Solana ETFs: Liquid Staking Gains Institutional Backing

Institutional support is growing for liquid staking within Solana Exchange Traded Products (ETPs), with key industry players advocating for its inclusion to the U.S. Securities and Exchange Commission (SEC).

Liquid Staking: A Primer

Liquid staking involves allocating tokens to a validator while receiving a derivative token in return, allowing the staked tokens to remain liquid. These Liquid Staked Tokens (LSTs) can be traded or used in decentralized finance, enhancing capital efficiency. However, it's important to note that liquid staking introduces risks beyond traditional staking.

Key Advocates and Their Arguments

Solana infrastructure provider Jito Labs, along with asset managers VanEck and Bitwise, are leading the charge, appealing to the SEC to approve liquid staking for Solana ETPs. Organizations like the Solana Policy Institute and Multicoin Capital Management also support this initiative, emphasizing that liquid staking could improve capital efficiency by enabling ETP issuers to avoid forced rebalancing.

Benefits of Liquid Staking in Solana ETFs:

• Improved Capital Efficiency: LSTs allow for quick rebalancing during large creations and redemptions, reducing operational costs and potential tracking errors.
• Enhanced Network Security: Liquid staking can contribute to the overall security of the Solana network.
• Increased Product Options: Investors gain access to a wider range of product offerings.
• Additional Revenue: ETP issuers can benefit from increased revenue streams.

Currently, at least nine Solana (SOL) ETPs are awaiting a decision from the SEC.

Risks and SEC Considerations

The appeal to the SEC does not ignore potential risks, including smart contract vulnerabilities, depegging events, and slashing risks. While the SEC has not provided formal guidance on liquid staking, they have indicated that traditional staking may not be considered a securities offering if directly tied to a consensus process.

Broader Crypto ETP Staking Trends

The push for staking isn't limited to Solana. Issuers of Ether (ETH) funds are also seeking approval for staking features. Nasdaq, for instance, filed an application with the SEC to allow staking in BlackRock’s iShares Ether ETF and similar applications for Grayscale.

Analysts believe that adding staking to Ether ETFs could attract significant institutional capital. Robbie Mitchnick, Head of Digital Assets at BlackRock, noted that their Ether ETF, while successful, would be “less perfect” without staking.

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