Staking can modernize the Ethereum ETF

Before diving into the crux of this op-ed, let’s be clear: The vision outlined here recognizes the pragmatic approach ETF issuers are currently taking.

Initial Ethereum ETFs will be “plain vanilla” in structure and simply track the spot price of Ethereum as a first iteration. That said, just as the equity ETF market has evolved to offer a plethora of sophisticated products beyond simple price tracking offerings, so too must the Ethereum ETF space.

With that understanding, a particular vision emerges — one where, just as an investor in an equity ETF demands a pro-rata dividend, an Ethereum investor assertively seeks out staking rewards. To omit such rewards is akin to denying oneself a full, comprehensive return on investment.

Staking is Ethereum’s beating heart. It is the mechanism that rewards any ETH holder for bonding their holdings to validators, who then propose and attest to new blocks on the Ethereum blockchain, and in return are rewarded with newly minted Ethereum as well as a portion of the transaction fees in the block.

To put it plainly, staking is the modern-day operating system for Ethereum. And therefore staking must play a role in an ideal Ethereum ETF.

As an example, a fund with a balance of 9,600 ETH (approx. $15 million) could earn an additional 32 ETH on a monthly basis by staking. This not only enhances the fund’s revenue, but also contributes to Ethereum’s network security. Staking ensures validators are actively participating and making the network more resilient against potential attacks.

Incorporating staking rewards also gives investors a fuller experience of Ethereum ownership. These rewards can potentially provide enhanced returns over time when compared to solely tracking Ethereum’s price performance, as has historically been the case.

Staking rewards can offer a unique avenue for fund managers. They can be innovative in compensating investors, either by directly distributing the rewards pro-rata to investors like a dividend, or by reducing management fees and adding staking rewards to the fund’s total allocation, thus increasing the net asset value (NAV) for each investor. This creates a win-win scenario for both the fund and the investor.

Why staking matters

Since the Merge in 2022, Ethereum’s supply has been on a decline. A portion of the transaction fees paid by Ethereum users is burned, the amount of which is usually higher than the new supply issuance. This deflationary nature makes ETH scarcer by the day, increasing its inherent value.

An ETF that stakes and captures new issuance might, in essence, be capturing an increasingly valuable asset.

A staking-centric approach reinforces Ethereum’s network. As more ETH is staked and more validators join the network, the cost to attack Ethereum rises exponentially, fostering a more secure environment for transactions and smart contracts.

Staking is not without its challenges. The dynamic unbonding period of Ethereum means that once staked, the assets aren’t immediately liquid. To address this, an Ethereum ETF could strategically stake only 50% of its holdings.

Furthermore, by incorporating a liquid staking protocol which adheres to KYC/AML norms, the ETF could allocate another 30% — ensuring the requirements of institutional investors are met without compromising liquidity.

Read more from our opinion section: DeFi has a reputation problem

Liquid staking is a mechanism where users stake their crypto assets — in this case, ETH — and receive a token representing their staked amount in return. These tokens can then be traded, sold or used in other decentralized finance (DeFi) protocols, essentially making them a liquid counterpart to an otherwise locked asset.

It’s essential that institutional investors look for protocols who fulfill KYC/AML requirements. The remaining 20% could be maintained in spot ETH, offering additional immediate liquidity.

As Ethereum ETFs gain momentum, their success will hinge on delivering returns while addressing liquidity concerns.

An intelligent combination of staking platforms and liquid staking protocols can be the bridge between these two worlds, ensuring Ethereum investors get the complete value they deserve, analogous to the dividends stock investors have come to expect. This vision paves the way for an Ethereum ETF that truly resonates with the modern investor’s needs.

For informational and advertising purposes only. The views and opinions expressed are those of the authors but not necessarily those of MarketVector Indexes GmbH or Figment. The information herein is being provided to you for general informational purposes only. It is not intended to be, nor should it be relied upon as legal, business, or investment advice. MarketVector Indexes GmbH and Figment undertakes no obligation to update the information herein.

Josh Deems is Institutional Business Development Lead at Figment, leading efforts to bridge the gap between traditional finance and proof-of-stake services. With over eight years of experience in the “traditional finance meets digital assets” industry, Josh has played a pivotal role in shaping the landscape of digital asset adoption. As a founding employee at Fidelity Digital Assets, the industry’s largest initiative from a traditional institution, he successfully secured billions of dollars in assets under custody. Josh also contributed his insights at State Street, where he was a key member of the Emerging Technology Center, driving innovation through research on early blockchain protocols and digital asset services. As part of the investment team at Stillmark Ventures, Josh showcased his acumen in raising capital and conducting in-depth analyses of startups in the Bitcoin ecosystem, supporting their growth and success. Josh holds a Bachelor of Business Administration (BBA) from George Washington University and is based in Boston, MA.

Martin Leinweber works as the Digital Asset Product Strategist at MarketVector Indexes (“MarketVector”) providing thought leadership in an emerging asset class. His role encompasses product development, research, and communication with the client base of MarketVector. Before joining MarketVector, he worked as a Portfolio Manager for equities, fixed-income, and alternative investments. Martin was responsible for the management of active funds for institutional investors such as insurance companies, pension funds, and sovereign wealth funds at the leading German quantitative asset manager Quoniam. Previously, he held various positions at one of Germany’s largest asset managers, MEAG, the asset manager of Munich Re and ERGO. Among other things, he contributed his expertise and international experience to the establishment of a joint venture with the largest Chinese insurance company PICC in Shanghai and Beijing. Martin is co-author of “Asset-Allokation mit Kryptoassets. Das Handbuch “(Wiley Finance, 2021). It’s the first handbook about integrating digital assets into traditional portfolios. He has a Master of Economics from the University of Hohenheim and is a CFA Charter holder.

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