Ethereum staking reaches 7.4M ETH and growing.

Ethereum staking reaches 7.4M ETH and growing.

The Blockchain Industry: Exploring the Rise of Staking and the Ethereum Upgrade

By Chen Fang, COO of BitGo

Introduction

It has been one year since the Ethereum Merge, marking the beginning of a new era for both the Ethereum network and the broader staking landscape. This upgrade transformed Ethereum from a proof-of-work asset into the largest proof-of-stake digital asset by market value. With a market cap of approximately $200 billion, Ethereum has become a driving force in the staking ecosystem[^1^].

Staking, the process of participating in a blockchain network by holding and validating transactions, has gained significant traction. Not only does it secure the network, but it also allows participants to earn rewards on their holdings. In a recent report by Kraken, it was revealed that total staking rewards for all cryptocurrencies reached $5 billion annually in Q2 2023[^2^].

In this article, we will explore the growing staking ecosystem, the benefits of staking during a risk-off market, and the impact of the Ethereum upgrade. Additionally, we will discuss the entry and exit queues for staking, as well as the challenges and future prospects of the Ethereum network.

The Growing Staking Ecosystem

Staking has become a massive ecosystem, with the top 35 proof-of-stake cryptocurrencies combining for a market cap of $288 billion. Currently, there is approximately $68 billion worth of value staked in these assets[^2^]. Ethereum, in particular, has seen significant interest from holders who find staking an attractive option.

One of the primary appeals of staking is the ability to generate rewards during a risk-off market environment. Just as investors turn to defensive stocks with higher dividend yields during market downturns, staking helps Ethereum and proof-of-stake token holders weather the storm by earning returns on their assets without selling them[^3^].

Regarding Ethereum staking specifically, the current annual percentage rate (APR) for stakers is approximately 3.9%. While this rate has declined slightly due to increased validator participation, the introduction of MEV Boost has increased returns, ranging from 4.2% to 5.6% in the past six months[^3^]. MEV Boost not only boosts rewards but also promotes competition among validators, creating a more decentralized and censorship-resistant network[^3^].

These staking rewards are competitive with traditional yield-bearing financial instruments such as 10-year Treasury bonds or dividend stocks. Ethereum’s APR narrowly lags behind the current 4.5% yield of the 10-year Treasury and easily surpasses the average yield of 1.5% for the S&P 500. By offering conservative and consistent rewards over time, Ethereum is cementing its position in the conversation of income-producing traditional financial assets[^3^].

The Ethereum Upgrade: Removing Barriers to Entry

Although the Ethereum Merge marked the transition to proof-of-stake, staking on Ethereum only fully realized its potential with the Shapella upgrade in April 2023. This upgrade allowed early stakers to unlock their holdings and withdraw accrued rewards, reducing uncertainty and improving liquidity for institutional investors[^4^].

The introduction of Shapella had a significant positive impact on Ethereum staking. Since the upgrade, there has been a net inflow of over 7.5 million ETH into staking, contrary to predictions of a sell-off. This increase demonstrates the power of removing uncertainty around withdrawals and showcases growing demand for staking[^4^]. Furthermore, the percentage of the total ETH supply staked rose to 22.4% from 14.5% before the upgrade, suggesting a potential future increase to 50% by May 2024[^4^].

The number of validators has also surged since the Shapella upgrade, nearly doubling from roughly 430,000 to over 840,000[^4^]. This growth highlights the increasing interest in Ethereum and the desire to participate in its network. However, the sheer number of validators has strained the network, resulting in increased latency and longer consensus times[^4^].

To address this challenge, Ethereum developers are working on solutions that maintain decentralization while reducing strain. One proposed solution is to increase the maximum cap on the number of ETH per validator to 2,048, significantly reducing the number of machines operating on the network[^4^].

Entry and Exit Queues

The implementation of Shapella introduced some challenges in the form of entry and exit queues for staking. Initially, there were long queues as stakers rushed to secure their positions before the upgrade went live. The queues were further exacerbated when Kraken’s staking program halted due to a settlement with the U.S. Securities and Exchange Commission (SEC)[^5^].

However, as the situation normalized, the exit queue significantly reduced from days to under one hour. This improvement allows stakers more freedom to exit quickly if needed, providing increased liquidity. At the same time, the entry queue for staking normalized, currently standing at just over eight days, demonstrating healthy demand for staking[^5^].

Looking Ahead

The increased accessibility, improved flexibility, and UX of staking, coupled with the opportunity to earn rewards and participate meaningfully in blockchains, make staking an attractive option for Ethereum holders. Despite potential challenges, such as entry queues and network strain, the Ethereum network continues to evolve to meet growing user demands.

Upcoming upgrades to the Ethereum network, promising lower gas fees, greater speed, and account abstraction, further contribute to Ethereum’s appeal[^6^]. With the growing number of unique Ethereum addresses, increased staking participation, and the total amount of Ethereum staked, it is evident that these improvements are attracting new users and expanding the network’s reach[^6^].

In conclusion, staking has revolutionized the blockchain industry, providing a more energy-efficient and rewarding alternative to proof-of-work systems. Ethereum’s pioneering shift to proof-of-stake and the subsequent upgrades have significantly increased participation and interest in staking. As the industry continues to evolve, staking will play a pivotal role in shaping the future of blockchain networks.

[1]: [^1^] [2]: [^2^] [3]: [^3^] [4]: [^4^] [5]: [^5^] [6]: [^6^]

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