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Are Ethereum Staking Yields Too High?

Sep 10, 2024

As a seasoned researcher with a decade of experience delving into the cryptosphere, I find myself constantly amazed by the ever-evolving landscape of blockchain technology, and staking is no exception. The growth of staking as a service, pooled staking, and liquid re-staking has undeniably revolutionized the way we interact with digital assets, particularly Ethereum. With a staggering $110 billion worth of ETH secured through staking, representing approximately 28% of the total supply, it’s hard not to be captivated by its potential.

In recent times, staking has gained significant traction, thanks to the emergence of staking-as-a-service, pooled staking, and increased liquid re-staking. By July 2024, Ethereum‘s security budget will stand at an astounding $110 billion in ETH, which equates to approximately 28% of the total ETH circulating supply. The trend of integrating staking functionalities within exchanges and financial apps has also picked up pace, enabling users to secure the Ethereum network with their ETH holdings. Many consider staking as a relatively safe investment opportunity, making it an attractive proposition for ETH owners. Vitalik Buterin, one of Ethereum’s co-founders, is among those who have a portion of his ETH staked, although he maintains another part unstaked.

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As a researcher delving into the burgeoning world of liquid staking derivatives, I find it increasingly important to accurately assess and compare staking returns across various platforms, taking into account any changes over time. One effective method for this is by employing the Composite Ether Staking Rate (CESR) oracle feed – a standardized, on-chain Ethereum Staking Rate that serves as a valuable benchmark when analyzing staking trends. It’s essential to closely examine these trends and their potential implications, while also highlighting the added revenue-generating opportunities for ETH holders.
Why Might We Consider Lowering ETH Issuance?
Although staking is essential to Ethereum’s security, there are compelling arguments for reducing the ETH issuance rate.
    Diminishing Returns on Security: Beyond a certain point, adding more validators contributes less to network security. The marginal benefit decreases while the costs — mainly through ETH issuance — continue to rise. Increased Costs for Validators: As more staking occurs, the operational costs, such as hardware upkeep, also rise. These costs often trickle down to users, making the network more expensive to maintain.Centralization Risks: With large entities or staking pools controlling significant portions of staked ETH, the risk of centralization increases. This could compromise the very decentralization that Ethereum seeks to preserve.Dilution and Inflation: Excessive issuance of new ETH to reward validators leads to inflation, which dilutes the value of existing ETH holdings.

The Future of Staking

Staking, particularly through liquid re-staking, is rapidly evolving. As Ethereum continues to innovate, it will be important to better quantify trends in this corner of the market. Please visit our latest research report for an in depth analysis on recent liquid staking and re-staking yields.

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.

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2024-09-11 18:53