This op-ed was originally published in CoinDesk on October 4, 2023. You can read the original article here.
Picture this: a groundbreaking moment in the world of cryptocurrencies, where the lines between traditional finance and digital assets blur. It's not just a distant dream; it's happening now. The recent news that Cathie Wood's ARK Invest filed for the first spot Ethereum (ETH) Exchange-Traded Fund ETF in the United States marks a pivotal turning point.
It signifies not only the opening of doors for institutional investors but also the dawn of institutional liquid staking.
Why is there excitement over an ETH ETF? The answer lies in the resounding demand from investors seeking to integrate digital assets into their portfolios. While investors are hungry for these opportunities, current offerings fall short. U.S. investors eyeing a spot bitcoin ETF have to look beyond American shores. For instance, Grayscale's GBTC, has consistently traded at a 20% discount to its net asset value: when an investor purchases GBTC, they're not just buying bitcoin exposure; they're also navigating the complexities of liquidity in the crypto market—a daunting task.
The global demand for a spot ETH ETF becomes even more evident when you look at the thriving Exchange-Traded Product (ETP) markets in Canada and Europe, boasting a combined market size nearing $33 billion. This is nothing short of a seismic shift in the world of global finance.
Zooming out, we see macroeconomic forces at play with industry giants like Blackrock embracing crypto. Combine that with PayPal's push into the stablecoin arena, and the result is undeniable pressure on Congress and regulatory bodies like the SEC to create a viable framework for digital assets.
But where does liquid staking fit into this picture? Once the institutional floodgates open with a spot ETH ETF approval, there will be a scramble to participate. Simply holding ETH won't be enough; these institutions will pivot to staking, looking to give their investors a higher return on their ETF holdings (especially on a deflationary asset).
Enter liquid staking.
Once the floodgates of institutional investment open with the approval of a spot ETH ETF, institutions will be eager to participate.
This innovation in staking technology, which allows stakers to retain liquidity while participating in staking, will be the tool of choice for managing staked ETH, especially in light of ETFs' redemption periods. Typically, asset managers gravitate towards shorter redemption periods, aiming for a daily cadence if possible.
This preference stems from minimizing the net asset value discounts, avoiding liquidity challenges, and avoiding the operational burden of managing staking and unstaking. Given the period of time to withdraw staked ETH is variable (from 5 to more than 30 days), these managers will need a solution that offers the ability to process daily redemptions while providing their investors the benefit of higher returns.
Institutions will seek a solution through compliant and security-focused liquid staking tokens that offer liquidity, a diverse node operator set, and operational efficiency. The best way to manage staked ETH positions with shorter redemption periods is through a compliant liquid staking token.
Approving a spot ETH ETF isn't just likely; it's necessary in crypto's march to mainstream adoption. With the underpinnings of robust demand and the involvement of financial juggernauts, it's time for the regulators to take notice and approve ARK Invest's spot ETH ETF. As the tide of change surges, compliant liquid staking emerges as the linchpin for forward-thinking ETF providers. Will this be the catalyst for mainstream adoption of institutional liquid staking?
Matt Leisinger, is CPO and Co-Founder of Alluvial, the development company behind Liquid Collective. Matt boasts robust tech and business expertise with a track record in distributed systems design and product development. At Alluvial, he steers product strategy and supports Liquid Collective's development. Before Alluvial, Matt was Product Lead at Figment. Matt's early career was with TransMarket Group, evolving from Senior Software Engineer to Managing Director of Software, managing large teams and critical tech projects. Matt graduated from Purdue University with a B.S. in Computer Engineering in 2003. In 2012, Matt graduated with an M.S. in Computer Science from the University of Chicago.
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Any discussion of the risks contained herein should not be considered to be a disclosure of all risks or a complete discussion of the risks that are mentioned. The material contained herein is not and should not be construed as financial, legal, regulatory, tax, or accounting advice.