Staking on Ethereum has become a hot topic as the blockchain network continues to evolve. Galaxy’s comprehensive report sheds light on the opportunities and risks that Ethereum stakeholders face in the staking landscape. In this first part of a three-part series, we delve into various staking activities, including restaking and liquid restaking.

Overview of Ethereum Staking

Ethereum (ETH) holders have staked over $111 billion worth of Ether as of July 15, 2024, representing 28% of the total ETH supply. This staked amount is known as the “security budget” of Ethereum, contributing to the network’s security and rewarding stakers through protocol issuance, priority tips, and maximal extractable value (MEV). However, the high demand for staking has prompted developers to consider changes to issuance policies to manage this trend.

Types of Stakers

There are six main types of Ethereum users who earn rewards from staking. Managed stakers, who delegate their ETH to professional staking node operators, are predominant. Liquid staking protocols like Lido also play a significant role, with around 29% of total ETH staked delegated through such platforms.

Risks of Staking

Staking risks differ depending on the method used:

• Direct Staking: Involves running proprietary staking hardware and software, with risks such as staking penalties and slashing.
• Delegated Staking: Involves delegating ETH to another entity, introducing counterparty risk.
• Liquid Staking: Involves delegating ETH and receiving a liquid token, adding liquidity risks.

Regulatory risks, especially for delegated and liquid staking methods, as well as protocol risks like penalties for offline nodes and slashing, are significant concerns.

Staking Rewards

Stakers can earn approximately 4% APY on their staked ETH deposits, derived from new ETH issuance, priority tips, and MEV. However, rewards have decreased in the past two years due to increased staking and reduced transaction activity on the network.

Staking Rate Projections

The staking rate on Ethereum is projected to surpass 30% in 2024. Liquid staking services have simplified the staking process, bypassing typical limitations like entry queues. Developers are exploring changes to issuance policies to manage staking demand and maintain network balance.

Issuance Change Discussions

Developers are considering various options to reduce Ethereum’s staking rate, including short-term reductions in staking yields and long-term stake ratio targeting. These discussions have sparked controversy, with concerns about staking provider profitability and the lack of data-driven analysis for proposed changes.

Conclusion

The Ethereum staking economy is still in its experimental phase, evolving as the network undergoes further changes. Stakeholders must carefully evaluate the risks and rewards associated with staking as the base of stakeholders widens. While frequent changes to staking dynamics pose challenges, Ethereum, as a relatively new proof-of-stake blockchain, is expected to undergo significant evolution in the years to come.

For a detailed overview of Ethereum staking and future projections, check out the full report by Galaxy here.

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