Recommendations
Based on our research findings, we are providing four recommendations for Lido regarding Ethereum staking rate swaps. These recommendations reflect the market’s nascent state, stakeholder feedback across the Lido ecosystem, and the need to balance institutional market development with existing ecosystem sustainability. They focus on maintaining Lido’s market leadership while taking a measured approach to market evolution, emphasizing data-driven decision making and comprehensive stakeholder impact assessment. The recommendations are designed to position Lido strategically for future market development while managing risks and preserving optionality in this emerging market segment of staking rates derivatives.
Monitor Staking Rates Derivatives Market Development
The staking rates derivatives market (including the Ethereum staking rate swaps market) is in its infancy, with limited clarity on demand, liquidity, and regulation. By monitoring market developments, Lido can stay ahead of trends, competitor offerings, and shifts in institutional interest. This approach will allow Lido to identify if and when it should adapt its offerings, such introduce as introducing an ex-MEV version of its benchmark rate to capture growing demand from institutional stakeholders. Key metrics to track include Ethereum staking rate swaps nominal size, trading volumes (both OTC and on-chain), the number and type of active participants (e.g., ETF issuers, hedge funds, asset managers, exchanges), and product structures and terms being offered.
Consider ex-MEV Lido stETH APR for DeFi institutional products
There is a valid concern from institutional players about the volatility that MEV (Maximal Extractable Value) introduces to an industry reference rate. Introducing an ex-MEV Lido ETH APR could provide a more stable and predictable benchmark, without impacting Lido’s broader ecosystem and making it more attractive for institutional products that prioritize stability and reliability. Monitoring competitor benchmark adoption rates and clear institutional demand signals will provide insights into if and when the market reaches a level of maturity that warrants further actions and investment from Lido in this space.
Measure and monitor impact of growing institutional adoption on Lido Operators and Solo Stakers rewards
As institutional adoption of Lido middleware grows, it may affect the rewards distribution within the ecosystem, particularly for Lido operators and solo stakers. Monitoring this impact ensures that Lido can address any negative externalities, such as reward dilution or excessive centralization, and make adjustments if necessary.
If it is not already the case, it could be valuable to agree metrics to track the effects of institutional staking on the reward structure for operators and solo stakers, such as changes in APR, market share, and decentralization levels. Regularly publishing these findings in a transparent report would help maintain community trust and allow for data-driven adjustments to policies or incentives.
Further research appropriateness of stETH for institutional derivatives
Further research into stETH’s appropriateness for institutional derivatives is warranted given emerging market signals and stakeholder feedback. While stETH has demonstrated strong fundamentals with $567M in DeFi liquidity and growing institutional support (evidenced by Wintermute’s recent collateral integration and custody solutions from Fireblocks, Ceffu, and Taurus), several critical areas require deeper investigation for institutional derivative applications including settlement risk profile, regulatory considerations and market dynamics. Prioritizing engagement with institutional stakeholders who have existing stETH exposure or custody capabilities would be beneficial, as their practical experience would provide valuable insights for derivative applications.
Sources:
A Primer: Ethereum Staking Rate Benchmarks: DocSend
Ethereum Mechanism Design: MEV, MEV Burn, Execution Auctions: https://www.youtube.com/watch?v=4O8jRVT2Vqc , In a post MEV-Burn world - Some simulations and stats - Proof-of-Stake - Ethereum Research