“How often do you think about the Roman Empire?”
Many of us have likely seen this social media meme in recent weeks. But, if not, some context: spouses across the internet have been perplexed to learn that evidently, their husbands think about the Roman Empire quite often. Once or twice a week, in fact, appears to be the typical response.
The team at CoinDesk Indices has been thinking about the Roman Empire a lot lately. Basically every day. Why? Because of the recently launched composite ether staking rate, otherwise known as CESR.
CESR, licensed by CoinDesk Indices from CoinFund, tracks the annualized yield from staking as a validator on the Ethereum Beacon Chain. This staking rate, which currently hovers at about 3.75%, is a combination of two elements: the consensus base reward and the more volatile transaction reward.
The base reward has marched on a slow and steady decline — the direct result of a continuous increase of fresh validators joining the consensus ranks since staking went live after the Merge in September 2022. That increase was further accelerated by the Shapella upgrade in April 2023, when validators could withdraw their stake for the first time.
As more validators participate in the consensus of the network, the base reward distribution to the entire network increases proportional to the square root of the additional validators. The result is that the reward for each individual validator decreases slightly.
This constant stream of new staking participants — the current number of validators sits at about 800,000 — has been so substantial that it has even led some to propose a hard cap on the number of new validators that can enter the pool on any given day. The rationale being that the current “churn” limit of 12 new validators per epoch, (which equates to 2,700 validators, 86,400 ETH, or roughly $138,000,000 per day), is unsustainable long term. A queue controls how many can join at any given time and the capacity of that queue increases as the network grows*, which could eventually stress the functionality of the network.
See also: How Staking Rates Can Drive the Crypto Economy Forward | Opinion
The numbers don’t necessarily bear that out, however, as nearly every other proof-of-stake protocol seems to operate just fine, despite considerably higher staked-to-unstaked ratios. Additionally, the projected yield if Ethereum was 100% staked is 1.6%. It’s hard to see that rate being attractive to the millions of validators needed to reach that point, but anything is possible.
Regardless, the near-doubling in validators since the Merge one year ago has been impressive. Staking is clearly very popular. But Ethereum is far from the only proof-of-stake protocol in town, which raises the question: What — if anything — sets it apart from the rest?
Well, for one, inflation. Since EIP-1559 in 2021, Ethereum has implemented a mechanism that burns a portion of ether on every single transaction on the network. The result today is that this burn mechanic often (but not always) offsets the network’s inflationary token minting, and in fact on occasion the inflation is negative. Ethereum’s staking yield is therefore effectively a “real” yield.
Here, we look at some of the other larger proof-of-stake (PoS) protocols, nearly all of which have been operating for years now, and evaluate their “real” staking rates. Many protocols boast higher annualized rates than Ethereum’s humble sub-4%. But, adjusted for their respective supply inflations, the “real” rates end up being far less impressive.
In fact, looking at the top PoS protocols by market capitalization in the CoinDesk Market Index, we find that despite advertising the second-lowest yield, after adjusting for supply inflation, Ethereum jumps to the second-highest. Only Polkadot is higher. If we begin to consider these in risk-adjusted terms, it’s no contest, particularly over longer time frames.
What we discover is that nearly every PoS chain has seen substantial supply inflation. In fact, with the exceptions of Ethereum and Cardano, every other PoS chain listed has averaged yearly inflation in the double-, and even triple-digits. So, while some chains boast double-digit yields for validating (or delegating to a validator), the reality is that in some instances a staker could have a negative “real” yield by the time they decide to un-stake.
"Fully diluted valuation," often abbreviated FDV, is not a meme after all; in other words, tokenomics matter. Pre-Merge, ether’s annualized supply inflation was over 3%. At the moment, with the implementation of its burn mechanics, it hovers right around 0%, meaning what you see is pretty much what you get.
It should be obvious that this high-level overview by no means covers the various intricacies of each proof-of-stake protocol. They have their own unique goals, and consensus is achieved in different ways. The difficulty, access and cost of staking can vary widely from one chain to the next. But what is evident is that a tremendous amount of infrastructure and products are being built around it, both on- and off-chain.
The advent of liquid staking is opening doors to an entirely new industry, rich with innovation and creativity. Other services are focusing heavily on simplifying the staking process, thereby removing the barriers to entry and enabling further decentralization in the space.
In the not too distant future, staking may be viewed as one’s civic duty. Rome wasn’t built in a day. Until then, CESR will keep marching on.
* For every 64,000 additional validators to the total pool, the number of new validators than can join increases by one validator per epoch (or 225 per day).
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