Are Ethereum Staking Yields Too High?

Staking has grown in popularity in recent years due to the availability of staking-as-a-service, pooled staking, and the growth of liquid re-staking. As of July 2024, Ethereum’s security budget amounts to a staggering $110 billion worth of ETH, representing roughly 28% of the total ETH supply. There is also a general adoption of staking features within exchanges and financial applications allowing people to allocate their ETH to secure the Ethereum network. Many view staking as a low-risk return on investment, which makes it appealing to ETH holders. Vitalik Buterin, co-founder of Ethereum, holds a portion of his ETH staked, although he still keeps a part of it unstaked.

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As staking grows in popularity through liquid staking derivatives, there is a need to better quantify staking returns for different platforms and how they change over time. One way to do this is using the Composite Ether Staking Rate (CESR) oracle feed which is a standardized on-chain Ethereum Staking Rate. This can act as a useful benchmark when considering trends in staking. It is crucial to better quantify trends in staking and consider their ramifications, while also pointing out the benefit of generating additional revenues for ETH holders.

Although staking is essential to Ethereum’s security, there are compelling arguments for reducing the ETH issuance rate.

Diminishing Returns on Security: Beyond a certain point, adding more validators contributes less to network security. The marginal benefit decreases while the costs — mainly through ETH issuance — continue to rise.

Increased Costs for Validators: As more staking occurs, the operational costs, such as hardware upkeep, also rise. These costs often trickle down to users, making the network more expensive to maintain.

Centralization Risks: With large entities or staking pools controlling significant portions of staked ETH, the risk of centralization increases. This could compromise the very decentralization that Ethereum seeks to preserve.

Dilution and Inflation: Excessive issuance of new ETH to reward validators leads to inflation, which dilutes the value of existing ETH holdings.

Staking, particularly through liquid re-staking, is rapidly evolving. As Ethereum continues to innovate, it will be important to better quantify trends in this corner of the market. Please visit our latest research report for an in depth analysis on recent liquid staking and re-staking yields.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

Edited by Benjamin Schiller.