The Emerging Divide in Ethereum ETFs and ETPs: Staked vs. Unstaked Exposure

The landscape of institutional access to Ethereum (ETH) is undergoing a significant transformation, with the advent of exchange-traded funds (ETFs) and exchange-traded products (ETPs) designed to provide regulated exposure to the second-largest cryptocurrency. As these investment vehicles gain traction, a critical divergence is materializing between products that capture the inherent staking rewards of the Ethereum network and those that forgo them. This distinction is poised to redefine what constitutes "full" ETH exposure for institutional investors and influence the competitive dynamics among product issuers.

The Staking Imperative: A New Pillar of ETH Exposure

Ethereum’s transition to a Proof-of-Stake (PoS) consensus mechanism in September 2022, famously known as "The Merge," fundamentally altered its economic model. Instead of relying on energy-intensive mining, network security is now maintained by validators who "stake" their ETH as collateral. In return for contributing to network security and transaction validation, these stakers earn rewards, which currently represent a substantial yield on their ETH holdings. Data from Dune Analytics indicates that over 30% of the total ETH supply, amounting to more than 36 million ETH (valued at over $120 billion at current market prices), is currently staked across the network. This significant proportion underscores the economic importance of staking rewards, which many institutions are beginning to view not as an optional bonus, but as an integral component of comprehensive ETH exposure.

For asset managers and institutional investors, the ability to generate yield on underlying assets is a core tenet of portfolio management. Omitting staking rewards from an ETH investment product means leaving a material source of potential return on the table. As staking participation continues to grow and its economic impact becomes more pronounced, the disparity in returns between staked and unstaked ETH positions becomes increasingly difficult for ETP issuers to ignore. This creates a compelling competitive imperative: products that can seamlessly integrate staking rewards are likely to attract more capital, offering a more complete and potentially more attractive value proposition to discerning institutional clients.

A Timeline of Institutional Staking Integration

The journey towards integrating staking into regulated financial products has seen several key milestones:

• September 2022: The Merge. Ethereum successfully transitions to Proof-of-Stake, activating staking rewards for validators.
• April 2023: Shanghai/Capella Upgrade. This crucial network upgrade enables ETH validators to withdraw their staked ETH and accumulated rewards, significantly de-risking the staking process and making it more appealing for institutional participation.
• October 2025: VanEck Files for Staked ETH ETF. VanEck, a prominent asset manager, files a preliminary prospectus with the U.S. Securities and Exchange Commission (SEC) for a proposed U.S. stETH ETF. This move signals a strong intent to bring staking-enabled ETH products to the highly scrutinized American market, despite the SEC’s cautious stance on crypto ETPs.
• December 2025: WisdomTree Launches stETH-Backed ETP in Europe. European markets, often more forward-leaning in crypto regulation, saw the launch of WisdomTree’s 100% stETH-backed European ETP. This product, available on exchanges like Xetra, SIX Swiss Exchange, and Euronext, represents a tangible implementation of a liquid staking solution within a publicly traded wrapper. Its launch demonstrates the viability and market demand for such products in a regulated environment.

These developments highlight a clear trend: the question is no longer if staking belongs in regulated ETH wrappers, but rather how it should be implemented to best serve the needs of exchange-traded products.

Native Staking: Operational Complexities for ETPs

While native staking offers direct participation in Ethereum’s consensus mechanism, it presents significant structural challenges when applied to the operational requirements of an ETF or ETP. Exchange-traded products demand:

1. Daily Pricing and Valuation: Accurate, real-time pricing is fundamental for ETPs to allow investors to trade near the underlying net asset value.
2. Reliable Liquidity: ETPs must be able to create and redeem shares efficiently to maintain price stability and accommodate investor flows. This requires immediate access to the underlying assets.
3. Custody Controls and Security: Robust custody solutions are paramount for institutional-grade products, ensuring asset safety and regulatory compliance.
4. Operational Predictability and Simplicity: Issuers need straightforward, predictable processes to manage the fund, minimizing operational overhead and potential points of failure.

Native staking often conflicts with these requirements. When ETH is staked natively, it is locked into validator contracts. While withdrawals are now enabled, the process involves variable delays. New ETH must pass through a validator entry queue, and exiting requires navigating a withdrawal queue. These queues can fluctuate significantly based on network demand and activity. For instance, in early March 2026, Ethereum’s validator queue exhibited an entry queue of approximately 57 days, an exit queue of about 1.5 days, and an additional sweep delay of around 8 days. Such variability and potential illiquidity are problematic for ETPs, which rely on the ability to swiftly acquire or divest underlying assets to manage creations and redemptions.

For an ETF or ETP issuer considering native staking, several complex approaches might be considered, none without adding significant operational overhead:

• Maintaining a buffer of unstaked ETH: To manage redemptions without waiting for withdrawals, an issuer might hold a portion of the fund’s assets in unstaked ETH. This, however, reduces the overall staking yield for the product.
• Utilizing derivatives or futures: To hedge against queue delays or manage liquidity, an issuer could employ complex derivative strategies, adding cost and counterparty risk.
• Pre-funding validator entries/exits: Attempting to anticipate fund flows and pre-emptively manage validator entries and exits introduces significant operational complexity and the risk of misjudging market demand.

While these strategies might make native staking "workable" for some institutions seeking direct validator control and a specific risk profile, they are inherently less suited to the demands of an exchange-traded product that prioritizes liquidity, reliable pricing, and operational simplicity above all else. Market participants and industry observers consistently emphasize that the friction associated with native staking’s variable liquidity makes it a less-than-ideal foundation for a mass-market investment product.

Liquid Staking: An Infrastructure Alternative for ETPs

Liquid staking emerges as a powerful alternative that addresses many of the structural constraints posed by native staking for ETPs. The core innovation of liquid staking is its ability to tokenize staked ETH, making the staked position and its associated rewards liquid and transferable.

Protocols like Lido allow users to stake their ETH and, in return, receive a liquid staking token (LST), such as stETH. This token represents the underlying staked ETH plus any accumulated staking rewards. Crucially, stETH is not locked; it is a transferable token that can be traded on secondary markets, used as collateral in decentralized finance (DeFi) applications, or integrated into various financial workflows.

This architecture offers several compelling advantages for ETF and ETP issuers:

• Enhanced Liquidity: Instead of waiting for validator queues, ETP issuers and their authorized participants (APs) can source or divest stETH directly from secondary markets. This allows creations and redemptions to rely on existing market liquidity, significantly reducing delays and improving operational efficiency.
• Reduced Operational Burden: Issuers no longer need to manage the complexities of running and maintaining validators, dealing with entry/exit queues, or handling validator-level operational risks. The liquid staking protocol handles these intricate details, effectively abstracting away the operational burden of native staking.
• Predictable Pricing: Because stETH is traded on liquid markets, it offers continuous price discovery, which is essential for accurate daily net asset value (NAV) calculations for ETPs.
• Capital Efficiency: The ability to instantly access and trade staked positions means capital is not tied up in queues, improving overall capital efficiency for the fund.

In essence, liquid staking transforms the illiquid, operationally complex act of native staking into a fungible, tradable token that aligns seamlessly with the requirements of exchange-traded products.

stETH: A Benchmark for Institutional-Grade Liquid Staking

Not all liquid staking tokens are created equal, especially when considering the rigorous demands of institutional investment products. For an LST to be suitable for an ETF or ETP, it must demonstrate:

• Scale: Sufficient market size and adoption to ensure deep liquidity and broad acceptance.
• Liquidity: Robust trading volumes and tight bid-ask spreads across multiple venues.
• Custody Support: Integration with institutional-grade custodians.
• Reliable Pricing: Consistent and transparent pricing mechanisms.
• Robust Market Infrastructure: Broad integration across trading, lending, and collateral platforms.
• Security and Decentralization: A strong track record of security audits, a diverse validator set, and resilient protocol architecture.

stETH, as the leading liquid staking token, currently meets these criteria comprehensively. It represents more than 9 million ETH staked, translating to over $30 billion in total value locked (TVL) and constituting nearly one-quarter of all ETH staked on the network. This sheer scale is foundational to its utility for institutional products.

Furthermore, stETH boasts exceptional liquidity and market integration. It is widely traded across centralized exchanges (CEXs) and decentralized exchanges (DEXs), with approximately $100 million of liquidity available within 2% depth and over $2 billion in weekly trading volume. Its utility extends beyond trading, with roughly $10 billion used as collateral across various DeFi protocols and centralized lending platforms. This extensive integration into the broader crypto financial ecosystem ensures that stETH is not just a token, but a deeply embedded financial primitive that can be reliably leveraged by ETP issuers and market makers.

For institutional workflows, stETH offers critical advantages:

• Institutional Custody: Support for stETH is live across leading institutional custody providers such as Fireblocks, Copper, and BitGo, addressing a primary concern for regulated entities.
• Security Audits: Over $4 million has been invested in security audits of the Lido protocol, demonstrating a strong commitment to robustness and reliability.
• Validator Diversification: The Lido protocol utilizes more than 650 independent node operators to run validators, providing a high degree of decentralization and mitigating single points of failure, which is crucial for risk management in institutional products.

This combination of scale, secondary market depth, institutional custody access, and robust operational history positions stETH as a de facto standard for liquid staking solutions seeking integration into the traditional financial system. Industry analysis suggests that such comprehensive infrastructure is indispensable for any underlying asset supporting an exchange-traded product.

The Next Generation of ETH Wrappers: A Bifurcated Future

The trajectory of ETH ETFs and ETPs suggests a future market that will likely bifurcate into two primary categories: those offering pure spot ETH exposure, and those providing staking-enabled ETH exposure. For the latter, liquid staking solutions like stETH are structurally better aligned with the operational requirements of an exchange-traded product than native staking.

While native staking retains its importance for use cases demanding direct validator control, especially for large, sophisticated institutions capable of managing the associated operational complexities, it is less suited for mass-market investment vehicles built around daily tradability, scalable distribution, reliable pricing, and operational simplicity.

The European market has already demonstrated the viability of this architecture, with WisdomTree’s stETH-backed ETP serving as a prime example of a publicly traded product successfully implementing a liquid staking model. In the United States, similar structures are still navigating the proposal stage, awaiting regulatory clarity and approval from bodies like the SEC, which has historically expressed concerns about liquidity, custody, and market manipulation in the crypto space. However, the filings by asset managers like VanEck signal a strong industry belief in the eventual approval and market demand for such products.

For ETF and ETP issuers, the choice of infrastructure for staked ETH products will be a pivotal strategic decision. It will directly influence the product’s liquidity profile, operational efficiency, cost structure, and ultimately, its long-term competitiveness in an increasingly crowded market. On these critical measures, stETH’s established scale, deep secondary market liquidity, extensive institutional custody support, and mature market infrastructure offer a compelling foundation for the next generation of staking-enabled Ethereum investment products. The evolution of these products marks a significant step in the maturation of digital asset integration into mainstream finance, promising more comprehensive and capital-efficient access to the Ethereum ecosystem for investors worldwide.

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Past performance is not indicative of future results, and outcomes may vary.

Participation in blockchain networks, staking, or DeFi activities involves risks, including smart contract risk, market volatility, liquidity constraints, and potential loss of assets. Readers should conduct their own research and seek independent professional advice before engaging with any protocol or product mentioned.