Staking: Dangers & Benefits
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Ethereum stands as the largest proof-of-stake (PoS) blockchain by the total value staked. As of July 15, 2024, ETH staking reached over $111 billion worth of ether (ETH), representing 28% of the total ETH supply. This staked ETH is often termed Ethereum’s “security budget” because it is at Dangers of being slashed by the network for double-spend attacks or other protocol violations.
In exchange for bolstering Ethereum’s security, stakers receive rewards through protocol issuance, priority tips, and maximal extractable value (MEV). The ability to stake ETH without sacrificing liquidity, due to liquid staking pools, has spurred staking demand beyond the expectations of Ethereum’s developers. With the current trend, developers foresee the staking rate—the percentage of total ETH supply staked—continuing to grow in the upcoming years.
The Different Variety of Stakers
Six main types of Ethereum users earn rewards from staking. Of these primary types of stakers, the most numerous type is managed stakers, stakers who delegate their ETH to professional staking node operators. Professional staking node operators, while not as numerous as their client base, are the type of staking entity with the highest amount of staked ETH under management.
Liquid staking, restacking, and liquid staking pool protocols are excluded from this analysis since they do not directly manage the infrastructure or fund its use. However, these entities do earn a portion of the rewards generated by professional or hobbyist stakeholders who use their platform to serve managed stakeholders. Acting as intermediaries, they facilitate the connection between managed stakers and professional or hobbyist stakers, making them significant players in the Ethereum staking ecosystem.
Lido, a prominent protocol, stands out as the largest staking pool operator on Ethereum, overseeing approximately 29% of the total ETH staked, which is delegated to professional and hobbyist stakers. Given the widespread adoption and crucial role of liquid staking pools on Ethereum, it is essential to recognize and understand the associated dangers of liquid staking.
The Dangers of Staking
Liquid Staking: Liquid staking involves not only the inherent dangers of direct and delegated staking but also introduces liquidity dangers. Market volatility and extended delays in validator entries or exits can lead to a de-pegging event, where the liquid staking token’s value significantly diverges from the underlying staked assets.
Delegated Staking: When delegating ETH to another entity for staking, you face the dangers of direct staking, along with counterparty risk. The entity responsible for your staked ETH might fail to uphold its duties as a staking service. ETH holders may opt to delegate to trust-minimized staking-as-a-service entities, which are primarily governed by smart contracts. However, this adds technological risk, as the code can be susceptible to hacks or bugs.
Liquid Staking: This encompasses all the inherent risks of direct and delegated staking, with additional liquidity risks. Market volatility and extended delays in validator entry or exit can trigger a de-pegging event, where the liquid staking token’s value diverges significantly from the underlying staked assets.
The Benefits of Staking
In return for the associated dangers, stakers can earn approximately 4% annual percentage yield (APY) on their staked ETH deposits. These rewards come from new ETH issuance, priority tips added by Ethereum end-users to their transactions, and maximal extractable value (MEV), which is the additional value generated from reordering user transactions within a block.
While the rewards from ETH issuance can be estimated based on the total number of active validators and the amount of staked ETH on Ethereum, the other two revenue streams—priority tips and MEV—are less predictable due to their reliance on network transaction activity.
Over the past two years, transaction activity has diminished, leading to lower base fees, priority tips, and MEV for validators. Typically, when higher-value assets are transferred on-chain, users are inclined to attach larger tips to prioritize their transactions in the next block, resulting in increased MEV for searchers who profit from reordering these transactions within a block.
Conclusion
Ethereum’s staking economy is still developing. Initially, with the Beacon Chain launch in 2020, ETH stakers couldn’t withdraw or transfer their funds. The 2022 merger introduced additional rewards through tips and MEV, and the 2023 activation of ETH withdrawals allowed users to exit validators and realize profits.
Future changes in Ethereum’s roadmap are expected to affect staking, with some changes impacting financial incentives. As Ethereum evolves, it’s essential to carefully assess the risks and rewards of staking, given the increasing complexity for protocol developers and the growing number of stakeholders.
