Author: Tanay Ved & Matías Andrade Source: Coin Metrics Translation: Shan Ouba, Golden Finance
Ethereum’s staking ecosystem has come a long way, evolving from its initial PoW to PoS with The Merge, with the emergence of key innovations such as liquidity staking, re-staking, and spot Ether ETFs shaping its journey.
There are approximately 33.5 million ETH, worth approximately $115 billion, staked on the Ethereum consensus layer, accounting for 27.8% of the total ETH supply.
There are currently 1.05 million active validators participating in the network, which is up 15% YTD in 2024.
Staking is at the heart of Proof-of-Stake (PoS) blockchains like Ethereum. As Ethereum transitions from a Proof-of-Work (PoW) network to Proof-of-Stake (PoS) in 2022, participants will now need to commit to “stake” by depositing at least 32 ETH as collateral in order to become active validators on the network – the core economic actors of the system.
Staking is fundamental to network consensus, the process by which network participants (validators) propose, verify, and attest to new blocks on the blockchain, and the value of the staked assets contributes to the economic security of the network. Validators’ stakes serve as an economic incentive for participants to act in the best interest of the network. On one hand, validators are rewarded with ether if they perform their duties honestly, or risk being punished or having their stake slashed for malicious behavior.
With the upcoming launch of a spot ether ETF on July 23, and the regulatory clouds surrounding staking, we believe it is important to understand the fundamental role staking plays in the Ethereum network. In this edition of Coin Metrics’ State of the Network, we reveal Ethereum’s staking journey so far, understanding how the $115 billion staking ecosystem emerged, developed, and where it’s headed.
From the transition to PoS via The Merge, to withdrawals via Shapella, to the emergence of liquid staking and re-staking, and the recent launch of a spot ETH ETF - staking is undoubtedly one of the core pillars of the Ethereum roadmap and is critical to the entire ecosystem.
The genesis block of Ethereum was recorded on July 30, 2015. Thereafter for more than seven years, the chain was secured by a Proof of Work (PoW) consensus mechanism. Similar to how the Bitcoin blockchain operates today, this required massive clusters of hardware, including general-purpose processing units (GPUs) and eventually application-specific integrated circuits (ASICs), which expended computational resources to find the hash of the nonce. Miners who find a valid nonce broadcast the new block to the chain and are rewarded in the form of a block reward (ETH issued) and transaction fees included in the block.
Introduction to the Beacon Chain (2020)
In October 2020, the staking deposit contract was deployed on the Ethereum execution layer. This is the gateway for participants to stake ETH, whether through self-custodial infrastructure (staking alone), through staking-as-a-service providers such as Figment, pool staking platforms such as Lido and RocketPool, or the eventual emergence of centralized exchange staking programs.
Source: Coin Metrics Network Data Pro
Currently, there are 33.5 million ETH (worth about $115 billion) on the Ethereum consensus layer, with 105 10,000 active validators participating in the network. This represents 27.8% of the total ETH supply, also known as the “staking rate”. Staking rates can vary widely due to implementation differences between PoS blockchains.
In December 2020, the Beacon Chain (also known as the consensus layer) was launched as a parallel blockchain to the Ethereum mainnet, implemented via EIP-3675. It marked the first step in the transition from Proof of Work (PoW) to Proof of Stake (PoS). The chain was specifically designed to handle the PoS process, managing validator balances, responsibilities (attesting and proposing new blocks), and incentives (rewards and penalties) to reach consensus. This sets the stage for an eventual merger with the mainnet, which hosts a large number of smart contracts and dApps powered by the Ethereum Virtual Machine (EVM).
The integration of Ethereum’s two distinct systems, the “execution layer” (also known as the mainnet) and the “consensus layer” (also known as the beacon chain), is now widely referred to as the “merge.” This represents Ethereum’s official shift to using the beacon chain as the engine of block production.
As we described in our report “Planning the Merger”, the move to PoS brought significant changes to Ethereum’s validator and currency economics. Under PoW, Ethereum’s daily issuance was around 13.5K ETH, with an annual inflation rate of over 4%. However, with the changes implemented in EIP-1559, which introduced a base fee burn mechanism and priority fees (which are distributed to validators), ETH’s daily issuance is closer to 0, with an annual inflation rate of 0.67% currently.
At the time, Ethereum’s PoS system had certain bottlenecks, which prompted the rise of stake pool providers and Liquid Stake Tokens (LST). Some of these issues include:
Inability to withdraw stakes: Staking was a one-way operation for months. Staked ETH could only flow from the execution layer (where the stake deposit contract was located) to the consensus layer and could not be redeemed.
Lack of liquidity for staked ETH: The inability to withdraw meant that staked ETH was effectively illiquid, hindering any further use.
Capital and operational requirements: The minimum capital requirement of 32 ETH, combined with the need to run and maintain Ethereum node software (including execution and consensus layer clients), created a barrier to entry for many potential stakeholders, limiting widespread participation in the network’s validation process.
As a result, multiple pool solutions such as Lido, Coinbase, and RocketPool emerged to take advantage of this lucrative opportunity. They allow users to participate with any denomination of ETH, managing node operations by accumulating deposits between users to create validators on the beacon chain. Users receive liquid receipt tokens (called liquid staking tokens) representing the underlying staked assets, which do not need to be "locked" to receive staking rewards. Ultimately, this lowers the entry barrier to staking, driving the growth of the industry and allowing a larger group of participants to protect the Ethereum network.
Currently, 9.8 million ETH (worth about $32 billion) is staked through Lido. This represents a 29% market share of all staked ETH, also known as “Lido dominance”. Surpassing a high threshold (33%) of ETH staked by a single entity can introduce centralization risks. This drives the need for decentralized sets of validators and node operators to be managed through innovations like DAO governance or DVTs.
In addition to making it easier to participate, stake pools drive the utility of Liquid Staking Tokens (LSTs) in the broader on-chain ecosystem. Lido-issued LSTs such as stETH and wstETH (wrapped staked ether) have generated significant network effects and are widely used in decentralized finance (DeFi) applications, both as collateral in the largest lending protocols and as liquidity on decentralized exchanges (DEXs).
Source: Coin Metrics ATLAS
Currently, more than 2 million ETH (worth about $10 billion) is used as a DeFi token in Aave v3 and Spark. Collateral-backed loans for lending protocols. LST is also a popular form of liquidity reserve in DEXs, layer 2s, and for economic security in re-staking protocols.
On April 12, 2023, the Shanghai and Capella upgrades (called Shapella) arrived, closing the loop on staked ETH and eventually enabling redemption from the beacon chain. Validators are now able to enter and exit the PoS system, subject to validator queue and churn limits (the cap on the number of validators that can be active per epoch, currently set to 8 via EIP-7514 in Dencun).
Source: Coin Metrics Network Data Pro
Currently, there are 4,000 validators in the staking queue, down from 96K in June 2023. and 21K in April of this year.
While the validator cohort may have leveled off compared to last year, deposits of staked ETH still outstrip withdrawals. Since the Shapella upgrade, 30M ETH has been deposited into the consensus layer, while 17M ETH has been withdrawn. The discrepancy between the decreasing number of validators in the cohort and the increasing amount of deposits can likely be attributed in part to the popularity of liquidity staking, which has led to an increasing amount of staked ETH without the need to directly increase validators.
Source: Coin Metrics Network Data Pro
With the EigenLayer in 2023 With the launch of the mainnet, restaking has quickly become one of the fastest growing verticals in the crypto ecosystem. While staking ETH secures the Ethereum network, restaking allows the same staked assets to secure external services built on Ethereum, such as oracle networks, data availability layers, bridges, and other middleware, using native staked ETH or Liquid Stake Tokens (LST). This innovation helps emerging protocols bootstrap security without the high cost of finding their own validators.
Restaking improves the capital efficiency of staking ETH and expands Ethereum's security model to the broader ecosystem. However, it also brings the risk of managing the liquidity representatives (LRTs) of staked and re-staking assets, which come from different networks with different risk profiles. While the restaking space is still in its infancy, it has expanded from Ethereum to other blockchains, such as Solana, and new entrants such as Symbiotic and Jito have also demonstrated its growing importance.
This brings us closer to today - spot Ether ETFs began to roll out last week. While this is exciting news for the market, the current structure of Ether ETFs prevents issuers from participating in staking activities. This is an opportunity cost for investors, who will forgo an additional ~3% in staking rewards, a key component of staking.
Validators are incentivized to participate in the consensus process by receiving rewards in the form of ETH issuance, priority tips, and maximum extractable value (MEV), which are derived from the consensus layer (CL) and the execution layer (EL). The current ETH staking annualized rate (APR %) (excluding MEV) is slightly above 3%. While this may impact investor demand for an ETF, the implications for the Ethereum network are considerable, such as:
Expected APY returns for validators, stakers, and overall network inflation
Potential impact on stake participation and decentralization
Source: Coin Metrics Network Data Pro
Any decision to incorporate staking rewards will need to carefully consider these factors to balance network security and economic sustainability for the Ethereum ecosystem.
Since the “merge,” Ethereum’s staking ecosystem has come a long way, and its future direction depends on a number of converging factors.
With Ethereum’s staking rate exceeding 25% of total supply and the number of validators exceeding one in a million, researchers and the community are considering changing Ethereum’s issuance curve and increasing the maximum effective balance of validators. These proposals stem from concerns about ETH’s growing staking rate and the trend of staking pool centralization, with incentives favoring liquid staking tokens over vanilla ETH. Additionally, consideration is being given to increasing the maximum effective balance of a validator from 32 ETH to 2048 ETH to control the exponential growth of the validator set, thereby reducing overhead at the consensus layer.
Source: Coin Metrics Network Data Pro
Growth of Liquidity Staking and Restaking, Spot Ethereum ETF The emergence of , regulatory developments around staking, and potential changes to validator and issuance dynamics present a complex and interconnected landscape that will guide Ethereum’s PoS system in the coming years.
The ethereum community is debating the power and responsibilities of the Ethereum Foundation, with some arguing that the foundation acted like a central bank when it proposed changes to ethereum’s token issuance formula.
JinseFinanceThe Dencun hard fork has been completed on the Goerli, Sepolia and Holesky testnets, and the mainnet will be launched on Epoch 269568 (approximately March 13, 2024).
JinseFinanceEthereum’s eagerly anticipated Shanghai upgrade, which will enable the withdrawal of staked ETH, will likely occur in the first two weeks of April.
decryptA recent update has revealed an additional development on Ethereum. Besides the much anticipated Shanghai and Capella upgrades coming sometime in March.
BitcoinistAs the withdrawal date for unstaking Ethereum closes in, tokens powering various liquid staking protocols are enjoying a hefty rally.
decryptDeutsche Telekom will also be participating in the governance of the StakeWise decentral autonomous organization (DAO).
OthersThe Ethereum network has transitioned to proof-of-stake. Ethereum staking is a way ETH investors can earn a reward by locking up their coins.
CoindeskStakers have been and will be natural sellers in futures and perpetual futures and the hedging activity will increase as staking yields rise.
Coindesk
Coinlive Lido Finance has announced plans to offer its ETH staking services across the entire L2 system, as long as specific networks have “demonstrated economic activity.”
Cointelegraph