Institutional ETH staking survey report: Favor large, integrated platforms; Liquid staking is becoming more popular

Original title: Unlocking Institutional Ethereum Staking: A Survey of Industry Leaders

Original author: Tricia Lin, Daniel Shapiro, Blockworks

Original translation: TechFlow

Main Takeaways

· The survey shows that most respondents (69.2%) are currently staking Ethereum (ETH), of which 78.8% are investment companies or asset management companies. This shows that institutional participation in staking ETH has reached a certain scale, mainly driven by returns and network security contributions.

· About 60.6% of respondents use third-party staking platforms, and they prefer large, integrated platforms. These platforms are able to solve problems such as low capital efficiency and technical complexity encountered when staking alone.

· Liquid Staking Tokens (LSTs) are becoming increasingly popular due to their ability to improve capital efficiency, keep staked ETH liquid, and be used in decentralized finance (DeFi) strategies. 52.6% of respondents hold LSTs, and 75.7% are willing to stake ETH through decentralized protocols.

· Distributed Validators (DVs) are becoming increasingly popular among institutional participants due to their enhanced security and fault tolerance. More than 61% of respondents expressed a willingness to pay a premium 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 earn 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 the staking behavior of institutional token holders, with a particular focus on the Ethereum ecosystem. Our main research goal is to shed light on the current state of institutional staking and explore the motivations and challenges faced by market participants. By collecting survey data from multiple types of institutional stakers (such as exchanges, custodians, investment firms, asset managers, wallet providers, and banks), we hope to provide valuable insights into the market for distributed validators and multi-validator models, allowing both new entrants and established participants to better understand the complexities of this rapidly evolving field.

The survey included 58 questions covering ETH staking, Liquid Staking Tokens (LSTs), and related topics. We used a variety of question formats, including multiple-choice questions, Likert scales, and open-ended questions, and allowed respondents to choose not to answer certain questions. The survey results showed:

· The majority of respondents (69.2%) are currently staking ETH.

· The majority of respondents are institutional players:

· 78.8% are investment firms or asset managers

· Of these institutions, approximately 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% fall into other categories

· Respondents demonstrated broad knowledge of staking economics and generally had a high self-perception of staking concepts and associated risks.

· Geographic diversity of respondents and node operators: Although specific locations were not provided, many respondents stressed the importance of geographic diversity among node operators.

Current ETH Staking Landscape

The landscape of ETH staking has changed significantly since the Ethereum network upgraded to Proof of Stake (PoS), an event known as The Merge. Notably, the number of validators and the total amount of ETH staked have been increasing. Currently, there are close to 1.1 million validators on the network, with 34.8 million ETH staked.

After The Merge, early ETH stakes were locked to ensure a smooth transition to PoS. Network participants will not be able to withdraw their ETH until after the Shanghai and Capella upgrades (collectively known as Shapella) in April 2023. After a short initial withdrawal period, the network observed a sustained net inflow of ETH staked. This suggests that demand for staked ETH remains strong.

To date, 28.9% of the total supply has been staked, resulting in a robust staking ecosystem with over $115 billion worth of tokens. This makes Ethereum the most staked network in USD terms, with a lot of potential for growth.

The staking ecosystem continues to expand as users pursue the rewards that come with participating in network validation. The annualized effective issuance yield is dynamic, decreasing as more ETH is staked, as explained in an earlier whitepaper, Bonds for the Internet, by Obol and Alluvial CEOs Collin Myers and Mara Schmiedt.

The staking reward rate is typically around 3%, but validators can also earn additional rewards through priority transaction fees, which increase during periods of heavy network activity.

To earn these rewards, one can choose to stake ETH as an independent validator or delegate ETH to a third-party staking service provider.

Independent stakers are required to deposit a minimum of 32 ETH to participate in network validation. This amount is designed to strike a balance between security, decentralization, and network efficiency. Currently, approximately 18.7% of network participants are independent stakers. Unidentified stakers are generally considered independent stakers.

Over time, independent staking has become less attractive for several reasons. First, there are very few people who can afford 32 ETH and have the technical ability to run an independent validator, which limits widespread independent participation.

Another important reason is the low capital efficiency of staked ETH. ETH locked in stake cannot be used for other financial activities in the DeFi ecosystem. This means that it is no longer possible to provide liquidity to various DeFi projects, nor can ETH be pledged to obtain loans. This creates an opportunity cost for independent stakers, who must also consider the dynamic reward rate for staked ETH to ensure that they receive the best risk-adjusted return.

These two issues have led to the rise of third-party staking platforms, which are mainly dominated by centralized exchanges and liquid staking protocols.

Staking platforms provide ETH holders with the opportunity to delegate ETH to other validators for staking in exchange for a fee. Although there are 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 said their company is currently staking ETH.

· 60.6% of respondents said they use a third-party staking platform.

· 48.6% of respondents prefer to stake ETH on comprehensive platforms (such as Coinbase, Binance, Kiln, etc.).

The main reasons why respondents chose a staking provider included:

· Reputation

· Variety of supported networks

· Price

· Easy onboarding

· Competitive fees

Expertise and scaling capabilities

Finally, respondents allocated the following percentage of their portfolio to ETH or staking ETH:

Liquid Staking Protocols

To address the challenges faced by independent staking, the third-party staking platform market has grown rapidly in the past few years. This growth is mainly due to breakthroughs in liquid staking technology.

Liquid staking refers to receiving users' ETH through a smart contract protocol, staking it, and returning a liquid staking token (LST) to the user as a certificate 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 redeem their LST for native ETH at any time, although there may be delays due to the implementation of Ethereum PoS withdrawal restrictions in the Cancun/Deneb upgrade. 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 usually consist of code deployed on the chain and a group of decentralized professional validators, which are usually selected through DAO governance. Validators may be selected based on a variety of factors including technical ability, security practices, reputation, geographic diversity, or hardware diversity. Users' ETH deposits are centrally managed and then distributed among the set of validators to reduce slashing risk and the potential for centralization.

Due to the popularity of liquid staking, many DeFi applications in the on-chain ecosystem have adopted liquid staking tokens, further enhancing their use value and liquidity. For example, many decentralized exchanges (DEXs) have adopted LSTs, allowing holders to immediately provide liquidity for their LSTs or redeem them for other tokens.

Due to the potential delays in withdrawals, the integration of decentralized exchanges (DEXs) is particularly important. While users can redeem their liquid staking tokens (LST) for ETH at any time, the price of LST may deviate from the price of ETH when the market is tight or liquidity demand is high. This is because of the redemption queue. Users who want immediate liquidity and are willing to redeem ETH at a discount on the DEX drive this price deviation. When the market is stable, the redemption queue is usually smaller.

When LST has enough liquidity and the price is able to align with ETH, it can be adopted by the DeFi money market, 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 can improve yields as users can earn additional yield by using LST in DeFi strategies while earning Ethereum PoS rewards.

Ultimately, LST increases accessibility to ETH staking, maximizes capital efficiency, and enables new yield-generating strategies.

The survey showed 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 are using LST.

Advanced Staking Technology

Distributed Validators (DVs)

Liquid staking protocols have found market fit in their existing form, attracting retail investors, DeFi users, and crypto funds. However, in order to attract significant institutional capital inflows, distributed validators (DVs) may need to be implemented.

DVs, pioneered by Obol, enhance the security, fault tolerance, and decentralization of staking networks. The core problem Obol solves is the risk of centralized points of failure in traditional staking configurations. For example, if a validator node goes offline due to hardware failure or software bug, it is subject to an offline penalty. In addition, validator keys may be copied and run simultaneously on two nodes, which leads to the risk of "double signing" of transactions, which in turn triggers slashing penalties. This is a significant risk for institutional participants who require high security and the assurance of delegated ETH staking.

Single-node validators present multiple issues and risks:

· There is no protection against machine failure.

· Active-passive redundancy is difficult to implement effectively. Configuration errors, software glitches, or lack of monitoring can lead to duplicate validation of the same validator key, leading to slashing penalties.

· Hot keys used by validators are vulnerable to attack.

· The scale of validator infrastructure can lead to client centralization, increasing the risk of association for end users.

Obol’s distributed validators address these issues through multi-node validation technology, enabling trust-minimized staking. By spreading the responsibilities of a validator across multiple nodes, this distributed validator setup can keep a “single” validator up and running even when a node in the cluster fails. 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 diversity in client software, hardware, and geography within the same validator, as each node can run different hardware and software configurations. Individual validators, as well as the network as a whole, can be highly diverse in these respects.

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 more for specialized features such as enhanced security, stability, decentralization, and fault tolerance.

Overall, awareness of distributed validators (DVs) is high, with only 2.6% stating that they are completely unfamiliar with the technology.

No respondents considered DVs to be a significant risk to their staking operations, while 5.6% considered them to be not risky at all.

These responses support the view that institutional capital allocators prefer DVs as the best option for staking.

Re-staking Potential and Risks

In addition to DVs, re-staking is an important technological innovation that brings new income opportunities to stakers. Re-staking allows validators to use their staked ETH or Liquid Staked Tokens (LST) to provide security support for multiple protocols at the same time, potentially earning additional returns.

However, this also comes with additional risks. Restaking assets is used to secure multiple protocols, where any single malicious action or operational error could result in slashing penalties and losses. Restaking also introduces other risks, including centralization of staking, protocol-level vulnerabilities, and network instability.

EigenLayer already supports Liquid Collectives’ LsETH. This will allow LsETH holders to earn protocol fees and rewards through the EigenLayer protocol while holding LsETH, and receive ETH network rewards.

Symbiotic has also provided support for LsETH holders, who can now earn additional protocol fees and rewards from the Symbiotic protocol by holding LsETH, while receiving ETH network rewards.

The survey results show that respondents are generally positive about restaking and have a strong understanding of its risks.

· 55.3% of respondents expressed interest in re-staking ETH.

· 74.4% of respondents said they understood the risks of re-staking.

Despite this, respondents generally believe that re-staking carries some 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 said they understand the risks of re-staking, this shows that people have a positive attitude towards re-staking. However, overall, people still believe that re-staking is inherently risky.

Decentralization and Network Health

Liquid Staking Tokens (LSTs) display characteristics of a “winner-takes-all” market due to strong network effects formed by multiple factors. As LSTs grow, they offer better liquidity, lower fees, and more integrations with decentralized finance (DeFi) protocols. This widespread adoption results in deeper liquidity pools, making the token more attractive for use in trading and other DeFi applications. Large LSTs also benefit from economies of scale: they attract more operators because they generate more fees. This in turn enhances security because there are more operators to allocate staking. Currently, over 40% of all ETH is staked by Lido and Coinbase.

Large LSTs may also benefit from better branding, which was cited as an important factor by respondents in the survey.

The survey further confirmed the concentration of third-party staking platforms: more than half of the respondents held stETH.

This situation has led 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 violates Ethereum's core decentralized principles, but also may bring security risks and censorship attacks to the network's consensus mechanism.

The survey showed that respondents are very concerned about the issue of centralization, with 78.4% expressing concerns about the concentration of validators and generally believing that the geographical location of node operators is very important when choosing a third-party staking platform. The survey results suggest that the market may be seeking more decentralized alternatives to the current market leaders.

Custody and Operational Practices

Most respondents (60%) use a qualified custodial service 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% being neutral, and 21% disagreeing or strongly disagreeing.

Respondents generally had a high level of awareness of client diversity, which is the use of different software to run Ethereum validators to reduce single points of failure, maintain decentralization, and optimize network performance. 50% of respondents said they were familiar with the concept, with 31.6% strongly agreeing. Only 2.6% were unfamiliar with client diversity. Overall, 81.58% of respondents understood the concept of client diversity.

Liquidity was considered a very important factor by respondents. On a scale of 1 to 10 (10 being the most important), the average rating for liquidity importance was 8.5, second only to the importance of protecting assets from loss (9.4). Clearly, liquidity is a key consideration for many institutional players in the ETH staking ecosystem. Additionally, 67% of respondents said that the source of liquidity is very important when choosing a Liquid Staking Token (LST), and they tend to choose decentralized exchanges such as Curve, Uniswap, Balancer, and PancakeSwap, as well as aggregators (such as Matcha) or on-chain exchange platforms (such as Curve, Uniswap, Cowswap).

Finally, respondents expressed moderate to high levels of confidence in their ability to withdraw staked ETH during periods of market volatility, with the majority (60.5%) confident in their ability to withdraw during periods of volatility, but 21.1% expressing some concerns. These confidence levels suggest that while most feel secure in their ability to withdraw funds, a significant portion still have concerns about the security of the withdrawal process during periods of market turmoil.

Risk Management and Security

Institutions face multiple risks when staking Ethereum:

· Slashing Mechanism: Slashing events may be triggered when a validator has an incorrect proof, an incorrect block proposal, or a double signature. This means that the validator will lose part of the staked ETH for violating the protocol rules, and the staking institution may also suffer significant financial losses. In addition, validators are penalized for 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 the Liquid Staking Token (LST) lacks sufficient liquidity, institutions may have difficulty quickly exiting large positions. In addition, fluctuations in the exchange rate between ETH and LST may also lead to losses. 71.9% of respondents expressed concerns about liquidity.

· Regulatory uncertainty: As the global regulatory environment is still changing, institutions need to pay attention to the latest developments on regulators' classification of staking rewards, 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.

Similarly, 55.9% of people do not participate in liquid staking protocols due to lack of regulatory clarity, and 20% are on the sidelines.

Overall, regulatory factors affect the decision-making of 39.4% of respondents when choosing an ETH staking service provider, of which 24.3% said they do not consider regulatory factors when making their choice. This may be because the regulatory framework for staking is still developing, causing these institutions to focus more on other operational risks that they consider more important.

· Operational risks: More than 90% of respondents said they are very familiar with the withdrawal process for ETH staking, which shows that institutions are aware that if the withdrawal process is delayed, it may cause large deviations in the LST price. However, respondents were mixed on their confidence in their ability to withdraw staked ETH in volatile market conditions, being almost evenly split between confident, neutral, and lacking confidence.

Our survey revealed that operating validator infrastructure at scale requires ensuring high uptime and performance of multiple validators while protecting private keys and promptly patching software vulnerabilities. Operational challenges have been a focus for respondents. Among the various metrics used when monitoring staking activity, annualized rate of return (APR) and validator uptime are 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 concerns

The most commonly used tools for monitoring staking operations by 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 concerns.

In addition, respondents were split on the importance of pursuing above-average staking returns versus targeting a benchmark.

Respondents were also split on the decision to participate in Liquid Staking Tokens (LST), with 44.4% expressing concerns about regulation and compliance.

Some asset managers mentioned that custody of holding LST was an issue due to the imbalance between risk and perceived input and reward. One respondent said: "We hold PoS tokens, but they are not mature enough. We don't know where to start processing or thinking about staking, yield, etc. Our team is small. We want to do it in compliance with regulatory requirements and limit risks." Another respondent believes: "LST is not staking. They are decentralized finance (DeFi) disguised as staking."

It is worth noting that the banks in the survey mentioned that staking ETH owned by customers and held by them will affect disclosure to customers and regulators, and introduce new capital requirements and operational risks that stem from the liquidity or lack of liquidity of LST.

Key Trends and Insights

From the survey results, we summarize several key points. The data shows that liquidity and regulatory transparency are crucial in influencing institutional participation in ETH staking, and many institutions remain cautious. Overall, the report reveals a complex but promising institutional ETH staking development environment as companies explore changing market conditions:

· Institutions are actively participating in ETH staking, but the extent and methods of participation vary.

· Despite the risks, there is growing interest in decentralized validation (DVs) and re-staking technologies.

· Decentralization remains an important consideration, influencing the choice of providers.

· Liquidity is a key concern for institutional stakers, influencing their choice of liquid stake tokens (LSTs) and staking methods.

· Due to regulatory uncertainty, institutions have adopted different strategies, with some choosing to proceed with caution and others less concerned.

· Institutional participants have a high level of awareness of the operations and risks of staking.

Despite the risks and challenges of Ethereum staking, liquid stake tokens (LSTs), and re-staking, these technologies provide attractive opportunities for institutional investors because they can generate returns. In a market where traditional fixed-income investments offer low returns, Ethereum staking provides a relatively stable and predictable return. Currently, ETH staking yields an annualized rate of return of approximately 3-4%, with participants potentially receiving additional rewards from priority fees. Additionally, LSTs improve capital efficiency by allowing staked ETH to be used in decentralized finance (DeFi) applications, allowing institutions to earn additional yield on their assets while earning staking rewards.

Overall, the widespread adoption of LSTs 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 remain, adaptability to the regulatory environment related to staking appears to be increasing.

Participating in staking enables institutional investors to align with the long-term development of the Ethereum network, potentially bringing not only financial returns but also strategic advantages in the blockchain ecosystem. While challenges remain, for many institutions, the potential benefits of staking, liquid staking tokens (LSTs), and re-staking appear to outweigh the risks. As the ecosystem matures and the percentage of ETH staked increases significantly, these technologies may become an increasingly attractive part of institutional crypto strategies.

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