Ethereum underwent a major transformation in September 2022 when the Merge went live, ushering in a proof-of-stake consensus. One of the major implications? Investors can now earn a yield from staking their Ether tokens. Let’s explore how popular staking is, where it’s headed, and where the yield may end up.
Staking has been wildly popular. Currently, 18.75% of the total supply is staked. According to CryptoQuant, the rate of increase has steepened since the Shapella upgrade in April. This upgrade allowed staked Ether to be withdrawn, with some early stakers having had tokens locked up since Q4 2020. Despite the lack of withdrawals, Ethereum’s staked tokens as a percent of the total supply still pale in comparison to other proof-of-stake coins. The chart below highlights Ethereum in yellow, its 19% ratio far below the other major proof-of-stake coins.
The chart below also shows that Ethereum’s 19% staked tokens carry a value of $43 billion – more than the other nine cryptos’ staked market caps combined. This low staked ratio implies that Ethereum should have more, especially considering recent developments such as discussion around potential Ether futures ETFs and PayPal launching a stablecoin on the network.
So, what happens to the staking yield if the amount of staked Ether continues to increase? Remember, the total annual yield paid out to stakers is calculated as follows:
[(gross annual ETH issuance + annual fees*(1-% of fees burned)]
These total staking rewards are then divided by the average ETH staked over the year to commute the APY. In other words: The amount of ether staked is in the denominator of the fraction. So as the amount staked gets bigger, the APY shrinks. This effect can already be seen in what has happened to date. Analysts had predicted a yield of 10%-12% ahead of the Merge, however today it is closer to 4%.
Is the yield therefore primed to collapse? Some analysts believe it is headed towards 1%-2%, while some think less. The reality is that nobody really knows because, as always, demand relies on a variety of factors. These include regulation, infrastructural development, and the macro landscape. We also need to consider trad-fi yields, as the market expects the end of the cycle is near. Could falling trad-fi yields affect demand for staking yield? Perhaps – while it is hard to separate the overall liquidity drain and suppressing of risk assets that occurs out of hiked rates, the superior (and risk-free) return is definitely a key reason why capital has flooded out of DeFi in the last year.
All in all, it remains too early to speculate about where the Ethereum staking yield is ultimately headed. While many are adamant the APY will cascade downwards to uber-thin levels, we have presented here at least some points of consideration as to why the situation may not be as clear cut.
