Introduction

As the cryptocurrency industry continues to mature, staking has emerged as a primary avenue for institutional investors to generate yield and contribute to a network’s security. However, the landscape of staking for institutional investors remains complex.

This research report presents a comprehensive analysis of institutional token holders' staking behaviors, with a particular focus on the Ethereum ecosystem. Our primary research aims to shed light on the current state of institutional staking, exploring the motivations and hurdles faced by market participants. By gathering survey data from a diverse range of institutional stakers, such as exchanges, custodians, investment firms, asset managers, wallet providers, and banks, we seek to provide valuable insights into the market for distributed validator and multi-validator models such that entrants new and mature gain a broader understanding about the nuances of this rapidly growing area.

The survey consisted of 58 questions covering various aspects of ETH staking, liquid staking tokens (LSTs), and related topics. We used a variety of question formats, including multiple choice, Likert scale, and open ended, with the option to leave some questions blank. Of the respondents:

• The majority of respondents (69.2%) currently stake ETH.

• The majority were institutional participants:

  • 78.8% investment firms or asset managers

    • Of this cohort, approximately 75% were firms or funds focused exclusively on investing on crypto assets

  • 9.1% custodians

  • 9.1% exchanges or wallet providers

  • 12.1% blockchain networks/protocols

  • 4.2% market makers or trading firms

  • 0.8% other

• A wide range of knowledge was displayed regarding staking economics, but there was generally high self-reported understanding of staking concepts and associated risks.

• Geographic diversity of respondents and node operator geographies: While specific locations were not provided, the importance of node operator geography diversification was noted by many respondents. 

Current ETH Staking Landscape

The ETH staking landscape has evolved considerably since the network upgraded to Proof of Stake (PoS); an event titled The Merge. Notably, we have continued to see an increase in validators and total ETH staked over time. Currently, there are nearly 1.1 million on-chain validators staking 34.8 million ETH. 

After The Merge, early ETH stake was locked to ensure a smooth transition to PoS. Network participants were free to withdraw their ETH only after the Shanghai and Capella upgrades (dubbed Shapella) in April of 2023. After a short initial period of withdrawals, the network saw  consistent positive net ETH staking flows. This indicates there is strong demand for staking ETH.

Today, 28.9% of the total ETH supply is staked, creating a robust $115B+ staking ecosystem. This makes it the network with the most dollar-value staked, but also the most room to grow.

The staking ecosystem has continued to grow as users pursue rewards associated with participating in network validation. The annualized real issuance yield is dynamic, decreasing as more ETH is staked, as explained in an early whitepaper from Obol and Alluvial CEOs Collin Myers and Mara Schmiedt titled “The Internet Bond”. 

The staking rewards rate has generally been around 3%, although validators can earn additional rewards in the form of priority transaction fees which increase during times of high network activity.

To access these rewards, one can stake ETH as a solo validator or delegate one's ETH to a 3rd party staking provider.

Solo stakers must deposit a minimum of 32 ETH to participate in network validation. This number was chosen to balance security, decentralization, and network efficiency. Currently, approximately 18.7% of the network are solo stakers. Note unidentified stakers are assumed to be solo stakers.

The incentive to solo stake has decreased over time due to a few reasons. For one, there are very few people that can afford 32 ETH while simultaneously possessing the technical capabilities to run a solo-validator, limiting widespread solo-participation in the network's validation process.

The other key reason is that staked ETH is capital inefficient. Once locked in staking, ETH can no longer be used for other financial activities throughout the DeFi ecosystem. This means that one can no longer provide liquidity to a variety of DeFi primitives, or collateralize one’s ETH to take out loans against it. This presents an opportunity cost for solo stakers, who must also account for the dynamic network reward rates of staked ETH to ensure they are maximizing their risk-adjusted yield potential.

These two problems have led to the rise of 3rd party staking platforms which are overwhelmingly dominated by centralized exchanges and liquid staking protocols.

Staking platforms give ETH holders the opportunity to delegate their ETH to other validators to stake it for them for a fee. Although this comes with trade-offs, it has quickly become the preferred method for the majority network participants.

Source: Endgame Staking Economics

Survey respondents corroborated this statement:

• 69.2% of survey respondents indicated that their company currently stakes ETH.
• 60.6% responded that they utilize a third party staking platform.
• 48.6% prefer to stake ETH with one integrated platform (Coinbase, Binance, Kiln, etc.)

Survey respondents indicated the main reasons for choosing a staking provider are the following:

• Reputation
• Range of networks supported
• Price
• Simple onboarding
• Competitive costs
• Expertise and scalability

Finally, the percentage of survey respondents' portfolios allocated to ETH or staked ETH can be seen below:

Liquid Staking Protocols

The market for third party staking platforms has grown dramatically over the past few years to address the challenges presented by solo staking. Much of this growth was driven by the technological unlock of Liquid Staking. 

Liquid Staking involves a smart contract-based protocol receiving ETH from users, staking it for them, and returning to the user a liquid staking token (LST) as a receipt for their staked ETH. An LST represents the underlying asset (ETH), is fungible, and will typically earn staking rewards autonomously, providing users with a frictionless way to capture yield. Users can redeem their LST for native ETH at any time, although withdrawal delays could exist due to Ethereum PoS withdrawal constraints implemented in the Cancun/Deneb upgrade. Liquid Collective provides extensive documentation around Deposit and Redemption buffers to ensure a smooth user experience.

Deposits and Redemptions System Architecture - Source: Liquid Collective 

Liquid Staking Protocols are usually composed of code deployed onchain and a decentralized set of professional validators, often selected through DAO governance. Validators can be chosen based on a variety of priorities, including technical proficiency, security practices, reputation, geographic diversity, or hardware diversity. User ETH deposits are pooled, and then distributed across the validator set to minimize slashing risk and centralization. 

Due to their popularity, many DeFi applications throughout the onchain ecosystem have adopted liquid staking tokens, further enhancing their utility and improving their liquidity. For instance, many decentralized exchanges (DEXs) have adopted LSTs, enabling holders to access immediate liquidity for their LSTs or swap them for other tokens. 

DEX integration is an important development due to withdrawal delays. Although users are free to redeem their LSTs for ETH at any time, during times of market stress or high demand for liquidity, the price of LST ETH may diverge from the ETH price due to redemption queues. Users who seek immediate liquidity and are willing to swap their LSTs for ETH on DEXs at a discounted price drive this divergence. With that, the withdrawal queue is typically low under steady-state conditions.

Once an LST has substantial liquidity such that its price is expected to remain generally tethered to ETH, it can be adopted by a DeFi money market, further enhancing its utility. Leading DeFi money markets, including Aave and Sky (previously MakerDAO), have integrated LSTs to enable users to borrow other assets without having to sell their staked ETH. This enables higher yields because users can compound Ethereum PoS rewards while earning additional yields from their LSTs deployed in DeFi strategies. 

Ultimately, LSTs improve access to ETH staking, maximize capital efficiency, and enable new forms of yield generating strategies.

Survey respondents were favorable towards LSTs.

• 52.6% of respondents hold LSTs.
• 75.7% were comfortable staking ETH with a decentralized protocol.

Finally, we asked respondents how their company uses LSTs.

Advanced Staking Technologies

Distributed Validators (DVs)

Liquid Staking Protocols have found product market fit in their current form, attracting retail investors, DeFi users, and crypto native funds. However, to enable substantial institutional capital inflows they will likely require the implementation of Distributed Validators (DVs).

Pioneered by Obol, DVs enhances security, fault tolerance, and decentralization of staking networks. The core issue Obol seeks to address is the inherent risk associated with centralized points of failure in traditional staking configurations. If a validator node goes offline, for example due to a hardware failure or client bug, it will begin to accrue offline penalties. Additionally, the potential for a validator key to be duplicated and run on two nodes simultaneously creates the risk of “double signing” of transactions, which results in slashing penalties. This poses a significant risk for institutional participants who require maximum security and guarantees around delegated ETH stake. 

Single-node validators create a variety of problems and risks:

• Single-node validators have no protection for machine failures
• It is difficult to employ an active-passive setup (for redundancy) that works effectively. Misconfiguration, software errors, or lack of monitoring can lead to simultaneous attestation from the same validator key, which leads to a slashing event.
• Validators have hot keys that can be compromised.
• There are economies of scale for validator infrastructure, leading to client centralization and correlation risk for end users.

Obol Distributed Validators address these problems by enabling trust minimized staking through multi-node validation. By decentralizing validator responsibilities across a cluster of nodes - what is known as a Distributed Validator - this setup enables a “single” validator to remain operational even if a node in the distributed cluster goes down. Specifically, so long as two-thirds of the nodes in a cluster are functional, the validator will remain operational. DVs also enable client software, hardware, and geographic diversity within the same validator, as each node can be running a unique hardware and software stack. Individual validators, as well as the greater network itself, can be heavily diversified across each of these centralization vectors.

Obol DV Architecture - Source: Obol (DV Labs)

Survey respondents were very favorable towards DVs.

• 65.8% of respondents were familiar with DVs.
• 61.1% would pay a premium price for specialized features, such as enhanced security/uptime, decentralization, and fault tolerance.

Overall knowledge of DVs was high, with only 2.6% indicating they were not at all familiar with the technology:

0% of respondents thought DVs were very risky to their staking operations, with 5.6% saying it was not risky at all.

These responses strengthen the thesis that institutional capital allocators favor DVs as the best option for staking.

Restaking

Along with DVs, restaking is another key technological unlock that creates new revenue streams for stakers. Restaking enables validators to use their staked ETH or LSTs to provide security for multiple protocols simultaneously, potentially capturing extra yield. 

This does not come without additional risks, though. Restaked assets are used to secure multiple protocols simultaneously, where a single instance of malicious behavior or operational failure could lead to slashing penalties and losses for validators. Restaking introduces other risks including stake centralization, protocol-level vulnerabilities, and network destabilization.

EigenLayer added support for Liquid Collectives LsETH. This will enable LsETH holders to earn protocol fees and rewards from the EigenLayer protocol while simultaneously receiving ETH network rewards by holding LsETH.

Symbiotic also added support for LsETH holders, who now have the potential to receive additional protocol fees and rewards from the Symbiotic protocol, while simultaneously receiving ETH network rewards simply by holding LsETH.

Survey respondents indicated they were generally favorable to restaking with a strong understanding of the risks.

• 55.3% of respondents said they are interested in restaking ETH.
• 74.4% of respondents said they understand the risks of restaking.

With that said, respondents indicated that they generally view restaking as risky. 

Our survey indicated that 55.9% of respondents were interested in restaking ETH, with 44.1% not interested. Considering 82.9% of respondents indicated they understand the risks of restaking, this shows that there is a favorable tendency towards restaking. With that said, the distribution was slightly skewed towards viewing restaking as inherently risky.

Decentralization and Network Health

LSTs exhibit characteristics of a winner-take-all market due to several factors that create powerful network effects. As LSTs grow, they offer better liquidity, lower fees, and more integrations with DeFi protocols. This increased adoption leads to deeper liquidity pools, making the token more attractive for trading and use in other DeFi applications. Large LSTs also benefit from economies of scale: they attract more operators because they generate more fees. In turn, this enhances security because there are more operators to distribute stake between. Over 40% of the total ETH is staked by Lido and Coinbase. 

Large LSTs could benefit from better branding as well, as this was an important factor amongst survey respondents.

The survey provides further evidence of third party staking platform concentration: stETH was held by over half of respondents.

This dynamic leads to the concentration of staking power in the hands of a few LSTs or centralized exchanges, where in some cases large staking pools often rely on a limited number of node operators. This centralization not only contradicts Ethereum’s core principles, but also introduces security vulnerabilities to the network’s consensus mechanism as well as censorship attack vectors. 

Survey respondents overwhelmingly indicated they were concerned with centralization issues, as 78.4% indicated they were concerned about validator centralization, with a general consensus that geographic location of node operator is important when selecting a third party staking platform. The survey indicates that the market could be looking for more decentralized alternatives to the current market leaders.

Custody and Operational Practices

The majority of respondents (60%) use qualified custodians to custody 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 reported a high level of familiarity with node operations, with the majority (65.8%) agreeing or strongly agreeing that they were familiar with node operations, 13% neutral, and 21% either disagreeing or strongly disagreeing.

There was generally a high level of awareness regarding client diversity, or using different software implementations to run Ethereum validators to reduce a single point of failure, maintain decentralization, and optimize overall network performance. Fifty percent of survey respondents indicated that they are familiar with the concept, and 31.6% strongly agreed. Only 2.6% were not familiar with client diversity. Overall, this suggests that 81.58% of respondents are familiar with the concept of client diversity.

Access to liquidity is highly valued by respondents. On a scale of 1-10 (with 10 being the most important), the average rating for the importance of access to liquidity was 8.5, second in priority only to safeguarding assets from loss (9.4): it’s clear that liquidity is a crucial factor for many institutional participants in the ETH staking ecosystem. Further, 67% of respondents indicated that liquidity available across all sources was important when considering LSTs, with liquidity venues heavily leaning towards decentralized exchanges such as Curve, Uniswap, Balancer, and PancakeSwap as well as DEX aggregators (Matcha) or on-chain swap platforms (Curve, Uniswap, Cowswap). 

Finally, respondents showed a moderate to high level of confidence in their ability to withdraw staked ETH during volatile market conditions, suggesting that the majority (60.5%) of respondents were confident in their ability to withdraw during periods of volatility, of which a fairly large portion (21.1%) had concerns. These confidence levels indicate that while the majority feel safe about their ability to access funds, a large portion still harbor doubts about the security of withdrawal processes during turbulent market conditions.

Risk Management and Security

Institutions face several risks when staking Ethereum:

• Slashing: Slashing events may occur when misattestations or incorrect block proposals or double signing occurs. As a result, validators may lose part of their staked ETH for violating protocol rules, and staking institutions may incur significant financial loss. Validator downtime or inactivity also incurs penalties.While slashing is an irreversible consequence for malicious behavior, downtime penalties are generally smaller and recoverable.
• Liquidity: Should staked ETH be locked up or LSTs lack deep liquidity, institutions may have a difficult time to exit large positions quickly. Further, depegging of the market rate between ETH and LSTs may also lead to losses. 71.9% of our respondents were concerned with liquidity across all available sources.
• Regulatory uncertainty: Given the regulatory landscape globally is still evolving, institutions should monitor ongoing developments regarding classification of staking rewards by regulatory bodies, compliance requirements for running validator infrastructure, and the tax implications for staking income. More than half (58.9%) do not hesitate to stake their ETH due to lack of regulatory clarity, although 17.7% stay on the sidelines. 

Similarly, 55.9% do not participate in a liquid staking protocol due to a lack of regulatory clarity, with 20% hesitating. 

Overall, regulations impact ETH staking provider selections for 39.4% of respondents, where 24.3% strongly agree that they do not factor regulations into their ETH staking provider selections. It is possible that given the regulatory landscape for staking is still evolving, leading those institutions to focus on other operational risks they deem more critical. 

• Operational: More than 90% of respondents were extremely/very familiar or somewhat familiar with ETH staking withdrawal processes, underscoring institutional awareness that lags in withdrawal processes can lead to large LST price divergences should withdrawals be limited. However, our respondents were again split on their confidence in their ability to withdraw staked ETH in volatile staking conditions, nearly evenly split between confident, neutral, and not confident.

As evidenced by our survey, running validator infrastructure at scale requires high uptime and performance across multiple validators, safeguarding private keys, and patching software against vulnerabilities. Operational challenges remained at the forefront of our respondents’ minds, and a wide variety of metrics used to monitor staking activities were dominated by APR and validator uptime followed by total rewards paid, attestation rates and liquidity.

*A number of survey respondents opted not to participate in this question due to proprietary and regulatory considerations

Internally-built monitoring tools produced by proprietary risk management systems, reports and dashboards provided by staking providers, and Dune were the most heavily cited tools institutions surveyed used to monitor staking operations.

*A number of survey respondents opted not to participate in this question due to proprietary and regulatory considerations

Further, respondents were split in how important achieving above-average staking returns vs. a benchmark were to them.

The respondent pool remained split on their decisions to participate in LSTs or not, with 44.4% citing regulatory and compliance concerns. 

Several asset managers mentioned holding custody of LSTs to be an issue and the risk and cognitive effort versus the reward to be imbalance. One respondent mentioned: “We hold PoS tokens but are unsophisticated. We don't know where to begin to tackle/think about staking, yield, etc. Our team is small. We want to do it in a regulatory approved way and also limit risk.” with another respondent stating “LSTs aren’t staking. They’re DeFi masked as staking.”

Notably, the banks we surveyed mentioned that staking client-owned ETH held in custody with them would impact disclosures to clients and regulators, and introduce new requirements for capital implications and operational risks stemming from LST liquidity or lack thereof. 

Key Trends and Insights

We noted several key takeaways from the aggregate results of the survey. Our data emphasizes the importance of liquidity and regulatory clarity in shaping institutional participation in ETH staking, with a notable percentage remaining cautious. Overall, the findings of the report illustrate a complex yet promising landscape for institutional ETH staking growth as firms continue to navigate evolving market conditions: 

• Institutions are actively participating in ETH staking but with varying levels of exposure and methods.
• There's growing interest in advanced staking technologies like DVs and restaking, despite associated risks.
• Decentralization remains a significant concern, influencing provider selection.
• Liquidity is a crucial factor for institutional stakers, affecting their choice of LSTs and staking methods.
• Regulatory uncertainty resulted in a divided approach, with some institutions proceeding cautiously while others are less concerned.
• There's a high level of awareness about operational aspects and risks associated with staking among institutional participants.

Despite the risks and challenges associated with Ethereum staking, liquid staking tokens (LSTs), and restaking, these technologies offer compelling opportunities for institutional investors due to yield generation opportunities: Ethereum staking provides a relatively stable and predictable yield in a market where traditional fixed-income investments often offer low returns. The current annualized reward rate is near 3-4% for ETH staking and participants may obtain additional rewards from priority fees. Further, LSTs may improve capital efficiency by allowing staked ETH to be used in DeFi applications, allowing institutions to earn staking rewards while simultaneously leveraging their assets for additional yield opportunities.

Overall, the growing adoption of LSTs in DeFi protocols creates new market opportunities. As 39.3% of respondents discussed their use of LSTs in DeFi applications, this trend is likely to continue, potentially leading to increased liquidity and utility for these tokens. And, while regulatory concerns persist, comfort with the regulatory environment surrounding staking appears to be growing.

Finally, participating in staking aligns institutional investors with the long-term success of the Ethereum network, potentially offering both financial returns and strategic positioning in the blockchain ecosystem. While challenges remain, the potential benefits of staking, LSTs, and restaking appear to outweigh the risks for many institutions. As the ecosystem matures and the percentage of ETH staked meaningfully increases, these technologies are likely to become increasingly attractive components of institutional crypto strategies.

 

About the Sponsors:

The Obol Collective is the first and only Decentralised Validator Ecosystem. Together, we’re maximizing the security, opportunities, and rewards for all protocols and operators by providing technology, community, and on-ramps for validators.

The Liquid Collective is the trusted and secure staking standard: designed to meet the needs of enterprises, built and supported by a broad and dispersed collective of industry leaders, and launched in 2022. Liquid Collective’s liquid staking token is  LsETH, a liquid staking token representing staked ETH plus network rewards that is designed to meet the institutional requirements of enterprise ETH staking participants. Liquid Collective is stewarded by the Liquid Foundation and supported by members including software development company Alluvial, staking infrastructure providers Figment, Coinbase, Staked, and Blockdaemon, and others..

For more information, please visit https://obol.org and https://liquidcollective.io.