Are you curious about how you can earn passive income from Ethereum without running your own validator? This article explains what liquid staking tokens are, how they can be packaged into exchange‑traded funds (ETFs), and what you should watch out for before investing.
What is liquid staking and how does it differ from traditional staking?
Staking is the process of locking up a cryptocurrency to help secure its network and, in return, receive a share of the block rewards. On Ethereum, you must deposit 32 ETH to become a validator, which requires technical know‑how and a reliable internet connection.
Liquid staking services, such as Lido, let you stake any amount of ETH and issue you a liquid staking token—in Lido’s case, stETH. Each stETH token represents a claim on the underlying ETH you deposited plus any future staking rewards. Because stETH is an ERC‑20 token, you can trade, lend, or use it in DeFi protocols while your ETH continues to earn rewards in the background.
The key benefit is liquidity: you don’t have to wait for the long unbonding period that traditional staking imposes before you can move your funds. However, you also rely on the staking service’s smart contracts and governance, which introduces additional risk.
How can a liquid staking token be turned into an ETF?
An exchange‑traded fund (ETF) is an investment vehicle that holds a basket of assets and issues shares that trade on a traditional stock exchange. For a liquid staking ETF, the fund would buy the staking token—like stETH—and hold it on behalf of investors. The ETF’s shares would then reflect the value of the underlying token plus any staking rewards that accrue.
From a regulatory standpoint, the ETF sponsor must file a registration statement (often an S‑1) with the U.S. Securities and Exchange Commission (SEC). The filing describes the fund’s investment strategy, the assets it will hold, and how it will calculate net asset value (NAV). If approved, the ETF can be bought and sold through regular brokerage accounts, giving investors exposure to staking rewards without dealing with crypto wallets or DeFi platforms.
Because the ETF’s assets are custodial, the sponsor must also address custody solutions, audit procedures, and how to handle events like token upgrades or smart‑contract failures. These layers add both transparency and complexity compared to holding the token directly.
Real‑world illustration: VanEck’s withdrawn Lido stETH ETF
In October 2025, asset manager VanEck filed an S‑1 registration statement for a proposed Lido staked Ether ETF. The fund would have held Lido’s liquid staking token, stETH, and aimed to pass on the staking rewards to shareholders. However, in a filing dated 15 October 2026, VanEck announced that it “does not intend to proceed with the planned distribution” of the trust’s shares and is withdrawing the application. The company did not disclose the specific reason for the withdrawal, nor whether it will pursue a different product.
This example shows that even well‑known financial firms can encounter regulatory or operational hurdles when trying to bring crypto‑based ETFs to market.
What this means for you
If you want exposure to Ethereum staking rewards without running a validator, you have two main routes: directly hold a liquid staking token like stETH, or invest in a traditional ETF that holds such a token. Directly holding stETH gives you full control and the ability to use the token in DeFi, but you must manage wallet security and understand the staking service’s risk profile.
An ETF would simplify the process—shares can be bought through a brokerage, and the sponsor handles custody and compliance. However, ETFs are subject to regulatory approval, may have higher fees, and can be withdrawn or delayed, as seen with VanEck’s attempt.
What to check before you invest
- Token issuer credibility: Research the staking service’s track record, governance model, and audit history.
- Smart‑contract risk: Look for third‑party audits and understand how the token handles potential failures or upgrades.
- Custody and insurance: For ETFs, review the sponsor’s custody solution and any insurance coverage for the underlying assets.
- Fee structure: Compare the staking service’s fee (often a percentage of rewards) with the ETF’s expense ratio.
- Regulatory status: Ensure the product is registered with the SEC or the relevant regulator in your jurisdiction.
FAQ
Is stETH the same as holding ETH?
No. stETH represents ETH that has been deposited into Lido’s staking pool plus any future rewards. You can trade stETH, but you cannot redeem it for the original ETH instantly; you must wait for Lido’s unbonding process.
Can I lose my stETH if the Lido smart contract is hacked?
Yes. While Lido undergoes regular audits, smart‑contract vulnerabilities can lead to loss of funds. Holding stETH directly means you bear that risk; an ETF might mitigate it through additional custodial safeguards, but it does not eliminate the underlying risk.
Do staking rewards get taxed?
In most jurisdictions, staking rewards are treated as taxable income at the time they are received, and any subsequent sale of the token may trigger capital gains tax. Consult a tax professional for advice specific to your situation.
Are staking ETFs a good way to earn passive income?
They can provide a convenient, regulated avenue to earn staking rewards, but they come with management fees, potential regulatory delays, and the same underlying risks as the liquid staking token itself. Evaluate both the convenience and the cost before deciding.
This article references reporting from cointelegraph.com.
