After Ethereum switched to POS, the development and opportunities of Ethereum staking

With the arrival of Ethereum Shanghai upgrade, Ethereum staking is expected to usher in a new climax.

Written by: Asher Zhang

After the Ethereum merger, the Ethereum network has switched from PoW to PoS consensus mechanism. PoS has fostered a staking ecosystem composed of participants. The Ethereum network will be protected by validators who have staked 32 or more ETH, replacing the previous role of Ethereum miners. With the disappearance of miners, the benefits of the Ethereum ecosystem have also been redistributed, and the staking track has undoubtedly made the most profit. So, what is the current situation of Ethereum staking? What opportunities does the Ethereum staking ecosystem have? What new atmosphere and opportunities will the Ethereum Shanghai upgrade bring to the staking track? This article will discuss these issues.

After Ethereum switched to PoS, opportunities for staking

After the merger of Ethereum, the staking income of ETH was supplemented by transaction fees and MEV income in the short term, and the yield of staking ETH increased; but after excluding some extreme cases, with the continuous increase in the amount of Ethereum staking, the annualized staking yield of Ethereum tended to decline overall. As of December 6, according to Oklink data, the annualized yield of Ethereum staking was 4.06%.

Although the annualized yield of Ethereum is generally declining, Ethereum has a strong value preservation, and the amount of Ethereum pledged has been rising. According to Oklink data, as of December 6, the Ethereum pledge rate was 12.99%.

However, compared with the token pledge ratios of many other large public chains, Ethereum's pledge ratio is relatively low. The pledge ratios of many public chains are mostly distributed around 60%-80%, and Ethereum's pledge ratio still has a lot of room for improvement. However, it should be noted that the high pledge rates of many large public chains are mainly attracted by high annualized yields, which will result in a reduction in the value of pledged tokens; and Ethereum has actually entered a deflationary stage since the merger. With the continued prosperity of the Ethereum ecosystem, the economic incentives of Ethereum pledge are very sustainable and attractive, and are constantly attracting more and more institutions to participate.

Sandy Kaul, senior vice president of Franklin Templeton, the world's largest listed fund management company with approximately $1.5 trillion in assets under management, said in an interview with Real Vision that "Ethereum staking provides a huge opportunity for institutions that are interested in the crypto market. I have seen some very strong products that I think will fully meet the needs of institutional investors." On September 29, Deutsche Telekom launched the latest institution for Ethereum equity services. Its T-Systems MMS subsidiary will host verification nodes for blockchains and provide custody solutions for the liquid staking solution StakeWise. Earlier, on September 8, Swiss digital asset bank SEBA Bank announced the launch of ETH staking services, which provides more bank customers and investors interested in cryptocurrencies with the opportunity to enter the cryptocurrency market. In the future, I believe that more institutions will participate, because Ethereum has great potential in the future, and it is still very attractive compared to financial products in traditional markets.

Overview of Ethereum staking ecosystem and status

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

Ethereum Protocol — is a set of rules run by Ethereum nodes, 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 amount that can be extracted from block production beyond the standard block reward and gas fees by changing or excluding the order of transactions in a block, a concept originally applied by Proof of Work (PoW) miners.

Flashbots — extends the Go-ethereum client with a service that allows searchers to submit MEV transactions to miners without revealing the transactions to the public mempool, which helps reduce high gas prices.

Distributed validation technology - refers to Ethereum validators running on multiple untrusted 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.

Stake Providers – are considered the backend operators who run all the computers and physical infrastructure that make a PoS blockchain function.

Staking Pools - Issue liquidity tokens that represent staked ETH and allow users to trade or use the token in DeFi applications, as well as in return for new trading/investment opportunities.

Custodian - is the institution that actually owns the user's financial assets. It is usually a brokerage firm, commercial bank, or other type of institution that holds the user's funds and investments for convenience and security.

Data vendors – are organizations or businesses that provide data for use by third parties. Some data vendors provide access to datasets for free, others sell data for a fee, and some data vendors offer a mix of free and paid data services.

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

Wallets and Explorers — are the connection points between the user, the protocol, and the Ethereum chain. Wallets have different features to suit the needs of the user. The ones listed offer Ethereum staking as a key feature of the wallet.

Custodial staking - users stake cryptocurrencies through a centralized entity. The exchange is the custodian of the user's assets. Users entrust the management of their private keys to the exchange and are bound by its terms.

Interpretation of the leading project in the Ethereum staking track

Although the Ethereum staking ecosystem has taken shape, as mentioned above, Ethereum staking assets only account for about 13% of the circulation. It is foreseeable that a lot of growth has not yet arrived, which also means that there is still a lot of room for growth in the Ethereum staking track in the future. In such a huge and promising track, the most noteworthy ones are undoubtedly the leading staking projects. In the staking track, the four major institutions, Lido, Binance, Kraken, and Coinbase, have basically monopolized Ethereum PoS staking. Among them, 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. Depositing ETH into the Lido smart contract will receive transferable stETH (Lido platform staking ETH liquidity token). In return, 10% of all ETH staking income (which can be changed through LDO voting) goes to the Lido DAO, which is controlled by LDO token holders.

Its advantages are:

1. Lido’s stake accounts for 30.36% of the total Ethereum stake, ranking first on Ethereum. Lido has an absolute advantage in the market.

2. Lido is easy to operate and has no threshold to choose, and its deep usage is comparable to stETH.

The disadvantages are:

1. LidoDao controls Lido. According to Nansen statistics, the top 9 addresses control 46% of the voting rights, which can theoretically influence the validators and thus affect whether the nodes comply with the review. If the Lido market continues to expand, it will face two major problems: decentralization and anti-censorship.

2. Lido is too large, and the increase in Ethereum staked by Lido in 2022 is quite insignificant;

3. Problems such as centralized governance and excessive market share emerge.

Future development of Ethereum staking track

Currently, Ethereum can only deposit ETH but cannot withdraw ETH. The total value of pledged ETH is close to 23.5 billion US dollars, which is "trapped" on the Ethereum network. If the unstaking function is not opened as soon as possible, the attractiveness of staking ETH will be greatly reduced, and the number of people entering the Ethereum ecosystem will also be affected in the future. This will undoubtedly have a huge impact on the future development of Ethereum and network security. Therefore, after the London upgrade, the most important 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, the withdrawal operation of pledged ETH is realized, and the implementation method is to introduce system-level withdrawal instructions. There are many ways to perform withdrawal operations. The characteristics of this withdrawal operation are as follows: 1. It is initiated by the system itself, not by a certain user, which is simpler and easier to review; 2. There is no gas fee consumption. The system initiation is controlled by the withdrawal limit of the consensus layer, and there is no need to use gas for anti-DoS protection; 3. Directly update the balance of the execution layer, without EVM execution process, and adopt the simplest implementation strategy.

Ethereum core developers have previously stated that the Shanghai upgrade will probably be at some point in Q1-Q2 of 2023. With the arrival of the Ethereum Shanghai upgrade, Ethereum staking is expected to reach a new climax. By then, the Ethereum staking track will once again usher in major development opportunities.