Driven by falling rates and rising transaction fees on the Ethereum network, shifting market dynamics are expected to narrow the gap between Ethereum staking returns and traditional risk-free rates in the coming quarters.

The spread between Ethereum’s Composite Staking Rate and the Effective Federal Funds Rate has remained negative since mid-2023.

However, two key factors could push the spread into positive territory by mid-2025, creating a “double-whammy effect,” according to crypto trading and institutional brokerage outfit FalconX.

In an investor note on Friday, FalconX pointed to the Federal Reserve’s recent decision to cut interest rates under a regime that is expected to continue next year.

According to futures markets, there is an 85% chance that the federal funds rate will drop below 3.75% by March 2025 and a 90% chance it will fall further to 3.5% by June, CME FedWatch data shows.

Lower U.S. rates would reduce yields on traditional assets like Treasury bonds, narrowing the yield gap or spread, with Ethereum staking. Staking yields are currently hovering around 3.2%, data shows.

“We still have yet to see what juicy staking rates spread versus the risk-free rate amid a full-fledged crypto bull market for the price of Ethereum,” David Lawant, FalconX’s head of research, wrote in the note.

“The only time ETH staking rates were substantially above risk-free rates during a relatively long period was at the end of 2022 when the industry was grappling with the FTX debacle at the bottom of the previous bear market.”

Last week, Ethereum’s transaction fees, which play a role in staking rewards, climbed to their highest levels in nearly two months, YCharts data shows. That has since fallen to an average of $0.80 per transaction as of Sunday.

While fees remain well below previous bull market peaks, the uptick reflects increasing blockchain activity, FalconX said. Higher transaction fees boost staking yields, providing more attractive returns for ETH stakers.

FalconX believes this combination of declining U.S. rates and rising Ethereum yields could turn the spread positive in the next two quarters, making Ethereum staking more competitive with traditional yield-bearing assets.

A positive spread would likely increase the appeal of staking ETH, offering higher returns than risk-free options.

However, industry-coveted institutional investors will prefer to access staking yields through regulated products, including exchange-traded funds, Real Vision Chief Crypto Analyst Jamie Coutts told Decrypt.

“Until the Securities and Exchange Commission approves such offerings, demand may be subdued,” he said.

While more sophisticated asset managers and private wealth firms may start investing directly, the demand for direct exposure among most traditional institutions could “develop slowly,” Coutts added.