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Surging Popularity of Ethereum Staking Works Against Yields

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VOC, Voice of Crypto, ETH

Key Insights:

  • About 14 million Ether (ETH) worth over $2 billion is currently deposited on the Ethereum blockchain.
  • The increased staking is due to the recent Merge of the Ethereum Blockchain.
  • As more validators stake their tokens, the staking yield continues to decrease. 

According to Dune Analytics, traders have staked about 14 million Ether (ETH) worth over $12 billion on the Ethereum blockchain. Shortly after the migration to the Proof of Stake model in the last few weeks, ETH staking increased significantly. 

There was a spike in deposits to about 7.5% more than was recorded in the second quarter. The validators pooled their tokens into the Ethereum blockchain and were optimistic about high yield because of the Merge. 

Understanding the Ethereum Staking and Yields

Since the Ethereum merge that’s barely a month old, staking has become popular among crypto traders. The Proof of Stake model requires you to stake your coin and create validator nodes. The staked tokens will then be used to verify transactions. 

This staking method has become the new favorite for crypto traders to capture yields. As more traders stake their tokens, the yield reduces. That is, the percentage profit made by traders keeps reducing. 

The reduction is due to the formula for calculating yields under Ethereum’s Proof of Stake mechanism. The formula is the total amount of Ether (ETH) available for staking yield divided between all the accounts. 

Thereby increasing the account that will divide the Ether and reduce the yield. So as more accounts submit their Ether for staking, the less the yield to be shared. 

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Nick Hotz, the vice president of research at Arca Funds, identified the determinant variables of the staking yield. They are; gross ETH issuance, transaction fees generated per day by Ethereum, burning rate, and the amount of staked ETH. 

Similarly, there is another formula for calculating the staking yields.  

The annualized staking yield = [annual gross ETH issuance + annual fees * (1-% of fees burned)] /average ETH staked over the year.

Conclusion 

Shockingly, the staking yield continues to reduce amidst an increase in the number of validators. The stakeholders anticipated more than the Ethereum merge is offering. 

Before transitioning from the Proof of Work to Proof of Stake, experts opined that the staking yield percentage would rise to about 9%-12%. 

Barely after a month of the merge, the staking yield stands at about 4%-5%. Unfortunately, the staking yield might continue to decrease with no option for traders to opt out. 

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