Eth2.0: What happens to staking yields after the Ethereum Merge?

      The consensus of the Ethereum community around the Merge has turned decidedly bullish after the largely-successful March 15th merging of the Kiln testnet with the main proof-of-stake Beacon Chain, which is the prototype Ethereum 2.0 chain that’s expected to subsume today’s Ethereum Mainnet this June.

      The success of the Kiln/Beacon merge was a big deal for a community that’s been conditioned for disappointment after repeated Eth2.0 push-outs. There are no major roadblocks facing the merging of the remaining Ethereum testnets (Goerli, Rinkeby, Kovan and Ropsten) with the Beacon Chain.

      What does the Merge mean for an arm’s-length Eth investor?

      The Merge’s main changes to Ethereum are:

      • Turning transaction validation from “Proof of Work” —> “Proof of Stake” (personally I find this terminology confusing, and think of it as “proof of compute” —> “proof of collateral”)
      • Elimination of mining and the “computational race” in Proof of Work.
      • Keeping overall network seigniorage stable, while reallocating miner rewards to validators
      • Increase the demand/supply ratio of Ethereum (and thus the price) by diverting large amounts of Ethereum offline into staking

      What does the merge not do?

      • Change network transaction costs charged to end-users.
      • Change the user experience of the Ethereum network, relative to other alt-L1’s like Terra or Solana
      • Change the relative consumer value proposition of Ethereum

      “The Merge” is the second of a series of milestones that represent Ethereum’s “Serenity upgrade,” the series of innovations which, if successful, will allow Ethereum to maintain its commanding market share as the dominant smart-contract blockchain. The first milestone was the London Fork, also known as Ethereum Improvement Proposal 1559 (EIP-1559), which was successfully implemented last August. The milestones subsequent to the London Fork have been nicknamed “the Merge, Surge, Purge, Verge, and Splurge.” For this post, we’ll focus on the Merge only.

      Financializing transaction validation

      In ETH Mainnet today, seigniorage is paid to miners to mint new transaction blocks. Miners will be replaced by validators after the Merge.

      https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F481005d9-f180-4f6e-b6c0-b460f89ef922_1130x624.png

      As we can see from Beaconscan, 10.4M ETH has been staked on the Beacon Chain so far, translating into a 4.8% gross staking reward. However, validators also get their piece of Ethereum’s daily fees. At 10M of ETH staked, a validator could expect a total net staking yield of around 10.8% (5% validation + 7% fees, minus 10 percent of total for outsourcing staking to someone else), or a bit under 11%.

      However, post-Merge, it isn’t realistic to expect ETH to be staked at its current level (10.4M ETH, or 9% of all ETH outstanding). Today, an unsophisticated staker can only stake via irrevocable smart contract. The Beacon Chain is operating under fairly illiquid conditions relative to the post-Merge scenario, even though stETH mitigates this for more sophisticated crypto users (addressed below).

      I would expect 20-30M ETH to be staked post-Merge, which would yield a net validator return (staking return) of 4.2-6%. That would place ETH at a moderate premium to the other competitive, self-sufficient chains, such as SOL (5.8% net yield), Terra/LUNA (7%), AVAX (9%), BNB (8%), and ADA (5.8%).

      https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F2a989916-8d5f-4b00-9d35-2b8a51a5014f_795x675.png

      ETH validator rewards @ 20M total ETH staked. Link

      https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc82510f4-c622-40a2-816d-17739b3a79d1_758x673.png

      ETH validator rewards @ 30M total ETH staked. Link

      I would expect around 25M ETH to be staked on the Beacon Chain, due to liquidity preferences (most people want their ETH freely liquid and usable), the opportunity cost of foregoing stablecoin risk-free rates (7-8%), and other factors. But many people expect the percentage to be higher.

      stETH

      One interesting variable in future ETH staking is the composability of staked ETH (stETH). This instrument, apparently pioneered by Lido Finance, turns your stETH into eligible borrow collateral. Of the 10.4M ETH staked on the Beacon Chain today, just over 2M has been rehypothecated into stETH already.

      stETH trades at no discount to vanilla ETH today. In effect, you are exchanging Eth1.5 liquidity for Eth2.0’s ~11% annualized net staked yield. If we assume that the Beacon Chain will go live appx. 90 days from this writing, ETH1.0 trades at around a 2.7% liquidity premium to stETH (you collect a 2.7% staking yield for staking your ETH on the Beacon Chain for 90 days today, vs nothing for holding ETH in your Metamask wallet).

      Post-Merge, stETH will trade at a varying discount to ETH (Lido themselves previously wrote that they expected a 5-25% discount) depending on how long it takes to unstake your ETH from the Beacon Chain (it might take hours to weeks). The longer the staking lockup and the more ETH users elect to stake and utilize stETH, the wider the stETH discount will be to ETH.

      What does this mean for the relative value of ETH?

      The Merge is a huge milestone in ETH’s development. It clearly reduces the circulating supply of ETH, while also increasing the return on holding ETH (i.e. also increasing the relative demand for ETH). It does not address the core competitive issues of ETH relative to other alt-L1’s: high transaction costs and difficulty of use (which have not been materially altered, as of right now, by the growth of rollups; the rollups have instead cannibalized higher-value transactions on the Ethereum network and reduced overall protocol revenue).

      As we invest further in the research side of the newsletter, we’re eager to hear from you about projects where you’d like a deeper research dive. Please contact us at [email protected] for any research requests or general comments.

      Thanks for reading,

      Recovering TradFi Chad & the Staking Rewards team


      Staking at a Glance

      Global staked dollar volume rebounded strongly with the rebound in the overall crypto market. The global population of staking wallets and users also grew by a very strong 2.4% week-on-week.

      Solana saw by far the largest net staking flows (+$1.014B). Avalanche rode post-Barcelona AVAX Summit momentum to a new high. NEAR and WAVES saw strong organic momentum, and Fantom rebounded from its lows after lead developer Andre Cronje departed the project several weeks ago.


      Staking News

      Global Staking Research

      Polkadot Parachains launch $250M fund to grow ecosystem

      Nine Polkadot parachain teams launched a $250M Ecosystem Fund to support early-stage startups building Polkadot and Kusama-based dapps that support Acala Network’s aUSD stablecoin. Read Defiant Article

      LFG confirms 6,000 bitcoin purchase to back UST

      Luna Foundation Guard has bought over 11,700 BTC worth roughly $520 million so far this week to build a bitcoin reserve to support its stablecoin, TerraUSD (UST). Read Bitcoin.com Article

      Bored Apes creator Yuga Labs raises $450 million in round led by a16z

      Yuga Labs, the company behind the popular NFT project Bored Ape Yacht Club, has raised a $450 million funding round led by Andreessen Horowitz. Now valued at $4 billion, the company will use the funds to build out its NFT-based metaverse. Read The Block Article

      Staking Assets

      Ether Burn Rate Plunges to Seven Month Low

      Ethereum’s burn rate has plummeted to its lowest level since EIP-1559 was introduced in August 2021. Users are happy about this, as transaction costs are at a low level. Find More Stats

      ETH Daily Protocol Revenue show strong rebound

      Ethereum’s daily revenue payable to miners and validators surged to a two-month high on March 28th.

      source: TokenTerminal

      Anchor Protocol introduces semi-dynamic Earn rate on UST

      Anchor protocol, the decentralized money market built on the Terra blockchain, will dynamically adjust interest rates each month following a community vote that passed on Thursday. Read Coindesk Article

      Staking Providers

      Decentralized ETH 2.0 staking provider SSV Network introduces testnet staking of its native token

      After a $10M funding round happened last month, SSV Network is now announcing the benefits of SSV Staking and how it works. Read Medium Article

      ClayStack Mainnet Goes Live On Polygon To Bring Liquid Staking

      Polygon Liquid Staking goes live on ClayStack mainnet – a decentralized liquid staking protocol where users can stake MATIC, Polygon’s native token, and start earning staking rewards. Read Blog Post

      Liquid staking for the Gnosis Beacon Chain is now live on StakeWise In the Stakewise app it is now possible to deposit GNO & mGNO and earn up to 18% APR. At the same time you secure the GBC network. Read Medium Article

      📢 New Integration for Osmosis is now LIVE

      To learn more, check out the Osmosis asset profile!

      📢 New Integration for LooksRare is now LIVE

      To learn more, check out the LooksRare asset profile!

      📢 New Journal Article

      Luna Arbitrage: The strategy others are using to get free Luna

      👀 Read the article

      🔔 New Staking Mondays Episode

      We welcomed Kieran Warwick, Co-Founder of Illuvium $ILV to the show📺

      Watch the full episode here!

      For all Staking Monday’s episodes, watch on YouTube and listen on Spotify. Make sure to subscribe to keep up to date on the latest trends in the staking industry.

      🔔The StakingRewards x Stakefish merch collab is live

      HEARTS holders can now claim:

      ☑️ A http://stake.fish branded Ledger Nano X

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      We are looking for proactive, intelligent, and determined people to join our team across all functions. Positions are fully remote.

      We are looking to hire 2-3 more Researchers, to join our team of 4 on a mission to become the unprecedented experts on staking data & economics. Apply here.

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      Please contact us at [email protected] for any research requests or general comments.

      Links:

      [Eth2.0 staking calculator]

      [List of all Eth2.0 staking variables]

      [Official Eth2.0 economics primer]

      [ConsenSys list of common Eth2.0 FAQs]

      About The Author

      Staking Rewards Research

      is a dedicated team of analysts in the emerging field of Staking, DeFi, and Passive Income with Cryptocurrencies.