Solana ETF Double-edged Sword! Custodianship institutions threaten Decentralization, who is the ultimate winner?

Solana ETF changes the staking economic structure of Solana. Hong Kong's Huaxia Fund launches a non-staking Solana ETF with a high fee of 1.99%, while three staking products are operated in the United States. The non-staking ETF fund pool will increase the APY of on-chain stakers, as the number of stakers decreases but the rewards pool remains unchanged; the staking ETF transfers billions of dollars in entrusted rights to a few custodians, threatening Decentralization.

Non-stake ETF unexpectedly assists on-chain stakers

The staking rewards model of Solana itself has a self-regulating function. The inflation mechanism proportionally allocates SOL to all stakers, so when the staking ratio decreases, the same reward pool will be divided among fewer participants, thereby increasing the annual percentage yield (APY) for each staker. This will incentivize capital to flow back on-chain until a new equilibrium is established.

The calculation is simple: If the circulating supply is approximately 592.5 million SOL and the base staking rate is 67%, then a non-staked Solana ETF asset management scale of $1.5 billion (calculated at $200 per token, approximately 7.5 million SOL) will reduce the staking rate to about 65.7%. The annual percentage yield (APY) is inversely proportional, rising from 6.06% to about 6.18%, an increase of 12 basis points. If the asset management scale reaches $5 billion, the annual percentage yield will increase by 41 basis points; if it reaches $10 billion, the annual percentage yield will increase by 88 basis points.

This means that non-staked Solana ETFs will not significantly reduce on-chain yields, but rather slightly enhance them. The larger the un-staked fund pool, the more attractive native staking becomes for users who can directly hold SOL and delegate it to validators. This is in stark contrast to the dynamic of “ETFs siphoning off staked funds,” which was the initial concern when spot products were first proposed.

On the contrary, non-staked funds are equivalent to subsidies for on-chain participants, concentrating rewards in the hands of those who continue to stake, while institutional capital remains idle in brokerage accounts. The ChinaAMC Solana ETF in Hong Kong began trading on October 27, explicitly stipulating that none of its SOL holdings can be staked, with ongoing fees in the first year reaching up to 1.99%, which effectively turns the original 6% staking yield into a -2% tracking difference relative to the spot rate. For holders of such high-fee non-staked products, they are essentially subsidizing all on-chain stakers.

Concerns of Centralization in Staking ETF

The Solana ETF with staking capabilities has changed the calculation method. If a fund like SSK entrusts the management of its holdings, the staking ratio remains almost unchanged, so the annualized return is still close to the benchmark level. However, the set of validators receiving these commissions is determined by the relationship with custodians and the policies of the fund initiators, rather than by community signals or performance metrics.

The design of SSK allows it to hold other staked ETPs along with directly delegated SOL, creating a hierarchical structure where multiple intermediaries (such as fund sponsors, custodians, and ETP issuers) each charge a portion of fees and determine the flow of staked funds. This is operationally similar to how Lido centralizes Ethereum staking through a selected set of node operators, but there is no on-chain governance and no composability of liquidity staking tokens.

Pledge funds like SSK can provide positive returns, with earnings of about 4.8% to 5.1% after deducting the fund's fee rate of 0.75% and the costs of the custody verification infrastructure. However, this convenience also comes with the risks of centralization. SSK's prospectus allows custodians to choose validators, and the fund also holds shares in non-US ETPs, which in turn have delegated a large amount of SOL tokens.

Centralization Risks of Solana ETF Staking Model:

Concentration of Custodian Power: A few institutions control the decision-making power of billions of dollars in entrustment.

Validator Selection Preference: Preference for US entities with compliant infrastructure rather than community choices.

MEV Routing Control: The power of transaction ordering shifts from decentralized communities to institutional gatekeepers.

Lack of Governance Transparency: No on-chain governance mechanism and the combination of liquidity stake tokens

If a few custodial institutions control billions of dollars through delegation, then Solana's consensus power and MEV routing will be concentrated in the hands of institutional gatekeepers rather than in community choices. This in itself is not worse, but it changes the control over block production and transaction ordering, and makes the economic conditions of validators more dependent on custodial relationships rather than community recognition.

stETH lessons but not a complete replay

The stETH precedent in Ethereum is inspiring, but not entirely accurate. Lido increased Ethereum's staking participation rate from single digits to over 30% of the supply by integrating liquidity and yield into one project. At its peak, Lido controlled about 32% of staked ETH, raising concerns about centralization and prompting governance bodies to take action to limit and diversify the number of node operators. Due to competitors like Rocket Pool and EigenLayer offering alternative staking routes, that share has declined to around 20%.

However, the core lesson still stands: securities with strong liquidity and rich rewards will expand participation and concentrate power unless actively managed to decentralize authority. The Solana ETF model does not reflect this trend. Many products, especially in Asia, clearly state that they do not support staking, which means that even if asset management scales up, they cannot concentrate the power of validators.

Those products that provide stake have yields lower than native liquidity staking tokens. CoinShares' physical staking Solana ETP does not charge a management fee, and after deducting validator commissions, the net yield is about 3%. At the same time, while 21Shares' ASOL reinvests rewards, it charges an annual fee of 2.5%, which reduces the yield transmission rate. Native LSTs like JitoSOL or Marinade can typically provide yields of 5% to 6%, with minimal impact from fees, and have complete on-chain composability.

The yield gap means that staking Solana ETF primarily attracts accounts that cannot directly hold cryptocurrencies, such as retirement plans, registered investment advisors, and regulated institutions, rather than users who can directly stake and receive all the rewards.

Scale Forecasting and Power Restructuring Path

The universal listing standards adopted by the U.S. Securities and Exchange Commission in September have lowered the threshold for exchanges to list spot cryptocurrency ETFs beyond Bitcoin and Ethereum. This regulatory shift has opened doors for mainstream issuers such as BlackRock, Fidelity, and VanEck. JPMorgan's basic forecast is that the Solana ETF will see inflows of $1.5 billion in its first year in the U.S., which is just a small part of the over $20 billion expected to flow into spot Bitcoin ETFs in 2024, but still significant, accounting for about 1.3% of Solana's circulating supply.

If most of the funds flow into non-staking funds, the native annualized return will slightly increase. If staking products dominate, the concentration of validation nodes will accelerate. Scenarios beyond the basic situation become interesting. If Solana's stock price rises, and many low-fee US issuers enter the market, then a scenario of $5 billion in assets under management is possible, which would account for more than 4% of the supply.

If held but not staked, this will increase the on-chain annualized yield by 41 basis points, making native staking more attractive and potentially pulling some liquidity back on-chain. If staking is done through an ETF, the collection of validators receiving these delegations will become a structural feature of Solana's consensus, with custodians guiding billions of dollars in staking based on operational signals rather than economic signals.

Who is the ultimate winner

The ultimate winner depends on who the marginal buyers are. Retirement accounts that cannot hold cryptocurrencies will opt for ETFs, while on-chain users will continue to stake natively to receive all rewards and maintain control over their delegation. The issue is not whether the Solana ETF will consume staking funds, but whether the institutional capital they release remains passive or starts to internally guide the Solana validator economy.

Based on existing data, on-chain stakers are the clear winners. For every additional $1 billion in the non-staking ETF's fund pool, it contributes about 8 basis points of APY increase for native stakers. Although staking ETFs provide returns, the net return rate of 3-5% is significantly lower than the 5-6% of native LSTs, primarily serving institutional clients that cannot directly stake.

The real loser may be the decentralization ideal of Solana. If the scale of stake-based Solana ETFs reaches billions of dollars, the power of validators will inevitably concentrate in the hands of a few large accomplices. This will not immediately threaten network security, but it will change the governance dynamics and power structure of Solana.