Original Title: "Ethereum's Future Staking Market"

Original Author: Ronan

Original Translation: Deep Tide TechFlow

This article focuses on the overlooked but crucial factors for the decentralization of Ethereum's staking layer. This includes the impact and returns of Ethereum ETFs, challenges faced by decentralization, institutional fund flow scale, and Lido.

Ethereum ETF to Follow Bitcoin ETF Approval

People have begun to turn their attention to spot Ethereum ETFs, and their confidence in the approval of spot Bitcoin ETFs stems from the SEC's approval of futures-based products, but the rejection of spot-based products is clearly inconsistent. Blackrock applied for an Ethereum spot ETF on November 9, further fueling this attention.

Considering the existence of CME Ether futures market and multiple futures-based Ether ETFs, the approved logic seems to be quite transferable. Even for the regulatory approach to Ether in the United States, it is non-securities based. The possibility of Gensler or future regulatory agencies changing their handling before is unlikely for many reasons.

Indeed, the SEC recently excluded Ether from legislation that lists securities for Coinbase.

Reward-based Ethereum ETF is a natural extension of non-staked Ethereum ETF

Before the approval of the Ethereum ETF in spot trading, issuers will scramble to find an implementation plan that allows them to earn Ethereum staking rewards. ETH with rewards is better than ETH without rewards, which may attract new investors who have been watching from the sidelines.

The issuers will compete to become the first market participants to launch staking vote rewards. Initially, the issuers seemed to be running their validators irrationally, considering the knowledge barriers, business model challenges of node operation, and increased regulatory risks.

In order to enter the market first, the issuer must propose a solution that complies with the existing regulatory framework and can be approved as soon as possible. Therefore, the easiest way is for the ETF issuer to reach a contractual agreement with a third-party centralized pledge voting provider, including a lending agreement, which charges a small fee.

This is already the solution adopted by 21Share's Ethereum ETF AETH for collateral. 21shares holds its ETH in custody with Coinbase Custody and may lend the underlying ETH to Coinbase Cloud, Blockdameon, and Figment.

AETH has attracted a net asset value of 240.77 million US dollars, equivalent to 121,400 ETH, all of which have been pledged to centralized providers. These inflows are completely unrelated to the yield, as a fixed percentage will be programmatically pledged regardless of the yield.

Reasonably assuming that US ETF issuers may enter into lending agreements similar to 21Shares AETH. This programmatic flow of funds may drive centralized providers to gain a larger market share relative to decentralized providers, as many custodians offer vertically integrated staking and voting products (such as Coinbase Prime → Coinbase Cloud) or have existing service level agreements (SLAs) with centralized staking and voting providers (such as Figment). As a specific example, considering that ARK is partnering with 21shares, it is reasonable to assume that they will use the same provider as the AETH product.

机构质押投票将转向流动性替代方案，给以太坊去中心化带来新的挑战

Institutional pledge voting will shift to liquidity substitution plans, bringing new challenges to decentralization of Ethereum

Smart institutions may seek out providers outside of ETF packaging for pledge voting, which have more favorable cost structures and greater utility. Decentralized protocols such as Lido have already opened up assets to existing institutional clients in various custody, QC, and regulatory environments. As decentralized protocols, they offer a consistent experience and institutional-level security, but are open to all market participants who wish to pledge any amount of ETH.

On the other hand, some new projects are positioning themselves specifically for institutional needs. Companies like Liquid Collective are building a "liquidity staking solution designed specifically for institutional compliance needs." Institutions can mint lsETH, a token staked by one of three centralized providers (Coinbase, Figment, and Staked) who also manage the project. There are two aspects to this idea:

Liquidity staking is a better product than regular staking for voting; you retain the currency properties of your ETH and most of the rewards.

Organizations must pledge with KYC/AML compliant providers, otherwise they may face civil and criminal liability.

The first point is quite obvious.

Liquidity Staking Tokens (LSTs) can be used as collateral throughout DeFi, serving as the underlying asset in liquidity pools and avoiding withdrawal queue times.

In addition, ETF and other institutional products benefit from liquidity, allowing for fund redemptions to be managed in less than a day. For illiquid funds, a portion of the unpledged ETH is typically held in custody for management. This carries the risk of a large-scale run on withdrawals leading to a de facto bank run, as well as the unlocking of the remaining ETH and a drag on reward rates during normal operation.

Having a liquid staking token will make it possible to manage redemptions more smoothly and increase the percentage of the fund that can be staked at any given time. To make this a reality, it is clear that the liquid staking token must be liquid. Simply providing the token is not enough if there is not enough liquidity available. Currently, the only liquid staking token with any substantial on-chain and off-chain liquidity used by institutions is Lido's stETH.

The second point is not very clear. Regulated institutions usually need to fulfill a series of obligations to reduce the risk or possibility of money laundering or crime. For this reason, KYC/AML obligations exist to maintain the auditability and traceability of fund flows between institutions and their clients. In addition, "qualified custodians" may have higher requirements. That is to say, qualified custodians and institutions should be able to fulfill their KYC/AML obligations without compromising asset selection, whether it is for LST tokens or staking providers.

Even if the staking service provider establishes a contractual relationship with the owner or custodian of the funds, I do not believe that regulatory agencies will create new KYC/AML compliance obligations for Ethereum staking. This is because I believe that regulatory agencies will come to understand over time that Ethereum staking is a special type of computational activity that does not match the characteristics of "capital flow" in traditional or financial senses. LST holders and custodians should be able to perform KYC/AML on any assets within their purview and fulfill their compliance obligations to reduce the risk of money laundering or terrorist financing.

Various urgent challenges facing the development of the Ethereum blockchain have been raised through the concentration of staking within centralized entities. Overall, the possibility of various interferences with the blockchain becomes increasingly likely under different levels of staking shares:

Block reorganization attack.The final confirmation delay.Fork selection.The content you provided is:

胁迫

Coercion

The first two types of attacks can disrupt the normal operation of the blockchain, and Ethereum has built-in some incentive mechanisms to prevent attackers from attempting to do so, such as gradually diluting the attacker's rewards and staking balance. However, when the market share of a single node operator reaches 33% or higher, even if disrupting network operations becomes expensive, the participant may still begin to delay final confirmation. At higher levels of market share, such as 50%, attackers can effectively fork the blockchain and choose the fork they "approve" of. At 67% or higher, the blockchain actually becomes a delegated database completely controlled by a single party.

It is objectively successful in attracting new holders of Ether, as the Lido smart contract has guided over 30% of all staked ETH, and stETH has nearly 300,000 holders.

It has objectively succeeded in limiting the growth of individual node operators, as they all see Lido as a successful channel for attracting new Ethereum staking, but cannot grow their individual market share within Lido beyond other node operators.

Although the Ethereum base layer is designed to be "ungoverned" or have very limited fork selection governance, an intermediary layer with one or more decentralized protocols can fill the necessary gaps that Ethereum cannot fill. Jon Charbonneau describes it this way:

Especially, LST governance can manage the additional subjective incentives required for decentralized operators (for example, different modules may receive different rates). A free market economy will not lead to independent validators or even staking distribution in the long run. The Ethereum core protocol is largely built on the idea that it should be objective and impartial whenever possible. However, subjective management and incentives will be required to achieve the combination of decentralized operators.

Although minimal governance is often desirable, LST may still require some minimal form of governance. Some procedures are necessary to match the demand for staking with the needs of running validators. LST governance will always need to manage the objective functions of the operator composition (such as the target of stake distribution, the weight of different modules, geographical targets, etc.). This fine-tuning may not occur frequently, but this high-level goal setting is crucial for monitoring and maintaining the decentralization of the operator composition. "

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