- As more Ether gets staked to secure the network, staking yield is falling.
- Annual staking yield, recently at 5%, is estimated to fall to 3% by year’s end. It could later fall below 1%.
- Staking protocols will have to find ways to juice yield in order to remain attractive.
Ethereum’s staking gold rush is only two months old. Still, it won’t last forever, and teams running staking protocols are already contemplating a future in which crypto’s safest yield-bearing play becomes boring.
The issue: The more Ether staked, the lower its annual yield. That drop is already underway.
Yields from staking Ether fluctuated between 5% and 6% in the months immediately after Ethereum shipped a major upgrade last September.
Since then, the share of circulating Ether staked jumped from 11% to almost 20%. This month, the yield from its staking has hovered at about 4.5% to 5%.
To contribute to the security of Ethereum, users must stake, or lock up, their Ether. Their compensation is a modest and relatively risk-free return, paid in newly issued Ether. Another major upgrade in April, dubbed Shapella, removed what little risk was left, and investors have stampeded to staking protocols, including Lido and Rocket Pool.
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Some researchers predict that the majority of Ethereum will eventually be staked. If that were to happen, yields could fall below 1%, according to Mike Silagadze, the founder of staking protocol ether.fi.
“No one’s going to stake for 70 basis points of yield,” he said. That would force protocols to find new ways to juice the returns.
Restaking
Restaking is the most obvious source of future yields, according to Darren Langley, the CEO of liquid staking protocol Rocket Pool.
Restaking allows users to recommit their staked Ether — using so-called liquid staking tokens like Rocket Pool’s rETH — on other decentralised applications on Ethereum and other blockchains. That technology made its debut last week, when US-based company EigenLayer launched its eponymous restaking protocol.
“The staking space is ripe with innovation and the Ethereum blockspace ecosystem is constantly evolving,” Langley said. “Eigenlayer serves as a prime example of how these advancements can further augment the potential rewards for stakers.”
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Silagadze agrees.
“In that [1%] world, what’s going to provide the staking returns?” he said. “I genuinely think restaking is going to be the biggest thing in Ethereum since Ethereum.”
Counterpoint
To be sure, stakers could still enjoy an attractive annual yield if Ethereum were to go mainstream. That’s because staking rewards also rise along with network activity.
“Rewards may start to increase again as network activity picks up, so it’s difficult to predict where ETH staking APYs will end up long term,” said Josh Fraser, co-founder of Origin Protocol, which offers a liquid staking service.
In November, for example, staking yields briefly jumped from 5.5% to 8% as FTX, one of the world’s biggest crypto exchanges, imploded, sparking a frenzy of trading.
Equilibrium
The inverse relationship between staked Ether and its yield was a design compromise between two choices that each have flaws, Ethereum founder Vitalik Buterin wrote last year — a fixed rate of reward or a fixed total reward.
The former would have forced Ethereum developers to choose a reward rate, a choice they probably would have bungled, he wrote. Too low, and nobody would stake, leaving Ethereum vulnerable to bad actors; too high, and the blockchain would issue too much Ether, diluting the token’s value over time.
‘People would still be happy to stake their ETH. It’s all about that steady and secure income.’
The latter would also have created an incentive to bully competing stakers into exiting, leaving those who remained to claim a greater share of the pie.
Still, if staking yields do plummet, Ethereum might reach an “equilibrium,” Matt Leisinger, a co-founder of liquid staking company Alluvial, told DL News.
“It’ll be interesting to see if [a falling yield] incentivises folks to un-stake at some point,” he said.
Some who spoke to DL News said that equilibrium is a long way off.
“We estimate that by the end of this year there will be 25% of all ETH staked; this would equate to a yield of around 3%,” James Butterfill, the head of research at crypto data firm CoinShares, told DL News. “Still attractive, in my view.”
And the safety of staking means yields can go very low before investors begin to look elsewhere, according to Langley.
“Ethereum staking is considered one of the safest ways to earn rewards, so even if the reward rate drops significantly,” he said, “people would still be happy to stake their ETH. It’s all about that steady and secure income.”
Correction: This story has been corrected to note the head of research at CoinShares is James Butterfill.