​The evolution of ETH Staking market demand, yield and products after Shanghai upgrade

ETH staking demand rises after withdrawal surge

ETH staking has been available on the Ethereum beacon chain since December 2020, but withdrawals were not enabled until last month’s Shanghai upgrade, which saw a significant increase in demand for ETH staking as Ethereum validators were able to withdraw staked ETH.

Currently, ETH holders can participate in staking by setting up network validators or staking service providers such as LSD, earning 4-6% ETH currency-based returns each year. In the eyes of most investors, opening up ETH staking withdrawals has increased the flexibility of funds, and there is no need to worry about funds being locked for a long time, and the staking risk is greatly reduced.

Judging from the trend chart of ETH staking deposits and withdrawals, the withdrawal tide is gradually subsiding after the Shanghai upgrade, and recently the staking deposits have far exceeded the withdrawal amount.

According to data from Wenmerge.com on May 20, there are 62,932 "quasi-validators" in the staking waiting queue. If you currently want to queue up to stake ETH on the Ethereum network, you need to wait 34 days and 2 hours; and there are only 6 validators waiting to exit the staking, so there is almost no need to wait in line.

According to OKLINK data, the number of ETH staked was approximately 18.01 million ETH during the Shanghai upgrade (April 12), and the number of ETH staked reached 18.41 million on May 18. After several waves of withdrawals, the number of ETH staked actually increased by 400,000.

Since the total supply of ETH is approximately 120 million, this means that Ethereum’s current staking participation rate is 15.47%, up from 15.1% before the Shanghai upgrade.

ETH’s potential double “deflation” trend

Compared with other PoS blockchains that allow flexible withdrawal of staking, such as Cardano, Solana, Avalanche, Cosmos, etc. (the staking participation rates are all in the range of 60-70%), ETH's staking rate still has a lot of room for improvement.

Allen, the founder of Ebunker, predicts that the future staking rate of Ethereum will be around 40%. Of course, given that only more than 50,000 ETH are allowed to be withdrawn from the staking contract every day, ETH staking withdrawals are not strictly flexible (in fact, it depends on the situation and sometimes requires queuing), so it may not be able to achieve the high staking participation rate of the above-mentioned PoS blockchain.

Judging from the current situation, the ETH staking participation rate will continue to increase over time, and the amount of unstaked ETH will gradually decrease, which will provide the first level of support for the ETH price.

In addition, in the 247 days since the Ethereum merger was completed, the total supply of ETH has decreased by 248,000, with an annual inflation rate of -0.31%. The total supply of ETH is decreasing, which is the second price support.

In early May, ETH’s short-term annual inflation rate reached -8.3% at one point, as the ETH burn rate surged due to a recent rise in transaction fees caused by meme-related network congestion.

LSD gets more liquidity

The Shanghai upgrade unlocked over $35 billion worth of liquidity capital, which had a significant impact on the liquidity pledge derivatives (LSD) market and significantly increased market liquidity. Before the unlocking, the main risk of holding LSD (such as stETH or rETH) was the volatility of the LSD to ETH exchange rate, but this is no longer the case.

The fluctuation of the LSD to ETH exchange rate is largely due to the fact that the staked ETH is locked, and investors can only withdraw the staked ETH at a certain discount rate when they are in urgent need of funds. After the upgrade, ETH can be withdrawn from the staked contract, so LSD can be closer to the ETH price. Correspondingly, the risk of impermanent loss in DeFi is also reduced, and users have more opportunities to use LSD and ETH to provide liquidity for AMM.

Take Lido Staked ETH as an example. As the stETH of the Lido protocol gained liquidity, it became the most important liquid LSD. Thanks to the snowball effect, Lido Staked ETH quickly gained most of the market share of staked ETH. In the longer term, similar situations may play out more broadly across the entire asset class.

Compressed revenue & more products

According to Delphi Digital’s forecast, the ETH staking rate will double in the next 12 months. Judging from the recent 5% annualized staking rate of return, it is very cost-effective for ETH stakers.

However, as more and more users participate in staking to get rewards, the staking yield will be compressed. It is expected that the ETH staking yield will gradually drop to 3% in the future, and stakers will also seek alternatives to increase their returns.

Case 1: OETH of Origin Protocol

OETH was created in response to the latest developments in Ethereum and LSD. OETH hopes to provide an alternative to LSD, earning income from staking rewards, transaction fees, and token rewards. Specifically, OETH's income sources include ETH staking interest + DeFi strategy profits and other token rewards (Compound, Aave, Curve, Convex, etc.).

First, by holding LSD, OETH can obtain a basic yield from validator rewards; second, by providing DeFi liquidity, more benefits can be obtained; finally, since ETH in DeFi earns transaction fees and token rewards, OETH holders will also receive additional benefits.

The rebase mechanism enables holders to receive rewards without having to pay gas fees or stake their tokens. The end result is a significantly higher APY on ETH without any of the hassles associated with staking. The characteristics of the Origin protocol make it one of the easiest ways to earn ETH yields, with yields exceeding those of traditional LSD protocols.

To improve efficiency, users can mint OETH on oeth.com or exchange ETH for OETH on the Curve platform.

Regarding the security of the Origin protocol, OETH has passed the OpenZeppelin audit, which is also responsible for the security audits of Coinbase, Aave, and The Ethereum Foundation.

Case 2: EigenLayer and shared staking

Eigenlayer is a new ecosystem for shared security that allows developers to leverage staked ETH to provide shared security. In return, stakers can earn secondary yields from other networks, providing ETH stakers with more optionality and higher yields. Although Eigenlayer is still in its infancy, it provides new opportunities for ETH yields.

Simply put, EigenLayer hopes to allow ETH Stakers to use a deposit (i.e. 32ETH) to perform more verification work, such as price feeders of oracles, middlemen of cross-chain bridges, validators of certain chains, etc., so that ETH Stakers can obtain more benefits.

summary

Since the launch of the Shanghai upgrade, the market has been paying close attention to the trend of Ethereum prices, but what should really be paid attention to is the progress of LSD and its surrounding infrastructure. At present, there is a relatively obvious trend: as the participation of ETH staking increases, the staking rewards will inevitably be evenly distributed and reduced accordingly until a dynamic balance is reached.

At present, this field is still in a very early stage and is in the bonus period of Staking. Therefore, it is the only choice for ETH holders to participate in Staking as soon as possible, start queuing as soon as possible, and make money from the current high APR.

Ebunker, an Ethereum long-termist, pays close attention to Ethereum technology development, proposal upgrades and community changes, and shares research and opinions on Ethereum's key tracks such as Staking, L2, and DeFi.

Currently, Ebunker includes businesses such as Ebunker Pool (a non-custodial Ethereum staking pool) and Ebunker Venture (Ethereum maximizing venture capital).