Ethereum Staking Rate Swaps Market
Market Size
It is currently very difficult to estimate the size of the Ethereum staking rate swap market. Based on our research and engagement with various stakeholders, we believe that the current market for Ethereum staking rate swaps is barely nascent and is being developed along two distinct tracks - institutional and retail - each with different requirements and characteristics.
On the institutional side, the publicized OTC deals are most likely to have been short duration (3 months maximum) with low six figure digits nominals.
This could be driven by factors such as market development strategy
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Gauging actual market demand through small-scale transactions
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Testing counterparty appetite and engagement
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Evaluating inbound queries and market feedback
And, experimental testing phase
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Understanding and validating pricing models and risk management frameworks
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Testing operational workflows and settlement mechanisms
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Establishing trust and credibility in a nascent market by demonstrating successful execution and settlement of smaller trades before scaling up
In contrast, protocols like IPOR provide permissionless Ethereum staking rate swap markets on Ethereum Mainnet and Arbitrum, offering more standardized products like 28, 60, and 90-day swaps with up to 500x leverage, referencing their version of the Lido Staking Rate Index. IPOR’s approach emphasizes accessibility and transparency for DeFi users and providing immediate (albeit small) liquidity through automated market making, prioritizing accessibility, capital efficiency, and integration with existing DeFi protocols.
Figure 6 - IPOR stETH Swaps on Ethereum - Source: https://dune.com/ipor/ipor-swaps
Figure 6 shows that the notional values have been varying significantly over time, with some months seeing higher activity, and a peak in January 2024. After the initial spike in early 2024, the market activity generally declines but has been remaining active throughout the year, with smaller peaks occurring in March and July 2024.
Figure 7 - IPOR wstETH Swaps on Arbitrum - Source: https://dune.com/ipor/ipor-swaps
Overall, the Ethereum staking rate swaps market (institutional and retail) is still in its very early stages with relatively modest volumes, characteristic of a market that has not yet achieved consistent adoption and/or traction and regular trading activity.
Term structure
In traditional finance, there are key components that compose standardized term structures: official benchmark rates, fixed trading tenors, market makers providing regular quotes for these tenors, standardized ISDA documentation, deep liquidity across different maturities, and reliable price discovery mechanisms. However, the Ethereum staking rate swaps market currently lacks these fundamental elements.
There are no official nor widely accepted term structures for Ethereum staking rates, and no standardized tenors or market conventions have emerged. Most trading activity is limited to sporadic over-the-counter (OTC) transactions between sophisticated counterparties, with no price transparency or centralized nor decentralized reporting. The absence of established market makers has resulted in fragmented liquidity and inefficient price discovery. This nascent market’s immaturity is further highlighted by the lack of consensus on key parameters such as benchmark rate calculation methodologies.
However, recent initiatives are emerging to establish standardized term structures for Ethereum staking rates. For instance, Treehouse Labs is developing the Decentralized Offered Rates (DOR) consensus mechanism - a panel-driven rate submission system aimed at creating an Ethereum Staking Rate (ESR) Curve. This involves market participants like Selini Capital, a crypto-native trading firm, contributing research-based staking rate forecasts to help form reliable benchmarks for future Ethereum yields. The DOR framework represents a step toward market maturity, attempting to mirror traditional finance’s benchmark rate-setting mechanisms while adapting to DeFi’s unique characteristics.
In the absence of a term structure, term rates must be derived using instruments like Ethereum staking rate dated futures. One approach is through looking at data from Ethereum staking rate futures markets such as the one recently launched by Rho Protocol that allows trading of staking rate futures across various maturities. This enables the construction of a synthetic yield curve for pricing, risk management, and forecasting.
Another approach could be to consider stETH markets on Pendle protocol. One could argue that they provide valuable insights to help structure swaps with different maturities, aligning with desired exposure and duration management strategies.
Figure 8 - Source - https://app.pendle.finance/trade/markets?search=steth
Indeed, the variation in PT yields (e.g., 3.529% for 26 Dec 2024 vs. 4.576% for 30 Dec 2027) helps establish a staking rate yield curve for Ethereum. This yield curve is crucial for pricing swaps across different maturities and determining duration-specific returns.
The data from Pendle demonstrate how tokenized staking rate components (YT and PT) can provide a foundation for an Ethereum staking rate swap market. By using YT for floating yield exposure and PT for fixed-rate exposure, a structured staking rate swap market could emerge, offering stakeholders a way to hedge against or gain exposure to staking rate fluctuations on the Ethereum network.
Market Liquidity
A key concern consistently raised during our stakeholder engagements was the ease of entering and exiting Ethereum staking rate swap positions. Currently, for institutional participants and Lido operators, trades most likely would have to be executed through bilateral agreements, requiring manual counterparty discovery and negotiation. In discussions with prospective liquidity providers and market makers, they indicated that to make markets effectively, positions would need to reach minimum notionals in the double-digit millions (USD). Their indicated pricing suggests spreads of around 20 basis points for the entire duration of the trade (approximately 2 basis points daily for a 10-day period) as the current market rate. While these size requirements and spreads reflect the nascent state of the market, our understanding is that they are open to exploring arrangements where they could help cover initial liquidity provision costs for interested counterparties to help bootstrap market activity.
However, as mentioned previously, it does not seem that the current trades are meeting the nominal size requirements so participants looking to enter or exit positions must rely on bilateral negotiations with counterparties. This creates additional operational overhead and potentially longer execution timeframes, as each trade requires finding a matching counterparty, negotiating terms, and establishing necessary trading agreements. The lack of a deep centralized or decentralized liquidity pool or consistent market-making activity means that position management becomes more challenging. This situation is likely to persist until trading volumes increase substantially enough to attract dedicated market makers and support more efficient price discovery and liquidity provision.
Future Market Development
Our engagement with stakeholders surfaced a general lack of awareness about Ethereum staking rate swaps. For most participants interviewed, including sophisticated institutional players and Lido operators, this was their first exposure to the concept. While they quickly grasped the potential utility and mechanics given their familiarity with traditional interest rate swaps, the novelty of the product in the digital asset space was evident. This knowledge gap highlights the nascent state of the market and suggests significant educational and marketing efforts will be necessary to drive adoption. The limited awareness also explains the current modest trading volumes and sporadic activity, as many potential users are still in the process of understanding how these instruments could fit into their operations or investment strategies. This finding indicates that market development is not just constrained by liquidity limitations, but also by the need to build basic product awareness among key market participants.
Yet, as the most established proof-of-stake blockchain with the largest institutional adoption to date, Ethereum’s staking rate has the potential to become the benchmark “risk-free” rate for the entire digital asset space. This could mirror how LIBOR and then SOFR function in traditional markets, serving as a reference rate not only for DeFi applications but also for other blockchain networks (i.e offering higher staking yields to compensate for additional risk relative to Ethereum staking rate).
In fact, despite the lack of awareness, when presented with the concept, the feedback was overwhelmingly positive, with stakeholders expressing a clear interest in Ethereum staking rate swaps. Many viewed the potential for such products to meet their hedging, yield enhancement, risk management and fixed yield product development needs over the next 12-18 months as particularly promising. This initial positive feedback for the use cases signals that institutional participants and Lido operators are willing to explore and potentially adopt these products, paving the way for broader market engagement.
In that context, an Ethereum staking rate swaps market could continue to evolve, with staking rate swap becoming a valuable instrument in the digital asset space. As a result, driving further volume and liquidity as more participants recognize its utility. Moreover, institutional players could leverage these swaps as part of broader investment or product development strategies creating a more robust and mature ecosystem for staking-related financial products.
Now that we have provided some market context, the following section will address the outcomes of our research in assessing the demand for an Ethereum staking rate swap product
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using Lido stETH APR as a benchmark rate
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using stETH as collateral and settlement currency
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and managed as a smart derivative contract (SDC) using ERC-6123.
Lido stETH APR as an institutional benchmark
A consistent theme in our institutional stakeholder discussions was that the development of a robust Ethereum staking rate swaps market fundamentally depends on the establishment of standardized benchmarks. These institutions, drawing from their experience in traditional fixed income markets, emphasized that a reliable benchmark is crucial for market development as it provides a common reference point for pricing, risk management, and contract settlement. Their feedback highlighted specific requirements for what constitutes a credible benchmark.
From an institutional stakeholder’s perspective, there are three key considerations 1) Does the benchmark include MEV 2) What are other market participants adopting 3) Regulatory considerations.
With or Without MEV
An Ethereum staking rate benchmark designed to exclude MEV (Maximal Extractable Value) is likely to be more stable than the Lido stETH APR for several reasons. MEV rewards are inherently volatile because they depend on network conditions, such as transaction volume, gas fees, and the presence of arbitrage opportunities. These factors are highly variable, making MEV unpredictable and subject to sudden fluctuations. Since MEV introduces a highly variable component to the overall staking yield, excluding it would make the benchmark less sensitive to short-term market dynamics.
As an example, during the Yen Carry Trade Unwind, LIDO’s APR spiked from its typical range to 9.90%.
Figure 9 - LIDO ETH APR - Yen Carry Trade Unwind
For market participants involved in rate swaps, especially fixed-rate receivers, these sharp increases in the floating rate can result in substantial settlement payments.
For fixed-rate receivers, volatility introduces the risk of paying large, unforeseen settlements. In a high-volatility event, like the one observed during the Yen Carry Trade Unwind, the fixed-rate receiver might be locked into an unfavorable position where they must pay out significantly higher amounts than anticipated.
For this reason, some institutional stakeholders have clearly expressed the view that for institutional use, a more stable and predictable benchmark is preferred for risk management and yield forecasting.
Market Adoption
In our publication “A Primer: Ethereum Staking Rate Benchmarks” covering the emerging space of standardized measures for Ethereum staking rewards, including the CF ETH Staking Reward Rate (ESRR), the MarketVector™ Figment Ethereum Staking Reward Reference Rate (STKR), the Compass Staking Yield Reference Index Ethereum (STYETH), CoinDesk Indices Composite Ether Staking Rate (CESR) and Lido Ethereum APR but also the upcoming Decentralized Offered Rates (DOR) framework from Treehouse.
The availability of so many Ethereum staking rate benchmarks has implications in terms of competition, adoption, market positioning and market fragmentation. Due to the very nascent nature of the space, there is no evidence of market dominance . However, it is important to note that there have been many recent press releases related to the CoinDesk Indices Composite Ether Staking Rate (CESR) denoting a deliberate effort to establish CESR as a de-facto benchmark for Ethereum staking rate. In the future, it could be the case that the market will develop for multiple benchmarks providing different use cases. So far, no benchmark to rule them all yet but with CESR potentially emerging as a front-runner.
Regulatory Considerations
Serving as a benchmark for institutional derivative products comes with regulatory considerations and requirements. Additional transformations of the data may be required to ensure that the Lido stETH APR rate aligns with EU Benchmarks Regulation (BMR) and equivalent regulations in other jurisdictions, in order to be used as a reference rate. Although issued by a software protocol in a programmatic and automated manner, there may still be some regulatory uncertainty regarding the suitability of such reference rates for use in regulated financial derivative products, such as swaps, which merits further evaluation from a legal perspective.
stETH as collateral and settlement currency
stETH as collateral in DeFi
As per figure 10, 29.39% of the total stETH supply is currently supplied as collateral which indicates a high level of confidence in stETH as a collateral asset within the DeFi community. Also, a 11.19% increase over the past 6 months suggests that stETH’s appeal as a collateral asset has been growing, likely due to its liquid nature and staking rewards accrual.
Figure 10 - Source: https://dune.com/lido/wsteth-as-collateral (31.10.2024)
stETH, unlike stablecoins like USDC, accrues staking rewards over time, which adds an additional rewards component. While this offers a potential rewards advantage, it also introduces complexity because the collateral value is subject to both the price of ETH and the staking rewards rate. This makes Ethereum staking generally harder to manage for USD-denominated investors, as stETH’s value fluctuates with Ethereum’s price and is also influenced by staking market conditions.
Unlike ETH, which only fluctuates based on price, stETH accrues staking rewards continuously, increasing its effective value over time. This accrued value helps offset potential price declines in ETH, making stETH relatively less risky than ETH alone from a USD-denominated investor’s point of view. The rewards component provides a “buffer” effect, so if the ETH price drops, stETH retains slightly more value due to the accumulated staking rewards.
Using stETH as collateral or a settlement currency offers a middle ground between the stability of USDC and the volatility of ETH. It is less exposed to price volatility than ETH because of its value accrual from staking rewards, but more volatile than USDC due to its price exposure to ETH and reliance on staking rewards. Therefore, the choice of collateral or settlement currency depends on risk tolerance, market conditions, and the need for yield versus stability in a specific Ethereum staking rate swap trade.
stETH for Institutional DeFi products
Using stETH as collateral or a settlement currency for Institutional DeFi products such as staking rate swaps does come with a different risk profile compared to using ETH or stablecoins like USDC. Institutional stakeholders are bound by regulatory requirements. Therefore the choice of collateral and settlement currency has to meet regulatory expectations, mitigate risk, and ensure operational stability. Many regulatory frameworks require collateral assets to meet specific reporting and custody standards. For interest rate swaps or other contracts where predictable cash flow is needed, using USDC as a settlement currency will likely become a de-facto standard and offers lower settlement risk from a USD-denomination perspective.
In directional or reward-seeking environments, stETH might be favored due to its staking reward accrual, which provides additional rewards and can help meet financial targets. This makes stETH suitable in scenarios where reward accrual strategies are prioritized.
In addition, using stETH as a settlement asset introduces some unique implications regarding currency risk exposure in scenarios where counterparties need to measure cash flows in USD.
stETH is inherently tied to the value of ETH. Therefore, when using stETH as a settlement currency, both parties are exposed to ETH-USD exchange rate volatility. If ETH’s price drops significantly against USD, the value of any stETH-based settlement amount will decrease in USD terms, potentially leading to losses or reduced returns for counterparties whose liabilities are denominated in USD.
Lastly, there is the risk of the stETH/ETH market price deviating. Our stakeholder engagement revealed varied perspectives on protocol and price risks associated with using stETH as collateral and a settlement currency. Some stakeholders expressed concerns about potential stETH-ETH price divergence, which could impact contract valuations and settlements. However, Lido operators and DeFi-native institutions offered a different view, pointing to historical data showing that significant depegging events have been rare and, when they occur, are typically short-lived. They emphasized that stETH’s design as a liquid staking token inherently maintains a close correlation with ETH, and that past divergences were mainly driven by temporary market dislocations during extreme events.
Figure 11 - Source: https://dune.com/queries/3301517/5529782
It’s important to differentiate between price divergence due to liquidity factors and price divergences due to solvency factors. When market conditions turn illiquid, such as when the Ethereum withdrawal queue extends over several days, the likelihood of a price deviation from par increases. This is mitigated, as observed by market participants above, by ample demand from investors eager to acquire stETH at any price under par, thus rapidly closing any fleeting price deviations.
With respect to solvency, stETH’s design inherently mitigates solvency concerns. Although the likelihood of a sustained and correlated slashing event is not zero, operational risks idiosyncratic to node operators are far more likely. By providing access to a large number of underlying node operators, this idiosyncratic risk is substantially diversified, especially when compared to centralized staking providers that only offer exposure to 1-3 node operators and thereby substantially increase counterparty risk exposure for investors. From an institutional perspective, concentrated counterparty risk is highly undesirable and stETH is a suitable mitigant.
Several stakeholders also noted that they already manage stETH-ETH basis risk through their existing operations and consider it a manageable risk rather than a significant barrier. Additionally, new DeFi primitives, such as Cork Protocol’s on-chain CDS’ are being developed to allow investors to hedge and trade the risk of peg deviations, offering an innovative solution for managing the stETH-ETH basis risk more effectively.
stETH Liquidity
stETH liquidity has not been raised as a concern during our stakeholder engagement. At the time of writing, there is around $567 million worth of liquidity across decentralised markets. Just on Ethereum mainnet, stETH’s order book can regularly clear in excess of hundreds of millions of dollars at under 10bps price impact or lower. stETH has also started establishing deep liquidity in OTC desks, centralized exchanges such as Bybit or regulated venues such as OKX, which makes it easy to convert or use in swaps and other DeFi transactions. This liquidity ensures that counterparties in the swaps market can execute trades efficiently, without the risk of significant price impact.
Figure 12 - Source: https://dune.com/lido/wsteth-liquidity