Forget the hype surrounding spot Ether ETFs—they were meant to revolutionize ETH investing, yet they come with a major catch: no staking allowed. Can you believe it? This seems to fly in the face of what every savvy investor desires!
Let’s face it: staking isn’t making its grand entrance into the world of spot Ethereum exchange-traded funds (ETFs) anytime soon. Why? Well, it seems U.S. regulators are still clutching their crypto-averse hearts, and until they loosen their grip, retail investors are left in a bind. For now, staking through regulated platforms like Coinbase or Gemini is your best bet.
In July, we finally saw spot ETH ETFs hit the U.S. exchanges—these funds were supposed to raise the bar for ETH investing! And in many ways, they’ve done just that: boasting high liquidity, low fees, and solid investor protections, funds like Grayscale Ethereum Mini Trust (ETH) and Franklin Templeton’s Franklin Ethereum ETF (EZET) are leading the charge.
But here’s the kicker: without staking, investors looking to supercharge their returns are stuck scratching their heads for alternatives.
Don’t Leave Your Ether on the Table!
Staking is the process where you lock up your ETH as collateral with a validator on Ethereum’s Beacon chain. In return, you reap ETH payouts from network fees and various rewards. However, there’s a caveat: the risk of “slashing”—essentially losing your ETH collateral if the validator goes rogue. But fear not; on reputable staking platforms, this risk is minimal. Right now, staking yields around 3.2% APR, with the potential for even higher returns through services like Flashbots.
Investing in ETH without staking? That’s akin to tossing away dividends from your stock portfolio! No wonder heavyweights like Fidelity, 21Shares, and Franklin Templeton have been clamoring for regulators to give the green light for staking in ETH ETFs. But alas, their pleas were met with a resounding “no” back in March. Out of the eight ETH ETFs currently trading in the U.S., none are dishing out staking rewards!
And regulators have their reasons for being cautious. Unlike typical index funds, spot ETH ETFs rely on a Grantor Trust structure, which is primarily tailored for passive commodity funds. Staking, by its very nature, requires active management—leading to concerns about compliance.
Another sticking point? Liquidity. With timelines for withdrawing staked ETH ranging from a few days to a week, promptly redeeming shares—a fundamental feature of ETFs—could become an impossibility. Navigating these complex waters isn’t easy, and it all hinges on regulators softening their stance. Don’t expect any breakthroughs until after the November elections.
Limited Choices Await
So, what are your options in this crypto conundrum? You could dive into one of the countless decentralized finance (DeFi) protocols dealing in liquid staking derivatives (LSDs). While they may appear diverse, they mostly follow the same model pioneered by Lido Finance, the reigning champion with over $30 billion in total value locked (TVL). In this setup, Lido users swap their spot ETH for stETH, a tokenized claim on Lido’s staking pool.
The DeFi ecosystem is a veritable playground for LSDs, offering everything from leveraged trading to restaking. But beware—the wild world of LSDs introduces an avalanche of risks for stakers, and they’re largely unregulated (especially in the U.S.). If things go south, you may find yourself with few options for recourse.
While Lido has rolled out a new institutional platform that merges composable stETH with infrastructure from Fireblocks and Taurus, it’s not exactly meant for the average investor looking to dip their toes in the crypto waters.
For a safer route, turn to regulated spot crypto exchanges like Coinbase and Gemini. While they don’t offer the same robust protections as ETFs, they’re still under significant oversight. Both are regulated Virtual Currency Businesses under the New York State Department of Financial Services (NYDFS), and they prioritize cybersecurity best practices—including insurance for accounts against certain exploits—and use professionally-managed validators for staking.
In 2022, Coinbase added Flashbots’ MEV-Boost, an open-source middleware designed to optimize transaction ordering for maximum rewards. Coinbase boasts that no user has ever lost crypto due to staking on its platform, and along with Gemini, promises to reimburse users for slashing losses due to errant validator behavior.
When it comes to fees, the differences between Coinbase and Gemini are noteworthy. Both platforms take a commission from staking rewards, but Coinbase typically claims 25% of ETH rewards and 35% for altcoins like Polygon and Solana. On the other hand, Gemini only takes a modest 15% cut. (As always, do your own research and assess whether staking aligns with your investment goals!)
In the end, investors deserve to bask in the benefits of ETFs while reaping the rewards of staking. Until then, we’re left navigating stopgap measures. The good news? The frigid regulatory climate in America is beginning to thaw. It won’t be long before ETH ETF issuers find a way forward!