Discussions about Ethereum exchange-traded funds (ETFs) have taken center stage, especially with expectations that a spot Ethereum ETF may be launched in the United States within the year.
Analysts at BitMEX recently weighed in on this issue, highlighting an important aspect that could impact the attractiveness of these ETFs to investors: their staking yield offerings.
According to analysts, ETH’s staking rewards offering presents both opportunities and challenges for constructing ETFs around digital assets.
Specifically, staking rewards refer to the revenue participants receive by depositing digital assets to support the operation and security of the blockchain network. These rewards are typically a portion of transaction fees, new coins generated through block rewards, or a combination thereof.
Ethereum staking return dilemma
The attractiveness of ETH spot ETFs to institutional investors and ETF buyers largely depends on “staking yields,” as pointed out by BitMEX Research analysts. They hypothesize that not including staking returns may weaken the attractiveness of spot ETH ETFs given the importance of these rewards in enhancing returns.
Analysts suggest that the price of ETH may lag Bitcoin in the long term if staking yields are not included in the ETF, despite the potential for stakers to earn higher returns through rewards. Analysts noted:
However, the staking system may make Ethereum less attractive or suitable for some ETF investors who are unable to stake. (…) At the same time, new money may be reluctant to invest in Ethereum ETFs. Knowing that they may get a worse deal than stakers and therefore lower returns, these investors may choose a Bitcoin ETF instead.
In particular, analysts also noted that Ethereum’s staking system poses unique challenges to setting up a spot ETH ETF due to the complexity of managing ETF redemptions along with ETH’s staking exit queue system.
The system requires stakers to go through two queues to get out. This includes a standard exit queue that limits daily withdrawals and a validator sweeping delay that adds waiting time.
For ETFs, managing daily outflows to these constraints could present operational hurdles, potentially impacting the fund’s liquidity and attractiveness to investors, according to analysts.
Analysts at BitMEX highlight that during periods of market volatility, waiting times for staking exits can become significantly longer, which could spell trouble for ETH staking ETFs in the future.
Navigating the Challenges
Despite the obstacles, there is a path that analysts have explored to circumvent the ETH ETF’s staking return problem.
One strategy highlighted by analysts and adopted by some ETH staking exchange-traded products (ETPs) in Europe is to stake only a portion of their holdings. This utilizes staking rewards while maintaining liquidity for redemptions. However, this approach inherently reduces potential yield.
The analyst noted:
Another idea we like is to avoid the Ethereum Stake ETF entirely and instead issue a stETH ETF. This completely resolves the redemption issue or transfers it to Lido.
So far, institutions like Ark Invest/21Shares and CoinShares have already ventured into offering Ethereum staking ETPs in Europe, while services like Figment Europe and Apex Group are ready to launch similar products on the SIX Swiss exchange, analysts say They pointed out:
In particular, the discourse around ETH ETFs and their inclusion of staking returns is unfolding against a backdrop of regulatory scrutiny, with the US Securities and Exchange Commission (SEC) taking a cautious approach to approving such products.
Analysts argue that final approval of an Ethereum ETF is inevitable but still a matter of timing given regulatory issues and the unique nature of Ethereum staking. Analysts said:
As with Bitcoin, courts could eventually force the SEC’s hand, and just as with Bitcoin, the SEC could be accused of hypocrisy for allowing an Ethereum futures ETF.
They also added:
Some argue that because Ethereum staking generates returns or stakers propose blocks, this makes Ethereum a ‘security’ and thus provides a basis for the SEC to reject the Ethereum ETF.
Featured image by Unsplash, chart by TradingView