Crypto for Advisors: Ethereum Staking

The
Ethereum
network

generates
over
$1
million
daily
in
transaction
revenue,
up
35%
from
one
year
ago.
Participants
can
stake
their
asset
to
be
a
validator
and
earn
revenue
or
yield.
ETH’s
all-time
high
was
$4,729
and
is
currently
close
to
$1,000
away.

Christopher
Perkins
from
CoinFund
explains
how
ether
and
staking
are
part
of
an
emerging
on-chain
financial
product.

Alex
Ryvkin
from
Rho
Labs
covers
common
questions
on
the
topic
in
Ask
an
Expert.

In
this
article,
we
reference
Ethereum,
ether
and
ETH
–
for
clarity,
Ethereum
refers
to
the
blockchain
network
while
ether
and
ETH
refer
to
the
cryptocurrency.

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reading.

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With
over
$10
billion
in
inflows
in
less
than
two
months,
the
spot
bitcoin
ETF
is
already
considered
the
most
successful
product
launch
in
ETF
history,
drawing
widespread
mainstream
attention
to
the
exciting
crypto
asset
class.
With
its
supply
cap
of
21
million
tokens,
bitcoin’s
narrative
as
“digital
gold”
or
a
store
of
value
is
easily
understood.
Now,
investors
are
asking,
“What’s
next?”

Enter
ether,
the
second
largest
crypto
asset
by

market
capitalization.
Ethereum
pioneered
“smart
contracts”
that
now
include
decentralized
finance
(DeFi),
non-fungible
tokens
(NFTs)
and
other
applications
across
the
ecosystem.
These
applications
have
skyrocketed
since
Ethereum
was

conceived
nearly
10
years
ago,
driving
demand
for
its
native
token,
ether
(ETH)
which
is
needed
to
pay
for
“gas”
to
record
transactions
on
its
blockchain.
Like
Bitcoin,
Ethereum
has
taken
steps
to
stabilize
its

monetary
supply,
and
today,
its
token
supply
is
slightly
deflationary:

Figure
1:
Supply
of
ether
(Source:

Ultrasound.money)

Any
asset
with
a
stable
supply,
increasing
demand
and
obvious
utility
could
be
worthy
of
investment
research.
Ethereum
also
delivers
a
compelling
yield
to
those
who
participate
in
its
security
as
network
validators
via
a
process
called
“staking.”

Unlike
Bitcoin,
which
relies
upon
miners
to
solve
mathematical
equations
known
as
“proof
of
work”
to
validate
transactions,
Ethereum
migrated
to
a
“proof
of
stake”
validation
mechanism
in
2022.
Under
this
approach,
those
who
participate
in
securing
the
network
by
“staking”
their
tokens
are
rewarded
by
the
protocol,
and
the
validators
also
receive
awards
known
as
priority
transaction
fees,
as
an
extra
incentiveto
include
a
user’s
transaction
in
the
upcoming
block.

Today,
there
are
nearly

1
million
validators
on
the
Ethereum
network,
and
the
combination
of
protocol
rewards
and
priority
transaction
fees,
against
the
backdrop
of
a
stable
monetary
supply,
result
in
a
compelling
[real]
yield
for
investors.

Figure
2:
The

Composite
Ether
Staking
Rate,
CESR
(Source:
CoinDesk
Indices)

So,
while
bitcoin
has
become
known
as
“digital
gold,”
Ether’s
narrative
has
shifted
to
“the
internet
bond”
because
of
this
underlying
staking
yield.
To
fully
understand
the
investment
case,
it’s
important
to
understand
the
drivers
of
its
yield:
1)
protocol
or
consensus
layer
awards
and
2)
priority
transaction
fees
or
execution
layer
rewards.

Consensus
awards
are
given
to
validators
by
the
protocol
for
securing
it.
The
size
of
the
rewards
are
correlated
to
the
number
of
validators
that
are
securing
the
network.
Since
these
rewards
are
shared
across
the
validators,
the
more
validators,
the
lower
the
rewards.
Ethereum
has
seen
the
number
of
validators
increase
materially
since
it
transitioned
to
proof
of
stake.
As
a
result,
consensus
rewards
have
declined
over
that
time
period.

Figure
3:
Ethereum
consensus
layer
rewards
(Source:
CoinDesk
Indices)

Priority
transaction
fees
are
the
second
component
of
Ethereum’s
native
yield
and
these
rewards
are
generated
through
transaction
processing,
paid
by
users.
The
volatility
of
these
execution
rewards
is
correlated
to
the
level
of
activity
and
demand
across
the
ecosystem.
Notably,
transaction
fees
spiked
during
the
insolvencies
of
FTX
(November
2022)
and
Silicon
Valley
Bank
(March
2023)
and
during
a
frenzy
of
memecoin
trading
activity
(May
2023),
since
users
raced
to
confirm
their
transactions
on
the
blockchain.

Figure
4:
Ethereum
Transaction
Fees
(Source:
CoinDesk
Indices)

Today,
Ethereum’s
staking
yield
powers
the
new
“internet
bond.”
Like
traditional
rates,
staked
ether’s
real
yield
can
power
competitive
returns,
unlock
structured
products
and
enable
new
classes
of
derivatives.
As
investor
attention
pivots
to
ether,
“total
return”
products
that
integrate
its
native
yield
will
certainly
take
center
stage.

–


Christopher
Perkins,
managing
partner
and
president,
CoinFund

Q.
Despite
spot
bitcoin
ETF
approvals
and
the
impending
halving,
ether
is
still
outperforming
bitcoin
YTD.
What
could
be
the
reasons
for
that?

A:
In
recent
days,
bitcoin
has
stolen
the
limelight
from
ether,
as
its
price
jumped
to
a
new
all-time
high
on
Tuesday.
However,
ETH
remains
the
better-performing
asset,
with
an
exceptional
YTD
return
of
68.13%.

While
Bitcoin
boasts
perhaps
the
strongest
and
most
dedicated
community
in
crypto,
Ethereum
has
become
the
infrastructure
layer
for
the
vast
majority
of
blockchain
applications.
As
network
adoption
grows,
Ethereum
is
offering
holders
of
ETH
the
opportunity
to
participate
in
network
fees
via
native
staking.
Ether’s
wide
adoption,
deflationary
nature
and
native
yield
constitute
a
large
part
of
the
asset’s
appeal.

As
a
function
of
network
usage,
ETH’s
native
yield
tends
to
fluctuate
quite
heavily
depending
on
the
state
of
the
crypto
market.
To
further
the
attractiveness
of
ETH
as
an
asset,
especially
with
institutional
and
non-crypto-native
audiences,
products
enabling
fixed-yield
ETH
staking
may
be
required.

Q.
What
does
the
future
of
ETH
staking
look
like?

A:
In
traditional
finance,
yield
is
king.
With
institutional
interest
towards
ETH
on
the
rise,
and
the
growing
popularity
of
staking-focused
DeFi
protocols
such
as
Lido
and
EigenLayer
(the
latter
flipped
Aave
this
week
to
become
the
second-largest
DeFi
protocol
behind
Lido),
the
importance
of
native
ETH
yield
will
also
continue
to
grow.

Most
recently,
asset
managers
such
as
ETC
Group
and
CoinShares
started
offering
total-return
ETPs
that
add
a
staking
yield
kicker
on
top
of
ETH
token
performance.
In
the
US,
Franklin
Templeton
and
Grayscale
also
look
to
incorporate
staking
into
their
proposed
ETFs.

In
the
non-ETH
realm,
Grayscale
has
recently
announced
its
actively
managed
Dynamic
Income
staking
fund,
further
proving
the
importance
of
income-focused
products
for
the
ecosystem.
It
is
safe
to
say
that
as
the
investors’
familiarity
with
the
asset
class
grows,
staking
yields
will
become
table
stakes
for
serious
ETH-based
products
and
services.

–

Alex
Ryvkin,
CEO,
Rho
Labs

The
US
spot
bitcoin

ETFs
surpassed
$50
million
AUM
this
week,
less
than
two
months
after
their
launch.

The
Securities
and
Exchange
Commission
has
again

delayed
its
decision
on
BlackRock
and
Fidelity’s
spot
ETH
applications.

Bank
of
America’s
Merrill
and
Wells
Fargo

provide
clients
access
to
the
spot
bitcoin
ETFs.