Educational Guide
on Staking with ETPs

As blockchain technology develops, the way networks agree on valid transactions, known as a consensus mechanism, is evolving. Proof of Stake networks such as Ethereum allow participants to “stake” (lock up) their tokens to help validate transactions and secure the network. In return, they earn rewards. Those who stake act as “validators” are responsible for checking transactions and adding new “blocks” (bundles of transactions) to the blockchain, which is a permanent digital ledger.

Staking has become an important feature of the digital asset ecosystem because it allows investors to earn additional returns while supporting the network. It is often compared to earning dividends from shares, but with a key difference: participants must actively contribute to the network's operation, and poor or dishonest behaviour can, in some blockchain systems such as Ethereum, but not all such as Solana, result in penalties, known as “slashing,” where some or all of the staked assets are lost.

For investors, staking can enhance returns, for example, combining price gains with staking rewards, or help cushion losses if prices fall. Rewards are typically paid in the same token, increasing the investor's holdings over time, and can be reinvested (“restaked”) to compound returns, similar to dividend reinvestment in traditional finance.

How do Staking Exchange Traded Products (ETPs) work?

Staking ETPs are designed to offer an exchange-traded way for investors seeking exposure to the price movement of a cryptoasset, and additionally to potential staking rewards that may accumulate within the ETP.

1. The issuer “stakes” the underlying assets of specific ETPs on selected platforms managed by professional, institutional-grade staking providers. In all cases, the private keys for these staked assets remain segregated and held in cold storage, which are offline digital wallets designed to prevent hacking, at regulated custodians.
2. The staking provider stakes the assets on behalf of the ETP, which are used to secure the network and generate returns.
3. Staking rewards are reinvested into the ETP daily, adding to the ETP's performance by increasing its underlying cryptocurrency entitlement.

While Staking ETPs may reduce certain operational complexities compared to direct staking, it is important to note that crypto ETPs carry their own risks and structural considerations and may not be suitable for all investors. Returns are also not guaranteed.

Comparing Staking and Non-Staking ETPs

Staking and non-staking ETPs differ primarily in how they seek to generate returns, their cost dynamics, and the investor experience.

Return profile

Staking ETPs aim to track the spot performance of the underlying cryptoasset while additionally incorporating staking rewards. These rewards may be partially or fully accrued within the product, which can contribute to an enhanced total return compared to non-staking ETPs that only reflect the price performance of the underlying asset. Note: taking rewards are variable and not guaranteed.

Cost and efficiency considerations

Staking ETP issuers may use staking rewards to offset product costs or improve overall efficiency for investors. As a result, total cost of ownership can differ between staking and non-staking ETPs. Investors should therefore consider both fees and potential reward participation when comparing products. The total expense ratio, fee structure, and the extent to which staking rewards are passed on to investors are among the factors disclosed by issuers in product documentation.

Liquidity and accessibility

Both staking and non-staking ETPs are typically traded on regulated stock exchanges and offer daily liquidity. Importantly, staking ETPs are structured so that investors are not directly exposed to the operational complexities of staking, such as lock-up periods or technical requirements. Trading and settlement remain aligned with standard securities market practices.

The different kinds of Staking ETPs

Staking ETPs share many structural similarities with other exchange-traded products. Core characteristics such as the total expense ratio (TER), custodians, listing venue, and overall ETP framework are often comparable across issuers. However, they may differ in several operational aspects, particularly how much of the investors ETH is staked and the proportion of staking rewards distributed to investors, tracking error, and execution methods from differences in market ecosystem participants, including brokers, market makers, and authorised participants.

There are differences, however, among the various products, and investors should do appropriate due diligence among providers to understand how staking rewards are shared.

Key questions to ask:

1. How much of the staking reward goes to investors and how much goes to the ETF issuer and/or staking provider?
2. Are the daily rewards earned by investors disclosed by the ETF issuer?
3. Are the daily changes to the crypto entitlement disclosed by the ETF issuers?
4. Are there any other hidden risks or costs?

ETP issuers typically retain a portion of the gross staking rewards as a staking service fee. This fee is used to cover the operational costs associated with staking, including validator services, custody, infrastructure, and ongoing management of the staking process.

Staking rewards are generally accrued on a continuous basis and reflected within the ETP, typically through an increase in the cryptocurrency entitlement per unit over time. The effective staking rate is variable and depends on factors such as network conditions, protocol-specific reward mechanisms, validator performance, and overall market dynamics.

Risks of Staking ETPs

Staking rewards are not guaranteed and may fluctuate over time. Actual outcomes can differ due to protocol rules, validator participation, network performance, market volatility, and transaction fee dynamics. Staking involves risks, including potential loss of staked assets and/or rewards as a result of slashing events, penalties, smart contract vulnerabilities, protocol-level risks, or operational failures. Investors may lose part or all of their capital invested.

Entry and Exit queues

Some blockchains have "exit queues" that limit how quickly a given amount of staked assets can be unstaked by validators. Ethereum, for instance, has a dynamic queue that limits how many validators can enter or exit per epoch (~6.4 minutes). An epoch is a time period used by the network to organise validator activity. If many validators attempt to exit at once, a queue forms and withdrawal times can extend to several weeks. Importantly, validators waiting in the exit queue continue to earn staking rewards because they remain part of the active validator set. Rewards only stop once the validator exits, after which there is an additional withdrawal delay of ~256 epochs (~27 hours) before the ETH becomes withdrawable.

For staking ETPs, this creates both liquidity and return considerations. While digital tokens in the exit queue still earn yield, it cannot be immediately redeemed. To manage this, many ETP issuers maintain a liquidity buffer, leaving a portion of the digital token unstaked so investor redemptions can be met without waiting for the full unstaking cycle (a waiting period required before staked assets can be withdrawn).

Liquidity Considerations

Staked assets can generally be withdrawn; however, depending on the underlying protocol, an unbonding or waiting period may apply before the assets are fully accessible. This period can range from immediate availability to several weeks, although in most cases it does not exceed one month.

To ensure continuous liquidity and seamless tradability during stock exchange trading hours, ETP issuers and managers have developed proprietary liquidity-bridging mechanisms. These processes are designed to effectively manage the liquidity requirements of the product, designed to support secondary market tradability (i.e. on the stock exchange) under normal market conditions, though liquidity may be reduced during periods of significant market stress. In parallel, creations and redemptions in the primary market (handled by authorised participants) can typically be executed within one to two business days, without exposing investors to counterparty risk.

Importantly, these liquidity-bridging arrangements are supported by established participants in traditional financial markets, ensuring a robust and reliable operational framework.

Slashing risk

An error in confirming a transaction or violating protocol rules can result in a penalty called “slashing,” which means some of the staking rewards (or in some case the original staked assets) are lost. Despite staking platforms' efforts to avoid errors and incurring slashing penalties, such issues can occur because of operational aspects of the staking process. Staking ETPs often reduce the risk of slashing by employing professional institutional staking platforms whose sole purpose is to stake assets and be able to cope with those operational challenges.

Staking platform risk

Staking ETPs use established staking providers that try to mitigate slashing using a range of measures such as third-party insurance and on-chain bonds. However, exceptions may exist where slashing risk is not entirely covered.

Reliance on a staking platform creates a dependency on a third party for a core function of the ETP. If a staking provider experiences an operational failure, a security breach, insolvency, or is subject to regulatory action, staked assets may be temporarily inaccessible, subject to delays in recovery, or partially or fully lost.

Price and Market Volatility

The market price of crypto assets and the ETPs that track them can fluctuate significantly and unpredictably. Investors are exposed to the price movements of the underlying asset, which may result in substantial losses, including losing entire capital invested. Broader market movements, including macro-economic events, changes in market sentiment, and shifts in trading liquidity, can materially affect the value of the ETP independently of any staking activity or reward accrual.

Secondary Market Liquidity

The tradability of a staking ETP on a secondary market depends on market depth, available trading volumes, and the continuous presence of market makers. In periods of heightened market stress or reduced activity, bid-ask spreads may widen and trading volumes may decline, which can affect an investor's ability to execute transactions at expected prices.

Custody and Cyber Risk

The underlying assets of a staking ETP are held by regulated custodians using institutional-grade arrangements, including cold storage. Despite these safeguards, digital assets may be exposed to cyber threats, including hacking, compromise of custody infrastructure, or losses arising from operational failures in the custody chain.

Regulatory Risk

Crypto assets and the regulatory frameworks governing them are subject to ongoing change. Changes in applicable laws, regulations, or regulatory interpretations across relevant jurisdictions may affect the structure, operation, or value of staking ETPs. Investors should be aware that the regulatory environment for crypto assets and crypto ETPs continues to evolve and that future regulatory developments could have an adverse effect on the product.

Conclusion

Staking ETPs provide access to staking mechanisms through a regulated and accessible investment structure, offering exposure to staking rewards without the operational complexity of managing validators directly. While staking can enhance total returns through yield and reinvestment effects, investors should remain mindful of operational, liquidity, and protocol-related risks. As the staking segment continues to expand within the broader crypto market, it is likely to play an increasingly prominent role in digital asset investment frameworks.