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A Year of Growth and Transformation

by Harry Garcia

The Ethereum staking industry has experienced significant growth and success since the implementation of the Merge and Shapella upgrades, which brought the Proof-of-Stake (PoS) mechanism to the Ethereum network. These changes have resulted in over $40 billion worth of staked assets and more than $1.6 billion in total staking rewards.

According to data from Staking Rewards, the total amount of staked ETH currently stands at $41.5 billion, accounting for 46% of the total staked assets across all blockchains. Staked ETH now represents 21.7% of the total supply, a significant increase compared to the 6.5% and 15.1% when the Merge and Shapella upgrades were activated, respectively.

Compared to other supply metrics, the adoption of Ethereum staking is even more impressive. The supply of ETH staked has surpassed 50% and 65% of the supply active over the past year and six months, respectively.

During this ramp-up period, the Ethereum network has operated smoothly, with only minor incidents where blocks failed to finalize for a few minutes but eventually recovered. This stability has caught the attention of institutional investors.

The incorporation of ETH staking by institutions can be seen in the difference between ETH and BTC basis in the CME futures market, which is primarily used by institutional investors. The fact that ETH now generates native yield while BTC does not has resulted in a difference in basis that approximates the yield. This difference currently stands at around 3.2% to 3.5%, close to the Composite Ethereum Staking Rate of 3.9%.

However, there are some potential challenges on the horizon for Ethereum staking. The adoption rate of Ethereum’s staking, currently at 22% of the total supply, lags behind other PoS networks like Solana and Cardano, which have adoption rates of 71% and 62% respectively. The question is whether this gap will eventually close.

One factor that could slow down the rate of ETH staking is the number of validators waiting in line to stake their ETH. The network can only accommodate a certain number of new entrants at a time, and the number of validators in the activation queue has been steadily declining. If this trend continues, the rate of increase in ETH staked will likely taper off.

Additionally, the macroeconomic conditions have shifted from favoring crypto for yield generation to becoming a headwind. The Composite Ether Staking Rate has decreased from 5.5% to 3.9% due to more validators and lower network activity, while traditional investment options like the two-year Treasury interest rate have seen an increase.

Another concern is the dominance of Lido, the leading staking provider, which controls almost a third of the total staked ETH. If an attacker were to gain control of this much staked ETH, they could potentially impact the network’s finality. While efforts are being made to further decentralize Lido’s operator set, it is crucial for the network’s security and decentralization.

Despite these challenges, the authors expect the Ethereum staking industry to continue gaining momentum. Institutional investors now have access to seamless staking platforms tailored to their needs, and the DeFi sector is witnessing the emergence of new use cases that leverage staked assets for sophisticated interest rate trading and other innovative applications.

While the path forward for Ethereum staking may not be entirely smooth, the long-term prospects for the industry seem promising. As the network evolves and addresses challenges, the Ethereum staking industry is expected to thrive, ushering in a new era of financial possibilities on the Ethereum blockchain.

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