increases, these technologies may become increasingly attractive parts of institutional crypto strategies.
