As the staking rewards for Ether decrease, the protocol will have to seek innovative solutions.

With decreasing staking rewards for Ether, the protocol must find innovative solutions.

Author: Aleks Gilbert Source: dlnews Translation: Blocking, Shanolba

Summary

• As more Ether is staked to secure the network, staking yields are decreasing

• The current annual staking yield is 5% and is expected to drop to 3% by the end of the year. It may eventually fall below 1%.

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• Staking protocols will have to find ways to increase yields to remain attractive

The staking craze for Ethereum has only just begun two months ago. However, it won’t last forever, and the teams operating the staking protocols are already looking to the future, where the safest way to make money in cryptocurrency may become tedious.

The problem is that “the more Ether staked, the lower the annual yield,” and this decline is already underway. After a major upgrade to Ethereum in September of last year, the staking yield for staked Ether fluctuated between 5% and 6%. Since then, the share of circulating Ether that has been staked has risen from 11% to nearly 20%. This month, its staking yield hovers around 4.5% to 5%.

To contribute to Ethereum’s security, users must stake (lock up) their Ether. Their compensation is a moderate and relatively risk-free return paid in newly issued Ether. Another major upgrade in April of this year, called Scheipalla, eliminated the remaining tiny risks, and investors flocked to staking protocols, including Lido and Rocket Pool.

Some researchers predict that eventually most of Ethereum will be staked. According to Mike Silagadze, founder of the staking protocol ether.fi, if that happens, yields could fall below 1%. “No one will stake for 70 basis points of return.” This will force protocols to find new ways to increase returns.

Re-staking

According to Rocket Pool CEO Darren Langley, re-staking is the most obvious source of future returns.

Re-staking allows users to re-invest their staked Ether into other decentralized applications on Ethereum and elsewhere, using liquid staking tokens like Rocket Pool’s rETH. The technology made its debut last week when the US-based company EigenLayer launched their eponymous re-staking protocol.

Langley said: “The staking space is full of innovation and the Ethereum block space ecosystem is constantly evolving. EigenLayer is a typical example of how to further increase the potential returns for stakers. What will provide rewards for staking in that [1%] case? I sincerely believe that re-staking will become the most important thing for Ethereum.”

Counterparty Law

It is certain that if Ethereum becomes mainstream, stakers can still enjoy attractive annual returns. This is because staking rewards will also increase with the increase of network activity.

Josh Fraser, co-founder of Origin Protocol, said: “As network activity increases, rewards may increase again, so it is difficult to predict what the annualized return on Ethereum staking will eventually reach.” Origin Protocol provides a liquid staking service. For example, in November last year, with the collapse of FTX, one of the world’s largest cryptocurrency exchanges, triggering a trading frenzy, the staking yield temporarily jumped from 5.5% to 8%.

Balance

Ethereum founder Vitalik Buterin wrote last year that the inverse relationship between staking ether and its returns is a design compromise between two choices, both of which have flaws. These two choices are a fixed reward rate or a fixed total reward. The former choice would force Ethereum developers to choose a reward rate, which they might mess up. If the reward rate is too low, no one will stake, making Ethereum vulnerable to bad actors; if the reward rate is too high, the blockchain will issue too much ether, diluting the value of the token over time. The latter choice also creates an incentive to pressure competing stakers to exit, allowing remaining stakers to get a larger share.

However, if staking returns do plummet, Ethereum may reach an “equilibrium point,” according to Matt Leisinger, co-founder of liquid staking company Alluvial, who told DL News. “It’s interesting to see if (the decline in returns) will at some point incentivize people to unstake.” Some say there is still a long way to go for this balance.

James Butterfill, research director at CoinShares, said: “We expect 25% of ETH to be staked by the end of this year; this will be equivalent to about 3% yield, which I still find attractive.” According to Langley, the security of staking means that the yield can be lowered until investors start looking for other investment opportunities.

Ethereum staking is considered one of the safest ways to earn income, so people are willing to stake their ETH even if the reward rate drops significantly. This all depends on stable and secure income.

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