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.