Staking rates are to crypto what interest rates are to traditional finance. Ethereum’s transition a year ago to proof-of-stake with “The Merge” was an incredible accomplishment for its ecosystem that delivered obvious enhancements to network security and reduced its energy footprint by 99.95%.
This shift, which made it so validators are rewarded with both protocol emissions and priority transaction fees, also unlocked something perhaps less obvious but absolutely groundbreaking for Ethereum: the introduction of a native interest rate. Staking ether (ETH), the ecosystem’s native token, now pays an interest rate. This forms a sort of bedrock layer – similar to the role interest rates play in traditional finance – that could power a new, global staking economy. For this to work, though, there must be a reference rate, so investors know what the benchmark is at any given time – a reliable number derived by observing the mean, annualized returns across a comprehensive validator population.
A standardized staking rate built on social consensus will serve as a foundational pillar of the crypto economy. It will catalyze new financial instruments and capabilities and unlock a new wave of consumer and institutional adoption.
Here are five reasons why the world needs a standardized staking rate:
- Benchmarking: Standardized interest rates are foundational across global finance. They serve as reference rates and performance indicators, and enable derivatives that serve as risk assessment tools. A standardized benchmark would help market participants clearly identify relative performance to Ethereum’s benchmark rate. Like an exchange-traded fund (ETF), which integrates efficiently into traditional financial securities infrastructure, a standardized staking rate benchmark would neatly fit into traditional systems – just like any other fiat reference rate. It would be a big deal for institutions. Today, institutional staking providers pay clients variable, bespoke, annual percentage yields (APYs) or floating rates. Offering yield returns relative to a common reference rate would give end users greater transparency and confidence about the floating returns they are set to receive.
- Real Yield: Ethereum’s real yield competes nicely with its traditional finance peers. Over the last year, changes to the protocol shifted the supply mechanics for Ethereum, making it potentially deflationary. As a result, when looking at the staking rate through a real yield lens, it can compete with its fiat peers. In time, investors seeking to maximize risk-adjusted yield will need to seriously consider deploying capital for the real-yield opportunities across Ethereum’s staking economy.
- Total Return Products: When it comes to exchange-traded products (ETPs) and other structured instruments, market participants do not want to limit their market exposure to ETH; they prefer products that deliver total return ETH, which includes the staking rate. While liquid staking tokens may deliver variable rates for crypto native market participants, a standardized staking rate could unlock a new class of financial products (synthetic or otherwise) that deliver ETH plus staking, a total return that would have strong institutional appeal. The holy grail of ETH ETFs will be the one that also pays the staking yield, and a standardized benchmark for that yield is essential for this offering.
- Risk Management: A standardized staking rate will enable market makers to create a forward yield curve and offer liquidity across a vast array of derivatives products, including swaps, futures and options that can be used for hedging and other risk management use cases. In traditional financial markets, interest rates alone underpin $500 trillion in notional swaps exposure, and derivatives such as these enable stakers to hedge against the volatility of the benchmark while also allowing market participants (on the other side of the trade) to hedge against future rising gas costs or seek real yield. Derivatives will also allow institutional staking providers to offer fixed-yield rate products, which are few and far between in crypto but widely available in traditional finance. Markets grounded by hedgers tend to drive liquidity, and a standardized staking benchmark will serve as a foundational building block for a new class of derivatives markets.
- Valuations: Using a discount rate to calculate a valuation is a common method in finance and investment analysis, especially when evaluating the worth of an investment, business or financial instrument. A standardized staking benchmark that serves as a foundation for a discount curve will help inform valuations across the Ethereum economy. This would not be possible without native staking rates.
Ethereum’s transition to proof-of-stake introduced native interest rates to the ecosystem for the first time. Industry adoption of a standardized benchmark has nearly infinite use cases and will be an important step in the evolution and maturity of crypto markets. Like traditional markets, interest rates can potentially drive crypto native markets forward and unlock a new wave of global adoption.