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Ethereum Staking: The Untapped Potential


Staking on Ethereum: A Growing but Underutilized Opportunity

Ethereum, the largest proof-of-stake network by market cap, has seen significant growth in staked ETH, with 32.5 million ($99 billion) ETH staked, a 78% increase since the Shanghai Upgrade in April 2023. However, only 27% of the ETH in circulation has been staked, leaving room for growth. Other proof-of-stake networks, such as Solana, Cardano, SUI, Avalanche, and Aptos, have a higher staking ratio, between 48%-81%. This suggests that staking on Ethereum can expand, potentially fueled by the adoption of Liquid Staking or Liquid Restaking Tokens on Layer 2 networks and DeFi protocols.

The Next Upgrade: Pectra and EIP 7251

The next Ethereum upgrade, Pectra, is expected to take place by the end of 2024 or early 2025. One of the key proposals, EIP 7251, aims to provide a better UX for validators to earn staking yield. This proposal will increase the max effective balance of validators from 32 to 2048, allowing leading staking service providers like Coinbase to consolidate the number of validators and increase efficiency and lower the cost of operation.

Auto-Compounding Staking Rewards

Solo stakers can now enjoy auto-compounding their staking rewards. However, at the current stage, solo stakers’ staking reward will be withdrawn to the execution layer automatically, and the reward received will no longer accrue staking yield. Solo stakers will need to wait until they have 32 ETH before spinning up another validator to capture the staking reward.

Restaking: The New Catalyst

Restaking has been an exciting primitive on Ethereum, with 38% and 48% of the staking volume coming from liquid staking protocols in March and April 2024, respectively. EigenLayer’s TVL comes from native ETH, showing the level of traction that restaking is able to bring to Ethereum. With the maturity and adoption of restaking, we could see more staking volume come from restaking and liquid restaking in the future.

Risks and Uncertainties

However, it is essential to note that restaking comes with risks, such as smart contracts and the quality of actively validated services. Given the reward and slashing mechanism of EigenLayer has not been activated, we are yet to see the full ramifications of restaking, both good and bad.

TL;DR: Ethereum staking has seen significant growth, but only 27% of ETH has been staked. The next upgrade, Pectra, aims to improve the UX for validators, and restaking has the potential to increase staking volume. However, restaking also comes with risks, and its full implications are yet to be seen.

Source: Coindesk


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