Exploring the Complexities of Staking on Ethereum

Staking
on
Ethereum
has
garnered
significant
attention
as
the
blockchain
network
continues
to
evolve.
According
to
a
comprehensive
report
by
Galaxy,
Ethereum
stakeholders
must
navigate
a
landscape
filled
with
both
opportunities
and
risks.
This
report
is
the
first
of
a
three-part
series
that
delves
into
various
staking
activities,
including
restaking
and
liquid
restaking.

Overview
of
Ethereum
Staking

As
of
July
15,
2024,
Ethereum
(ETH)
holders
have
staked
over
$111
billion
worth
of
ether,
representing
28%
of
the
total
ETH
supply.
This
staked
amount
is
often
referred
to
as
the
“security
budget”
of
Ethereum.
Stakers
contribute
to
the
network’s
security
and
are
rewarded
through
protocol
issuance,
priority
tips,
and
maximal
extractable
value
(MEV).
However,
the
high
demand
for
staking
has
led
developers
to
consider
changes
to
issuance
policies
to
manage
this
trend.

Types
of
Stakers

There
are
six
main
types
of
Ethereum
users
who
earn
rewards
from
staking.
Managed
stakers,
who
delegate
their
ETH
to
professional
staking
node
operators,
are
the
most
numerous.
Liquid
staking
protocols
like
Lido
also
play
a
significant
role,
with
approximately
29%
of
total
ETH
staked
delegated
through
such
platforms.

Risks
of
Staking

Staking
risks
vary
based
on
the
method
used:

• 
  Direct
  Staking:
  Involves
  running
  proprietary
  staking
  hardware
  and
  software,
  with
  risks
  including
  staking
  penalties
  and
  slashing.
• 
  Delegated
  Staking:
  Involves
  delegating
  ETH
  to
  another
  entity,
  adding
  counterparty
  risk.
• 
  Liquid
  Staking:
  Involves
  delegating
  ETH
  and
  receiving
  a
  liquid
  token,
  adding
  liquidity
  risks.

Regulatory
risks
also
loom
large,
particularly
for
delegated
and
liquid
staking
methods.
Protocol
risks
include
penalties
for
offline
nodes,
initial
slashing,
and
correlated
slashing
penalties.

Staking
Rewards

Stakers
can
earn
roughly
4%
APY
on
their
staked
ETH
deposits,
derived
from
new
ETH
issuance,
priority
tips,
and
MEV.
However,
rewards
have
declined
over
the
past
two
years
due
to
increased
staking
and
reduced
transaction
activity
on
the
network.

Staking
Rate
Projections

The
staking
rate
on
Ethereum
is
expected
to
exceed
30%
in
2024.
Liquid
staking
services
have
simplified
the
staking
process,
bypassing
normal
limitations
such
as
entry
queues.
Developers
are
considering
changes
to
issuance
policies
to
curb
staking
demand
and
maintain
a
balanced
network.

Issuance
Change
Discussions

Developers
are
weighing
several
options
to
reduce
Ethereum’s
staking
rate,
including
short-term
reductions
in
staking
yields
and
long-term
stake
ratio
targeting.
The
discussions
have
been
controversial,
with
concerns
about
the
profitability
of
staking
providers
and
the
lack
of
data-driven
analysis
for
proposed
changes.

Conclusion

The
Ethereum
staking
economy
is
still
experimental
and
evolving.
As
the
network
undergoes
further
changes,
stakeholders
must
carefully
assess
the
risks
and
rewards
associated
with
staking.
The
broadening
base
of
stakeholders
makes
frequent
changes
to
staking
dynamics
challenging,
but
Ethereum
remains
a
relatively
new
proof-of-stake
blockchain
expected
to
evolve
significantly
in
the
coming
years.

For
a
detailed
overview
of
Ethereum
staking
and
future
projections,
read
the
full
report
by
Galaxy

here.

Image
source:
Shutterstock