A year after the Merge, institutional ETH adoption ‘still forthcoming’

A year after Ethereum switched its consensus model to proof-of-stake, several barriers limiting institutional adoption of ether staking remain.

Staking involves depositing 32 ETH to activate validator software. As validators process transactions and add new blocks to the blockchain, they earn rewards.

Though various metrics signal clear growth in the segment, hurdles such as regulatory uncertainty and the macroeconomic environment are keeping many institutions on the sidelines, industry participants told Blockworks.

The number of Ethereum network validators has increased from roughly 400,000 to nearly 800,000 since the so-called Merge, according to data from staking company Attestant.

About 210,000 of those validators were added to the network after the Shapella upgrade in April — an event that allowed stakers with locked-up ether to retrieve their deposits from the network’s smart contract.

There was roughly 29.4 million ETH deposited in the Beacon smart contract, Compass Point Research & Trading analysts said in a Sept. 8 research note. This accounts for nearly a quarter of ether’s circulating supply.

Lido has the largest percentage of staked ETH, with a roughly 29% share, the data shows. Centralized exchanges hold 20% of staked ether, with Coinbase accounting for about half of that.

The percentage of ETH supply that is staked could move to between 30% and 40%, Compass Point analysts added, noting that is more in line with other proof-of-stake chains.

Ben Dean, director of digital assets at WisdomTree in Europe, told Blockworks in the days leading up to the Merge that Ethereum’s switch to proof-of-stake “completely changes the investment case for ether.”

A February survey by Nickel Digital Asset Management found that 77% of institutions believed the Merge would increase ether adoption. Roughly 40% of respondents said they expected ETH’s price to be at least $2,000 by the end of 2023.

Ether’s price was about $1,620 at 9 am ET on Friday — up 35% year to date but down 11% in the last month.

Hurdles in the way of broader adoption

More than 40% of the institutions that hold ether with Anchorage Digital also stake the ETH on its crypto platform, according to a company spokesperson. Anchorage has seen the amount of ETH staked on its platform increase by four times since the end of 2022.

But sweeping adoption remains to be seen, as demand for staking ETH remains the highest among crypto funds, Anchorage Digital co-founder Diogo Mónica said.

“Many crypto-native players approach Ethereum with a long-term horizon, so actively participating by staking is the next logical step,” he told Blockworks in an email.

Some venture capital funds — especially those with redemption requirements — do not stake all of their ETH due to liquidity concerns, Mónica added. Some corporations that hold ether are waiting for more tax guidance before fully jumping into staking, he noted.

“Institutions are also watching the continued evolution of the Ethereum ecosystem,” Mónica explained. “All eyes are on sharding as the next major upgrade, which would significantly increase the scalability of the network.”

Regulatory uncertainty is another hurdle, said Brian Mosoff, CEO of Ether Capital.

While Ether Capital is actively staking 97% of its treasury, they are in the clear minority.

The bulk of post-Merge ether adoption is coming from retail investors through exchanges and individual at-home stakers, rather than institutions, Mosoff added.

“Infrastructure in the crypto space has improved, but there is still a need for regulatory clarification, especially in the United States,” he said. “Questions remain about how these services should be offered and whether staking providers will require specific registrations.”

Crypto exchange Bitstamp is set to end ether staking for US customers later this month, citing “current regulatory dynamics” in the country.

The Securities and Exchange Commission targeted the staking services of Coinbase and Binance in June lawsuits against the companies. Kraken stopped its staking services in February as part of a settlement with the regulator.

Aside from regulatory uncertainty, another factor affecting ETH staking demand is the macroeconomic environment, Mosoff noted. The rise in interest rates has led some traditional finance investors to consider safer or more familiar investments like Treasury bills, he added.

“Mainstream education is still necessary to help people understand that Ethereum exposure should not be solely motivated by yield,” Mosoff said. “Those interested in staking yield must first recognize the importance of having ETH exposure in their portfolio as a long-term growth asset before appreciating the benefits of a 3% to 5% risk-free rate.”

Despite some of the current barriers around demand, staking highlights ether’s “productivity as an asset,” he noted.

“Will we see more people be able to participate in sequencing and security on layer-2?” Mosoff said. “What about EigenLayer providing security for specific apps or other chains?”

He added: “We are only beginning to scratch the surface of a post-Merge world.”

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