Ethereum is experiencing a prolonged period of growing pains. Its price remains under pressure, on-chain activity has significantly declined, and its spot ETFs continue to see capital outflows. These trends are gradually eroding market confidence in its growth potential. Against this backdrop, recent changes in the U.S. regulatory environment have prompted several ETF issuers to submit proposals for Ethereum staking ETFs to the SEC. For an asset currently lacking clear demand catalysts, this development is seen by the market as a potential key variable that could help Ethereum break out of its slump.
Severe ETF Outflows and the Potential of Staking Approval
The persistent outflow of funds from Ethereum spot ETFs is further dampening market sentiment. According to data from SoSoValue, while the U.S. Ethereum spot ETFs saw a cumulative net inflow of approximately $160 million in January and February of this year, March witnessed net outflows exceeding $400 million. This resulted in a net outflow of nearly $240 million year-to-date. In contrast, Bitcoin spot ETFs, despite also experiencing significant outflows in recent months, still maintain a net inflow of over $790 million for the year, with the net outflow in March shrinking by 74.9% compared to February.
Robert Mitchnick, Head of Digital Assets at BlackRock, believes that approved staking could represent a "quantum leap" for Ethereum ETFs. He recently stated that demand for Ethereum ETFs has been relatively subdued since their launch last July, but this could change if certain regulatory hurdles are resolved. There is a widespread perception that the success of Ethereum ETFs has been "underwhelming" compared to the explosive growth of Bitcoin-tracking funds. Although he considers this a "misconception," the inability of these funds to generate staking yields might be a limiting factor. ETFs are highly attractive instruments, but for ETH today, an ETF without staking is incomplete. Staking yield is a crucial component for generating investment returns in this space. Solving this isn't particularly straightforward; it's not as simple as a new administration giving the green light. There are numerous complex challenges to overcome. If these hurdles are cleared, we could see a leap in activity surrounding these ETF products.
Since February, multiple issuers, including 21Shares, Grayscale, Fidelity, Bitwise, and Franklin, have submitted proposals for staking within their Ethereum ETFs. 21Shares was the earliest to file such an application, which was officially accepted by the SEC on February 20. According to the SEC's approval process, the agency must make a preliminary decision within 45 days of receiving a 19b-4 filing, deciding whether to accept, reject, or delay the proposal. Counting from February 12, the preliminary decision deadline for 21Shares' Ethereum ETF staking application is March 29. As this falls on a weekend, the decision might be announced on the next business day, March 31. A final ruling is required within a maximum of 240 days, expected by October 9.
The market perceives the introduction of staking functionality for Ethereum ETFs as having multiple potential advantages. In terms of investment returns, the current annualized yield for Ethereum staking is approximately 3.12%. Compared to Bitcoin spot ETFs, which rely solely on price appreciation, Ethereum ETFs could generate additional yield through staking. This feature could be particularly attractive to institutional investors and potentially reverse the current weak demand. Regarding price support, staking locks up ETH, reducing the circulating supply and alleviating sell-side pressure, which could push the price of ETH higher. Dune Analytics data shows that as of March 24, the total amount of ETH staked on the Beacon Chain exceeded 34.199 million ETH, representing 27.85% of the total supply. If ETFs join the staking ecosystem, this percentage would increase further. For network security, ETF participation in staking would increase the number of validators on the Ethereum network, enhancing its decentralization and mitigating community concerns about the centralization risks associated with liquid staking protocols like Lido. Dune data indicates that, as of March 24, the liquid staking protocol Lido alone accounts for 27.28% of all Ethereum staked.
However, due to considerations for operational simplicity and regulatory compliance, the staking design of Ethereum spot ETFs might diminish their appeal to institutional investors. Taking the staking functionality application filed by 21Shares as an example, the staking process would be managed by custodian Coinbase using a "point-and-click staking" model. This involves a simplified interface to stake the ETH held by the ETF directly, without transferring assets to third-party protocols (like Lido or Rocket Pool), thereby reducing security risks associated with asset transfers. Furthermore, all staking rewards generated would belong to the ETF trust as revenue for the issuer, rather than being distributed directly to investors. According to Dune data, LSD (Liquid Staking Derivative) platforms like Lido and ether.fi remain the mainstream choice for ETH staking, compared to centralized exchanges like Coinbase and Binance. Based on available information, no Ethereum spot ETF issuer has explicitly committed to sharing staking rewards directly with investors. However, with potential U.S. regulatory easing and increasing market competition, the introduction of such a mechanism in the future cannot be ruled out.
Moreover, Ethereum spot ETFs face challenges regarding staking efficiency. Ethereum's staking entry and exit mechanisms are subject to strict limits (a maximum of 8 validators can enter and 16 can exit per epoch, with an epoch generated every 6.4 minutes). This restricts the flexibility of ETFs, particularly during periods of high market volatility, where investors' inability to exit promptly could exacerbate selling pressure. For example, the current total ETH held by U.S. Ethereum spot ETFs is valued at approximately $6.77 billion. At an ETH price of around $2,064, this equates to about 3.28 million ETH. The time required to stake this entire amount would be approximately 57.69 days, while the exit time would be around 28.47 days. This queuing mechanism cannot meet investor demands for agility, and liquid staking platforms that circumvent these mechanisms are excluded from the proposed ETF staking model.
The upcoming Pectra upgrade (EIP-7251) aims to increase the maximum effective balance per validator from 32 ETH to 2048 ETH, significantly improving staking efficiency. This would reduce the queue times for entering and exiting staking and lower technical barriers. However, in the latest 153rd Ethereum Core Developers Consensus (ACDC) call, developers decided to postpone setting a mainnet launch date for Pectra, potentially pushing it back to after May.
Therefore, issues like reward distribution and efficiency are more critical factors affecting the demand for Ethereum spot ETFs than the mere approval of staking functionality.
Persistent Weak On-Chain Activity: Can ETF Staking Solve Ecosystem Challenges?
Even if Ethereum spot ETFs introduce staking, their impact on circulating supply and market sentiment is likely to be limited. They are unlikely to fundamentally reverse the competitive pressures and growth bottlenecks facing the Ethereum ecosystem. Currently, persistently low on-chain activity, the分流效应 (diversion effect) of Layer 2s (L2s), and challenges from other high-performance public blockchains are all weakening Ethereum's market dominance.
From the perspective of ETF staking impact, Ethereum's current staking rate is approximately 27.78%. The total ETH held by U.S. Ethereum spot ETFs represents about 2.84% of the total supply. Even if all these ETFs participated in staking, the staking rate would only increase to around 30.62%, a mere 2.84% increase. This minor change is unlikely to exert significant upward pressure on the price of ETH.
In comparison, the staking rates of other Proof-of-Stake (PoS) competitors are much higher than Ethereum's. For instance, Sui has a staking rate of 77.13%, Aptos 75.83%, and Solana 64.39%. While Ethereum has room for staking growth, the capital scale and staking potential of ETFs are unlikely to constitute a dominant buying force in the market. The symbolic significance of staking functionality may outweigh its practical effect.
The continued decline in on-chain activity data further highlights the fatigue within the Ethereum ecosystem. According to The Block data, as of March 22, the amount of ETH burned from transaction fees on the Ethereum network dropped to 53.07 ETH, approximately $106,000, hitting a record low. Data from Ultrasound.money shows that the annualized ETH supply growth rate over the past 7 days was 0.76%. Furthermore, the number of active addresses, transaction volume, and transaction count on the Ethereum network have all declined in recent weeks, indicating a reduction in the ecosystem's vitality.
Simultaneously, Ethereum had its worst-ever Q1 performance this year. Coinglass data shows that Ethereum experienced its most dismal start to a year in recent history in Q1 2025, marking the first time it posted negative returns for three consecutive months: January: -1.28% (historical average return: +20.63%, median: +31.92%); February: -31.95% (historical average return: +1.68%, historical median: +9.96%).
Ethereum's challenges stem from multiple structural issues. For example, while L2s like Arbitrum and Optimism have significantly reduced transaction costs through Rollup technology, they have also分流ed (diverted) transaction volume away from the mainnet. Transactions on these L2s now exceed those on the mainnet, leading to a decline in both mainnet Gas fees and ETH burn. More critically, the transaction fees generated on L2s largely remain within their own ecosystems (e.g., Optimism's OP token economy) rather than flowing back to ETH. Additionally, Ethereum's market share is being eroded by other public blockchains like Solana, which demonstrate stronger competitiveness in high-performance application scenarios.
Standard Chartered also revised its year-end 2025 price target for ETH down from $10,000 to $4,000 in a recent report, outlining several key judgments: L2 scaling diminishes ETH market cap: L2s originally intended to enhance Ethereum's scalability (like Coinbase's Base) are estimated to have already eroded $50 billion in market capitalization. The ETH/BTC ratio is expected to continue declining. While $90 billion in growth is anticipated in the future, and ETH might maintain its 80% security market share, the Ethereum Foundation would need to adopt more aggressive commercial strategies (such as taxing L2s), which is considered unlikely.
In summary, although Ethereum ETF staking could influence ETH supply and holder returns to some extent, it cannot directly address core challenges such as ecosystem competition, L2 diversion, or weak market sentiment. Ethereum still needs to seek deeper breakthroughs in both technology and narrative. 👉 Explore more strategies for navigating the crypto market
Frequently Asked Questions
What is Ethereum staking?
Ethereum staking involves locking up ETH to help secure the Ethereum network's Proof-of-Stake consensus mechanism. In return, stakers receive rewards, similar to earning interest. It's a way to participate in network operations and earn a yield on holdings.
How would staking work in an Ethereum ETF?
If approved, the ETF issuer (through a custodian like Coinbase) would stake a portion of the fund's ETH holdings. The rewards generated would typically be treated as income for the fund. Current proposals suggest these rewards would increase the fund's net asset value (NAV) rather than be distributed directly to shareholders as yield payments.
Why are Ethereum ETFs seeing outflows compared to Bitcoin ETFs?
Several factors contribute to this, including weaker relative price performance of ETH, a lack of immediate staking rewards within the ETFs, and stronger market narratives and institutional demand currently surrounding Bitcoin, especially after its ETF approvals.
What is the Pectra upgrade, and how does it help staking?
The Pectra upgrade is a planned hard fork for Ethereum. A key feature, EIP-7251, would increase the maximum effective balance per validator from 32 ETH to 2048 ETH. This improves capital efficiency for large stakers (like ETFs), reduces the time needed to enter or exit staking queues, and lowers operational complexity.
Can ETF staking solve Ethereum's scalability issues?
No, ETF staking primarily addresses yield generation for investors and network security. Scalability issues are tackled through separate technological developments, primarily Layer 2 scaling solutions like Rollups (Arbitrum, Optimism) and future upgrades like DankSharding, which are part of Ethereum's long-term roadmap.
What are the risks associated with staking in an ETF?
Risks include potential smart contract bugs (though custodial staking may mitigate this), slashing penalties for validator misbehavior (borne by the fund), and the illiquidity risk associated with the time required to unstake ETH, which could be problematic during periods of extreme market volatility.