Standard & Poor’s Rating: Integration of Ethereum Spot ETF Collateralization May Lead to Concentration Risk in Collateralization

The Block cited a S&P analysis report, where analysts Andrew O’Neill and Alexandre Birry pointed out that the introduction of Ethereum ETFs with “staking functionality” could significantly change the concentration of Ethereum validators as the asset size grows.

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Introduction of Staking in Ethereum ETFs: Will it lead to concentration?
S&P: Issuers are unlikely to choose Lido staking
Is S&P overthinking?

Introduction of Staking in Ethereum ETFs: Will it lead to concentration?
Using Bitcoin ETFs as an example, analysts noted that Coinbase serves as the custodian for 8 out of 11 Bitcoin ETF issuers, and it is also designated as the staking institution for 4 Ethereum staking ETFs outside of the United States.

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Analysts stated that only the emergence of new large custodial institutions could allow ETF issuers to distribute ETH for staking to different institutions, reducing the risk of concentration (possibly referring to Coinbase’s staking market share). Issuers such as Ark Invest and Franklin Templeton have already been in negotiations with regulatory institutions regarding staking features.

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S&P: Issuers are unlikely to choose Lido staking
Lido, a liquidity staking protocol, is currently the largest Ethereum validator, followed by Coinbase. S&P analysts believe that ETF issuers are unlikely to choose decentralized protocols like Lido, and instead, they may opt for custodial institutions. JPMorgan analysts have also recently warned of the concentration risk of Ethereum staking, stating that Lido, as the largest validator, may experience single point failures, become a target for attacks, or intentionally monopolize and strengthen the Lido protocol itself.

Is S&P overthinking?
However, according to Bitcoin Treasuries data, all Bitcoin-related ETF products collectively hold 876,000 BTC, accounting for only about 4.17% of Bitcoin’s circulating supply. So, considering the lower attractiveness and trading volume of Ethereum ETFs, how much ETH would be locked in circulation? And would it significantly change the staking ecosystem of Ethereum and lead to concentration?

Perhaps, instead of worrying about the increasing staking market share of institutions like Coinbase, it would be better to address the dominant position of Lido. This has been a question raised by Ethereum developers, and even Ethereum’s founder Vitalik Buterin, suggesting limiting the share of a single validator entity through transaction fees and other means.

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Lido holds over 30% of the liquid staking market! Does Ethereum’s 22% validation limit really necessary?
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Further reading
LRT Battle Update: ether.fi, Puffer Finance, Kelp DAO in the top three, what’s the story behind staking and restaking?
2023 DeFi Protocol Revenue Rankings: Maker and Lido Take Top Spots