The Ethereum Staking Opportunity

As a researcher with experience in the cryptocurrency market, I find Ethereum’s current staking ratio of 27% to be relatively low compared to other proof-of-stake networks like Solana, Cardano, SUI, Avalanche, and Aptos. The impressive growth in staked ETH since the Shanghai Upgrade in April 2023 is noteworthy, but there’s still a significant untapped potential for further expansion.

Among all proof-of-stake networks, Ethereum holds the largest market capitalization. At present, approximately 32.5 million ETH, equivalent to around $99 billion, is locked in staking. Since Ethereum’s Shanghai Upgrade in April 2023, there has been a significant increase of 78% in the amount of ETH that has been secured through staking.

Although the expansion of ETH has been noteworthy, just over a quarter (27%) of it is currently being held in staked form. In contrast, other proof-of-stake networks including Solana, Cardano, SUI, Avalanche, and Aptos exhibit significantly higher staking ratios, ranging from 48% to 81%.

Put differently, wagering on Ethereum could expand significantly due to the increasing popularity of Liquid Staking or Liquid Re-stakingTokens in Layer 2 platforms and Decentralized Finance (DeFi) projects.

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EIP 7251 to drive more volume

The next Ethereum upgrade, Pectra, will likely take place by the end of 2024, or in early 2025. One of the key proposals, EIP 7251, can provide a better UX for validators to earn staking yield. This proposal will increase the max effective balance of validators from 32 to 2048. Leading staking service providers, like Coinbase, are managing more than 130,000 validators already. The lift in maximum effective balance allows these providers to consolidate the number of validators and ultimately increase efficiency and lower the cost of operation.

One advantage is that lone stakers can experience automatic growth of their staking rewards. At present, the rewards earned by lone stakers are transferred to the execution layer automatically. However, these rewards will no longer generate additional staking returns. Lone stakers must accumulate 32 ETH before starting a new validator in order to earn more rewards.

Restaking is the new catalyst

As a crypto investor, I’ve found the concept of restaking on Ethereum to be truly captivating. With the introduction of points programs from EigenLayer and liquid staking protocols, there’s a fresh surge of interest in ETH staking. In the spring of 2024, nearly 38% and then 48% of the total staking volume can be attributed to these liquid staking platforms.

As an analyst, I’ve noticed an intriguing trend in EigenLayer’s Total Value Locked (TVL): over 65% or $9.7 billion of it originates from native Ethereum. This figure underscores the significant impact of restaking on Ethereum’s ecosystem. With the continued maturity and increasing adoption of restaking, we can anticipate a larger share of staking volumes to originate from this source as well as liquid restaking in the future.

Yet, it’s essential to keep in mind that restaking involves risks, including potential issues with smart contracts and the reliability of actively validated services. With EigenLayer’s reward and slashing mechanism still inactive, we can only anticipate the full implications – positive and negative – of restaking.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

2024-05-15 18:51

The Ethereum Staking Opportunity

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