Partnered With:

Opportunities and Development of Staking Track after Ethereum's Transition to Proof of Stake.

Read this article in 16 Minutes

With the disappearance of miners, the benefits of the Ethereum ecosystem have also been redistributed, and the staking track undoubtedly reaps the greatest profits.

Original Title: "The Development and Opportunities of Ethereum Staking After the Transition to POS"

Original Author: Asher Zhang from Bitpush

After the Ethereum merge, the Ethereum network has switched from PoW to PoS consensus mechanism. PoS has nurtured a staking ecosystem composed of participants. The Ethereum network will be protected by validators who stake 32 or more ETH, replacing the role of Ethereum miners. With the disappearance of miners, the interests of the Ethereum ecosystem have been redistributed, and the staking track undoubtedly benefits the most. So, what is the current situation of Ethereum staking? What opportunities does the Ethereum staking ecosystem have? What new opportunities and prospects will the Shanghai upgrade bring to the staking track? This article will explore these questions.

Opportunities for Staking after Ethereum Transitions to PoS

After the Ethereum merge, the short-term staking income of ETH has been supplemented by transaction fees and MEV income, and the staking yield of staking ETH has increased. However, excluding some extreme cases, with the continuous increase of Ethereum staking volume, the overall annualized staking yield of Ethereum tends to decline. As of December 6th, according to Oklink data, the annualized staking yield of Ethereum is 4.06%.

Although the overall annualized yield of Ethereum is trending downwards, its value retention is strong and the amount of Ethereum staked continues to rise. According to Oklink data, as of December 6th, the Ethereum staking rate is 12.99%.

However, compared to the token staking ratio of many other major public chains, Ethereum's staking rate is relatively low. The staking ratio of many public chains is mostly distributed around 60%-80%, leaving a lot of room for improvement in Ethereum's staking rate. However, it should be noted that the high staking rate of many major public chains is mainly attracted by high annualized returns, which can lead to a decrease in the value of staked tokens. After the merge, Ethereum has essentially entered a deflationary phase, and with the continued prosperity and development of the Ethereum ecosystem, the economic incentives for Ethereum staking are highly sustainable and attractive, and are constantly attracting more and more institutions to participate.

The senior vice president of Franklin Templeton, the world's largest listed fund management company with assets under management of approximately $1.5 trillion, Sandy Kaul, said in an interview with Real Vision that Ethereum staking provides a huge opportunity for institutional investors interested in the cryptocurrency market. "I have seen some very powerful products that I think will fully meet the needs of institutional investors." On September 29th, Deutsche Telekom launched its latest institutional Ethereum equity service, with its T-Systems MMS subsidiary providing blockchain custody verification nodes and hosting solutions for the StakeWise liquidity staking solution. Earlier, on September 8th, Swiss digital asset bank SEBA Bank announced the launch of ETH staking services, providing more opportunities for bank customers and investors interested in cryptocurrencies to enter the cryptocurrency market. In the future, more institutions are expected to participate, as Ethereum's future potential is still very attractive compared to traditional financial products in the market.

Overview of the Ethereum Staking Ecosystem and Current Status

Around the Ethereum protocol, the staking ecosystem can be divided into: execution and consensus clients, middleware, DVT network, staking options, infrastructure services, staking pools, liquid staking derivatives, custodians, wallets, data providers, and tools. Specifically:

Ethereum Protocol - a set of rules that Ethereum nodes run on, which embody the core infrastructure of thousands of decentralized applications.

Client software - To participate in the Ethereum network, users need to install software called a client on their computer to turn it into an Ethereum node.

MEV refers to the maximum value that can be extracted from block production that exceeds standard block rewards and gas fees by changing or excluding the order of transactions in a block. This concept was originally applied by Proof of Work (PoW) miners.

Flashbots has extended the Go-ethereum client through a service that allows searchers to submit MEV transactions to miners without revealing them to the public memory pool, helping to reduce high gas prices.

Distributed verification technology - refers to Ethereum validators running on multiple non-trusted nodes to improve fault tolerance and security.

Personal Staking - Users need to deposit at least 32 ETH to activate the validator software and become a validator. The user will be responsible for adding new blocks to the blockchain, processing transactions, and storing data, while protecting the entire network and receiving new ETH rewards.

The pledger - regarded as the backend operator running all computers and physical infrastructure that enable the PoS blockchain to function.

Staking Pools - Issuing liquidity Tokens, these Tokens represent staked ETH and allow users to trade or use the Token in DeFi applications, as well as serve as a reward for new trading/investment opportunities.

The custodian is an institution that actually owns users' financial assets. It is usually a brokerage firm, commercial bank, or other type of institution that holds users' funds and investments for convenience and security.

Data suppliers are organizations or enterprises that provide data for third-party use. Some data suppliers offer free access to datasets, while others sell data for a fee. Additionally, some data suppliers offer a mix of free and paid data services.

Tools - The Ethereum community has developed some tools to make the staking process more secure, efficient, and scalable.

Wallets and browsers - they are the connection points between users, protocols, and the Ethereum blockchain. Wallets have different functions to meet the needs of users, and the ones listed provide Ethereum staking as a key feature of the wallet.

Hosting and pledging - Users pledge encrypted currency through a centralized entity, and the trading platform acts as the custodian of the user's assets. Users entrust the management of their private keys to the trading platform and are bound by its terms and conditions.

Ethereum Staking Leading Project Interpretation

Although the staking ecosystem of Ethereum has initially taken shape, as mentioned above, Ethereum staking assets only account for about 13% of the circulation, and it can be foreseen that a large amount of growth has not yet arrived. This also means that there is still a lot of room for growth in the future Ethereum staking track. In such a huge sunrise track, the most noteworthy is undoubtedly the leading staking projects. In the staking track, currently Lido, Binance, Kraken, and Coinbase, the four major institutions, basically monopolize Ethereum PoS staking, among which the decentralized staking project Lido is particularly noteworthy.

Lido is a financial platform that provides ETH staking derivatives services and charges management fees. It allows users to receive liquidity token rewards without locking assets or maintaining their own staking infrastructure. By depositing ETH into the Lido smart contract, users can receive transferable stETH (Lido platform's liquidity token for staking ETH). In return, 10% of all ETH staking rewards (which can be changed through LDO voting) are allocated to Lido DAO, controlled by LDO token holders.

Its advantages are:

1. Lido's staking amount accounts for 30.36% of the total staking amount on Ethereum, ranking first in terms of proportion on Ethereum. Lido has an absolute advantage in the market.

2. Lido is easy to operate and has no threshold for selection, and its deep use can rival stETH.

Its disadvantage is:

1. LidoDao controls Lido. According to Nansen's statistics, the top 9 addresses control 46% of the voting power, which theoretically can have an impact on validators and their compliance with audits. If the Lido market continues to expand, it will face two major issues: decentralization and resistance to censorship.

2. Lido's volume is too large, and the increase in Ethereum pledged by Lido throughout 2022 is not significant.

3. Governance concentration, high market share and other issues have emerged.

The Development of Ethereum Staking in the Future

Currently, Ethereum can only store ETH but cannot withdraw it. The total value of staking is close to $23.5 billion, all of which is "trapped" on the Ethereum network. If the staking function is not opened and resolved soon, the attractiveness of staking ETH will be greatly reduced, which will also affect the number of people entering the Ethereum ecosystem in the future. This will undoubtedly have a huge impact on the future development and network security of Ethereum. Therefore, the most important upgrade after the London upgrade is the Shanghai upgrade, and the core proposal to solve the above problems is EIP-4895.

Specifically, EIP-4895 can be said to be the core of the Ethereum Shanghai upgrade. In terms of results, it implements the operation of staking ETH withdrawals, and the implementation method introduces a system-level withdrawal instruction. There are many ways to execute withdrawal operations, and the characteristics of this withdrawal operation are as follows: 1. It is initiated by the system itself, not by a user, which is simpler and easier to audit; 2. There is no gas fee consumption, and the system-initiated withdrawal is controlled by the consensus layer withdrawal limit, so there is no need to use gas for anti-Dos protection; 3. The balance of the execution layer is updated directly, without EVM execution process, and adopts the simplest implementation strategy.

Ethereum core developers previously stated that the Shanghai upgrade is expected to take place at some point in Q1-Q2 2023. With the arrival of the Ethereum Shanghai upgrade, it is expected that Ethereum staking will reach a new peak. At that time, the Ethereum staking track will once again usher in a major development opportunity.