2023: Ethereum Staking—Growth and Transformation

2023: Ethereum Staking—Growth and Transformation

The Growing Momentum of Ethereum Staking Industry

Ethereum Staking Growth

The introduction of the Merge upgrade, which implemented the Proof-of-Stake (PoS) mechanism, and the subsequent Ethereum Shapella upgrade, enabling staked ETH withdrawals, have transformed the Ethereum ecosystem. These monumental changes have sparked a significant rise in the Ethereum staking industry, with staked assets now exceeding $40 billion. In addition, staking rewards have accumulated over $1.6 billion, indicating substantial revenue generation within the industry.

Growing Institutional Interest in Staking

The Ethereum PoS transition has undeniably been a resounding success. Currently, the total value of staked ETH stands at an impressive $41.5 billion, accounting for 46% of the total staked assets across all blockchains. Staked ETH represents 21.7% of the total supply, a substantial increase from 6.5% when the Merge was activated, and 15.1% when the Shapella upgrade was introduced. These figures demonstrate the widespread adoption and acceptance of Ethereum staking within the crypto community.

Furthermore, the adoption of ETH staking compared to other supply metrics reveals an even more significant impact. The volume of ETH staked has surpassed 50% and 65% of the supply active over the past year and six months, respectively. This adoption trend highlights the substantial enthusiasm and trust in Ethereum staking as a viable investment opportunity.

During this period of rapid growth, the Ethereum network has operated smoothly, except for a couple of minor incidents that did not significantly impact its performance. This level of stability has piqued the interest of institutional investors who have recognized the potential of Ethereum staking. This can be observed by examining the difference between the basis of Ethereum (ETH) and Bitcoin (BTC) in the Chicago Mercantile Exchange (CME). Given that ETH now generates native yield, while BTC does not, the difference between their basis should approximate this yield. The chart below illustrates how the difference has increased from a negligible value to 3.2% and 3.5% for the most liquid contracts, indicating institutional consideration of staking in their pricing process.

Ethereum BTC Basis Evolution

Will Ethereum Staking Fervor Cool?

Although Ethereum staking has experienced tremendous growth, early signals suggest that the adoption fervor could potentially slow down. Compared to other PoS networks like Solana and Cardano, the staking participation rate for Ethereum still lags behind at 22% of the total supply staked. However, this disparity is expected due to the more extensive distribution of ETH holders and its primary use as a network resource rather than a speculative asset.

Another factor contributing to the potential slowdown is the limited capacity of the Ethereum network to onboard new validators simultaneously. The line of validators waiting to stake their ETH has grown to nearly 100,000, far surpassing the number of people wanting to withdraw their staked ETH. However, since June 2023, the number of validators in the activation queue has consistently declined and is currently below 30,000, the lowest level since May. If this trend continues in the coming months, the rate of ETH staked will likely start tapering off.

A couple of challenges also present risks to the Ethereum staking ecosystem. Firstly, the broader macroeconomic conditions have shifted, affecting investors’ interest in crypto yield generation. The Composite Ether Staking Rate, which was 5.5% at the time of the Merge upgrade, has decreased to 3.9% due to higher validator counts and lower network activity. In comparison, the two-year Treasury interest rate has climbed from 3.8% to 5.2% during the same period. These changing conditions might affect the attractiveness of Ethereum staking for investors.

Secondly, the dominance of Lido, the leading staking provider controlling around one-third of the total staked ETH, raises concerns about network finality. If an attacker were to control such a significant portion of staked ETH, it could potentially impact the Ethereum network’s security and integrity. While some staking providers have committed to self-limit their stake below 22% of Ethereum validators, Lido has chosen not to impose self-limitation. However, efforts are underway to further decentralize their operator set and enhance network security. Initiatives such as proposer-builder separation (PBS) and distributed validator technology (DVT) aim to democratize access and control over the Ethereum network, thereby mitigating the concentration risks associated with Lido’s dominance.

The Future Looks Bright

Despite temporary challenges and potential slowdowns, Ethereum staking is expected to continue gaining momentum in the future. Institutional investors now have access to increasingly seamless staking platforms tailored to their specific requirements. Additionally, the Ethereum staking industry is witnessing the emergence of new DeFi primitives that leverage staked assets for innovative use cases, such as sophisticated interest rate trading.

While the cryptocurrency market is known for its volatility and non-linear progress, the long-term prospects for the Ethereum staking industry are incredibly positive. The successful implementation of the PoS mechanism and the growing interest from institutional investors lay a foundation for sustained and robust growth in this burgeoning industry. The future of Ethereum staking shines bright.

The authors express their gratitude to Freddy Zwanzger from Blockdaemon and Connor Siwik from FalconX for their valuable insights and reviews of this article.

Edited by Ben Schiller.