Is the Ethereum staking yield too high?

Author: RedStone and Warp.cc co-founder Marcin Kazmierczak, CoinDesk; Translator: Tao Zhu, Golden Finance

Staking has become increasingly popular in recent years due to the growth of staking as a service, staking pools, and liquidity re-staking. As of July 2024, Ethereum's security budget is as high as $110 billion in ETH, which is about 28% of the total ETH supply. Exchanges and financial applications have also widely adopted staking functions, allowing people to allocate their ETH to protect the Ethereum network. Many people believe that staking is a low-risk investment return, which is attractive to ETH holders. Ethereum co-founder Vitalik Buterin holds a portion of ETH staked, although he still has a portion of ETH unstaked.

As staking through liquid staking derivatives becomes more popular, there is a need to better quantify the staking returns of different platforms and how they change over time. One way to do this is to use the Comprehensive Ethereum Staking Rate (CESR) oracle information feed, which is a standardized on-chain Ethereum staking rate. This can serve as a useful benchmark when considering staking trends. It is critical to better quantify staking trends and consider their impact, while also pointing out the benefits of creating additional income for ETH holders.

Why should we consider reducing ETH issuance?

While staking is critical to Ethereum’s security, there are compelling reasons to reduce ETH issuance.

1. Diminishing Security Returns:After a certain point, adding validators contributes less to the security of the network. The marginal benefits decrease, while costs (primarily through ETH issuance) continue to rise.

2. Increased Validator Costs:As more is staked, operational costs such as hardware maintenance also rise. These costs are often passed on to users, making the network more expensive to maintain.

3. Centralization Risk:As large entities or staking pools control large amounts of staked ETH, centralization risk increases. This can harm the decentralization that Ethereum seeks to maintain.

4. Dilution and Inflation:Excessive issuance of new ETH to reward validators will lead to inflation, which dilutes the value of existing ETH holdings.

The Future of Staking

Staking, especially through liquidity re-staking, is growing rapidly. As Ethereum continues to innovate, it will be important to better quantify trends in this market area.