DeFi staking sits at a regulatory crossroads with billions at stake. As regulators contemplate the fate of Ethereum staking in ETFs and institutional involvement grows, the industry faces a pivotal moment. The battles unfolding in SEC filings and Treasury rulings will determine if DeFi fulfills its promise or remains confined to crypto's experimental edges.
The Total Value Locked in DeFi protocols surged to US$100 billion in Q1 2024, with liquid staking representing nearly half a US$47.7 billion. Lido Finance alone commands US$29.9 billion of this market, demonstrating the extraordinary demand for these services. But these figures pale compared to the potential growth if institutional capital gains unfettered access to staking yields. According to Datawallet research, Ethereum staking currently secures 33.8 million ETH (US$118 billion), with liquid staking capturing 31.1% of this market.
Traditional asset managers understand this opportunity. When Fidelity requested SEC permission to stake Ethereum ETF assets in March 2025, they specifically cited how "restricting staking in crypto asset ETPs harms investors by crippling the productivity of the underlying asset." This insight cuts to the regulatory paradox: agencies created to protect investors are now preventing them from accessing legitimate returns.
The heart of this tension lies in classification. Under former SEC Chair Gary Gensler, the Commission categorized staking-related activities as securities, forcing Ethereum ETF issuers to remove staking from their registration statements. This classification creates an artificial divide between the asset (Ethereum) and its native functionality (staking).
This distinction makes little technical sense. As AlphaPoint noted in April 2025, the regulatory landscape has been characterized by "legal imprecision and commercial impracticality," making compliance difficult for firms. The current regulatory approach resembles forcing car manufacturers to sell vehicles without engines, technically possible but fundamentally misaligned with the product's purpose.
The regulatory environment shifted dramatically in 2025. As documented by Jones Day, President Trump signed H.J.Res.25 on 10 April 2025, overturning Treasury regulations that would have extended IRS Form 1099 reporting requirements to DeFi participants by treating them as "brokers" under the tax code. This action, along with the creation of the SEC's Crypto Task Force, signals a potential sea of changes in regulatory philosophy.
The primary question now is whether this change will be comprehensive or piecemeal. If staking is approved for ETFs but the underlying DeFi protocols remain under regulatory pressure, we'll see a bifurcated market where institutional investors gain advantages over retail participants, contradicting the very ethos of DeFi.
Beyond regulatory concerns, innovation continues unabated. The emergence of restaking protocols like EigenLayer (with US$12.03 billion TVL by February 2025) demonstrates that DeFi's composability enables capital efficiency beyond what traditional finance can achieve. EigenLayer's dominance over competitors like Symbiotic (US$1.03 billion) shows how quickly innovation can concentrate capital in this space.
This creates a second regulatory challenge: as DeFi instruments become more sophisticated, they become harder to classify under traditional regulatory frameworks. The question isn't whether regulations will adapt, but how quickly they can evolve without stifling the underlying innovation.
Not all concerns about staking come from regulators. Ethereum co-founder Vitalik Buterin has highlighted potential centralization risks with Lido's growing dominance, noting that "with the DAO approach, if a single such staking token dominates, that leads to a single, potentially attackable governance gadget controlling a very large portion of all Ethereum validators."
This reveals an uncomfortable truth: some regulatory concerns about concentration risk are technically valid, even if the proposed solutions may be misaligned with market realities.
A peculiar pattern emerges in DeFi staking regulation. Authorities seem to fear what they don't understand rather than what threatens market stability.
The real risk isn't staking itself but the concentration of staked assets in too few protocols. Regulators fixating on classification miss the more urgent need for transparency standards in governance mechanisms.
Without targeted regulation focusing on actual risks, a two-tier market will likely emerge. Institutional players will gain privileged access to staking yields while retail investors face unnecessary barriers. This outcome serves neither innovation nor protection.