Bankless: The Ethereum Staking Landscape is Undergoing Major Changes

Author: Jack Inabinet, Source: Bankless, Translation: Shaw Jinse Finance

Cryptocurrency staking is gradually penetrating the traditional financial sector through spot exchange-traded funds (ETFs). Long hindered by unclear securities regulations, this breakthrough will ultimately bring native crypto yields to the masses.

Grayscale took the lead in early October by launching Ethereum staking, becoming the first company to enable staking on its spot Ethereum ETF. Two months later, the asset manager had staked more than 70% of its $4.7 billion worth of Ethereum under management. Meanwhile, BlackRock also joined the race by submitting a potential “iShares Staked Ethereum ETF” trust application, taking the first regulatory step.

Ethereum ETFs now hold $18 billion in assets, accounting for over 5% of ETH’s market cap, and control almost as much ETH as the network’s largest staking provider and largest single ETH holder, Lido.

Today, we explore the winner-takes-all landscape of the crypto staking market, assess who stands to benefit most from ETF staking demand, and analyze the concentration risks these staking inflows might create.

Winner-Takes-All Market

Two core dynamics in crypto staking naturally push the system toward winner-takes-all outcomes, potentially resulting in a single provider dominating the market.

Liquidity Advantage

For a given crypto asset, the largest staking provider can offer superior liquidity to its stakers—a crucial factor for many price-sensitive institutional holders, including ETF managers who must handle redemptions.

For example, staking with Lido (which controls 24% of ETH staked) gives access to stETH, a fungible deposit receipt that can be instantly exchanged at market price or redeemed 1:1 for ETH in a few days. Whether exchanging or redeeming, stETH holders typically achieve better execution than elsewhere thanks to deeper liquidity and a larger validator base—factors that can improve redemption prices and speed.

Economies of Scale

Currently, Lido charges a 10% commission on ETH staking rewards, lower than any other well-known staking service provider.

Though Lido has never lowered commissions as part of a low-cost strategy, top staking providers can attract more stakers by reducing fees, increasing profits at lower costs than competitors while users pursue higher returns.

Traditional finance offers many sharp examples of this dynamic. Ironically, Vanguard, a late starter in crypto ETF trading, cemented its pioneer status in the 1980s by launching low-cost passive index investment products. These products outperformed the then-prevalent high-fee active strategies.

Vanguard’s success is evident in the data—today, the asset management industry is dominated by low-cost passive index funds. The chart below clearly shows the close relationship between lower fees and larger assets under management.

Who Will Win?

While Lido is currently the leader in Ethereum staking, the status quo could be disrupted as more Ethereum staking ETFs enter the market.

Coinbase still lags far behind the leading Ethereum staking providers, with a staking share only one-fourth of Lido’s, accounting for 6.3% of total staked ETH. However, it remains the undisputed giant in institutional crypto custody.

As of June, Coinbase custodied 81% of all U.S. crypto ETF holdings.

Though it’s logical to think Lido could further expand its staking dominance by leveraging its liquidity advantage and economies of scale to incentivize ETF managers to use Lido, Coinbase may be better positioned to attract these flows.

In traditional finance, relationships are everything.

ETF managers need a trusted custodial staking partner—one with a solid reputation, credibility to withstand regulatory scrutiny, audited assurances, and, in the worst case, the ability to be subpoenaed in court.

Coinbase has spent years building relationships on Wall Street, successfully becoming the default custodian for institutional crypto along the way. So, when these institutions look for staking partners, Coinbase may be their natural first choice.

Concentration Risk

If BlackRock, which manages the largest Ethereum ETF, stakes ETH through Coinbase—where it owns a 7% stake—Coinbase could quickly surpass Lido as the main Ethereum staking provider.

As Coinbase’s staking product receives ETF inflows, available liquidity for redemptions will naturally increase. Additionally, Coinbase can consolidate staking market dominance by lowering staking commissions, providing an economic incentive for more stakers to switch to Coinbase in pursuit of better returns.

On Ethereum and many other proof-of-stake (PoS) blockchains, there are three key thresholds for staking dominance. As a staking group crosses each threshold, its influence over the chain increases along with staking rewards. In turn, these higher yields help solidify the leader’s position, discourage delegation elsewhere, and accelerate concentration.

No matter which operator dominates, these systemic concentration risks exist. But if Coinbase crosses these thresholds, the outcome is particularly troubling—in effect, handing all power over a blockchain designed for decentralization to a single centralized company accountable only to its shareholders.