Solana Staking ETF: Reward vs. Risk

CoinShares, a digital asset investment firm, has officially filed paperwork – an S-1 form – to create a Solana Staking Exchange Traded Fund (ETF). The company intends to list this new financial product on the Nasdaq.

The official filing reveals that the CoinShares Solana Staking ETF will primarily hold Solana (SOL) tokens. Crucially, the fund will also stake “a percentage” of its holdings, generating rewards for investors. BitGo will be the custodian of the fund and facilitate the staking process.

While CoinShares has not specified the exact allocation of SOL tokens to be staked, the company acknowledges potential risks. Specifically, the fund may face difficulties in fulfilling large redemption requests promptly, particularly if the quantity exceeds the un-staked portion of the fund’s SOL reserves.

Notwithstanding this potential challenge, the CoinShares Solana Staking ETF joins a growing list of similar applications recently submitted to regulators. Firms like BlackRock, Fidelity Investments, Grayscale Investments, and 21Shares are all seeking to add staking functionalities to their existing Ethereum ETFs. Several similar filings

Invesco Galaxy also submitted an application for a Solana staking ETF. Separately, the Rex-Osprey Solana + Staking ETF began trading last month, having been automatically approved under existing investment regulations.

The Rex-Osprey fund experienced strong initial demand, attracting $12 million on its debut day. It currently manages $137 million in assets, demonstrating an appetite for Solana-based investment products.

The significant growth potential in this space is reinforced by the success of Ethereum ETFs, which currently manage $27.5 billion in assets. Data comes from CoinShares’ Digital Asset Fund Flows report.

Ethereum ETFs enjoyed record investment flows, growing by $5.24 billion between July 1st and August 1st, per Farside data.

This growth is nearly equal to the $5.5 billion invested in Bitcoin ETFs. In contrast, Solana funds, primarily the Rex-Osprey Solana + Staking ETF, only gained $137 million in assets.

Currently, Solana-based funds have $2.4 billion in AUM, equivalent to 8.7% of the total for Ethereum funds. Solana’s market capitalization is about 20% of Ethereum’s market capitalization.

While demand for Solana ETFs and other altcoin ETFs is likely to increase, some analysts believe that the staking functionality will have a limited impact on demand.

Bryan Armour, Morningstar’s Director of ETF & Passive Strategies, shared this perspective with *Decrypt*. He expects staking alone will not dramatically shift institutional investment decisions.

“Staking should improve ETF efficiency by capturing yield otherwise lost in non-staked spot ETFs. However, the cryptocurrency’s performance will be the main driver,” he explained. “Institutional interest in staked Solana ETFs will probably stem from a desire to diversify cryptocurrency portfolios, similar to Bitcoin and Ethereum ETFs, in case one asset outperforms or underperforms.”

However, some industry experts think that the opportunity to stake will attract institutional investors who were previously hesitant due to the perceived complexity of direct staking.

“Demand for staking ETFs is accelerating as investors seek yield without the operational burdens of direct staking,” said James Harris, CEO of DeFi platform Tesseract, when speaking with *Decrypt*.

Harris believes that these ETFs simplify access to protocols like Ethereum and Solana, which currently offer yields of 7-8%.

He stated, “This is a logical progression. Given the choice between holding SOL or holding SOL and earning native protocol yield, it’s obvious investors will choose the latter.”

Harris acknowledges that staking introduces execution risk, adding to standard custody and counterparty risks. In his view, the additional yield typically justifies the additional complexity.

The primary execution risk concerns the challenge of providing redemptions when a significant portion of the fund’s SOL is staked. Armour agrees that this is the most serious risk.

“Un-staking can take anywhere from several hours to a few days, with a reported average of two to three days,” he explained. “Since ETF redemptions settle within one business day, ETFs cannot stake all their holdings if they expect to meet redemption requests promptly.”

Because of this risk, Armour anticipates that most staking ETFs will maintain a significant un-staked reserve. However, he acknowledges the possibility that redemption requests could exceed this liquid portion, creating problems for both the ETF and its market makers.

He said, “In this scenario, I would expect the ETF price to drop below its net asset value, forcing investors to sell their holdings at a discount if they need to exit.”