Since Ethereum has transitioned to PoS and the network is secured through staking, holders are able to stake their ETH and receive their proportion of the network’s inflation plus transaction fees. The annual percentage yield (APY) for ETH is not fixed, and can vary due to several factors such as network activity, total ETH staked, number of validators, and the value captured by MEV. As more ETH is staked and more validators activate, the APY will decrease gradually. Additionally, the staking option chosen can also impact the APY received, as exchanges may take a higher fee resulting in a lower APY for the user.This essentially makes ETH a productive commodity or capital asset and underpins an entirely new monetary policy.
Under PoS, rather than the protocol issuing a constant 2 ETH/block reward to miners, the ETH issuance schedule will be dynamic, changing based on the cumulative number of ETH staked. As the total of staked ETH increases, total issuance increases, albeit at a decreasing rate.
The more ETH staked -> the more ETH issued -> the less each validator earns.
Source: CoinMetrics
Staking yields began at ~25% and have trended down as more validators participate. Over ~16M ETH has already been deposited for staking. At ~520,000 validators, this results in an annual return of 4.56% from solely staking rewards for the typical validator. Validators also earn yield from transaction fees and MEV but those are far more variable and less consistent. With PoS, ETH becomes more institutionally friendly given its reduced energy output and consistent yield.
Image credit: Staking Rewards
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Over $20B worth of ETH has now been staked! Some on network progress:
- ETH deposited to deposit contract: ~16,200,000+ (~15% of all ETH)
- Current staking yield: ~5%
- Active validators: ~520,000
- Pending validators: ~50,000
- Network participation rate: 99.0%
ETH staking diversification/decentralization is critically important to the network security just like miners in PoW. If one group, company, or pool gains too much influence over the stake, it could create issues for the network. So far, ETH distribution is fairly evenly spread out among big holders (companies) and smaller validators (individuals). Several projects and services are rolling out staking solutions for holders with less than 32 ETH, which should help further decentralize the staking pool makeup. According to Etherscan, roughly 50% of all ETH deposits are coming from cryptocurrency exchanges and staking pools. This suggests an equal split between individuals choosing to stake using their own hardware and users choosing to rely on a third-party service provider to stake. It will be important to monitor shifts in this distribution over time as too much Ether in the hands of a small number of companies could lead to centralization issues.
The PoS upgrade reduced Ethereum’s inflation rate from ~3.5% to near zero. Post-merge, the daily ETH issuance becomes variable based on the number of stakers. As an example, if there are ~15 million stakers, the protocol will issue ~1,750 ETH per day. This amounts to a ~90% reduction in issuance i.e., token holder dilution/sell pressure.
Source: Grayscale
Post-merge, we also have the added dynamic of locked fees for what should be a period of 6–12 months. Protocol issuance fees (not MEV and tips) will remain locked until the Shanghai upgrade in 2023. While the decreased velocity of money may appear to harm the future health of DeFi on Ethereum, the growth of liquid staking derivatives makes overall systemic liquidity in DeFi a non-issue.
