How a Post-Merge Ethereum Could Attract Institutional Investment
Ethereum’s staking derivatives offer many of the qualities institutions look for in investments.
Mar 30, 2022 at 7:40 p.m. UTC:format(webp)/cloudfront-us-east-1.images.arcpublishing.com/coindesk/DTWDWQUZJFB4DHWJR5DAOXNBU4.jpg)
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As anticipation and mainstream media coverage begin to ramp up ahead of “the Merge,” a popular narrative about staked ether (ETH) and its derivatives is beginning to take shape: namely, that staked ETH could be an ideal investment vehicle for major institutions looking to dip their toes into crypto holdings.
Currently, staked ETH is already a wildly popular investment among crypto traders and investors, even though those deposits are illiquid and impossible to trade until sometime after the Merge takes place. Liquid staking solutions – services that offer users a tradable token representing those deposits in the ETH 2.0 staking contract– currently account for roughly $20 billion in deposits, per DeFiLlama, almost 10% of all of DeFi’s total value locked (TVL).
This article originally appeared in Valid Points, CoinDesk’s weekly newsletter breaking down Ethereum’s evolution and its impact on crypto markets. Subscribe to get it in your inbox every Wednesday.
The reason for this incredible success is attributable to how staked ETH derivatives offer yield farmers lucrative opportunities as part of complex farming strategies. For instance, users can leverage stETH, Lido’s staked ETH derivative, as collateral for many DeFi protocols.
Curve’s single largest pool is “steth,” with $4.91 billion in total value locked.Aave is another main destination for stETH, with $1.63 billion total stETH supplied. One popular strategy is when a user deposits their ETH into the Ethereum staking contract through Lido and receives stETH, then supplies their stETH as collateral to borrow more ETH against it, and re-stakes that borrowed ETH for stETH. The user can repeat this process multiple times over, in large part because the interest gained by staking is much higher than the borrowing rates across DeFi lending platforms. For instance, the APR for staking ETH is approximately 4%, while ETH’s variable interest rate for borrowing is 2.33% on AAVE’s lending platform, allowing them to create a leveraged yield position.
While the strategies institutions and individual farmers utilize with the assets will be different, staked ether’s core properties appeal to both for similar reasons.
A popular talking point among Ethereum maximalists is the “triple halvening” – after the Merge, ETH’s yearly inflation rate will drop from 4.3% to 0.43%, with new emissions falling from 12,000 ETH a day to 1,280 ETH a day. Combined with EIP 1559, which introduced an Ethereum burn mechanism, the switch to proof-of-stake will be the equivalent of three Bitcoin “halvenings” at once, the argument goes.
While traders have been excited at the forthcoming ETH supply shock for years (not to mention the beefier staking returns, which by some estimates might exceed 10%), institutions are starting to get the message as well.
In March, staking services provider Staked introduced a staked ETH trust aiming for 8% returns. Likewise, in June, Switzerland-based Sygnum Bank introduced institutional staking services for its clients. Even Goldman Sachs is getting in on the action.
The crypto market can be intimidating for institutional investors because it so rarely seems tethered to any fundamentals – the mess of dogcoins, memecoins and outright scams would put off any self-respecting suit. But trackable returns, provable scarcity and technological infrastructure – these are qualities an investment desk can appreciate.
Over 10 million ETH worth $34 billion is currently staked in the ETH 2.0 contract. As the buzz approaching the Merge grows louder, we expect to see more headlines about major financial entities getting involved as well.
Zelda’s big day
This has been an exciting week at Valid Points, as CoinDesk’s very own Beacon Chain validator, dubbed “Zelda,” successfully proposed a block yesterday. Zelda has been active since February 2021, and with Zelda’s new block proposal our total block proposals has increased to eight!
Zelda was awarded 0.0289 ETH or $98.23 for the successful block proposal. As shown in the graph in the Validator Health Data Visualization, there was a large increase in daily income yesterday, as block proposals are greater than attestations in one-time rewards. Zelda, over its entire lifetime, has earned 2.2177 ETH or $7,537.96.
Zelda’s last block proposal occurred in November 2021, five months ago. According to data sourced from etherscan.io, the average number of blocks produced daily in 2022 on the Ethereum network is approximately 6,455 blocks, and with 326,516 active validators an individual validator such as Zelda has a slim chance of receiving a block proposal each day.
Congrats, Zelda!
Pulse check
The following is an overview of network activity on the Ethereum Beacon Chain over the past week. For more information about the metrics featured in this section, check out our 101 explainer on Eth 2.0 metrics.
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Disclaimer: All profits made from CoinDesk’s Eth 2.0 staking venture will be donated to a charity of the company’s choosing once transfers are enabled on the network.
Validated takes
The dominance of Prysm, the leading client for the Ethereum proof-of-stake protocol, has waned to 62%.
- WHY IT MATTERS: Ethereum’s core developers have been warning about the lack of client diversity on the Beacon Chain because of the risk stemming from having more than two-thirds of all validators concentrated on a single client. While there is still an urgent need for improved diversity, the decrease in Prysm’s dominance to less than two-thirds majority demonstrates how the Ethereum community is making strides to address the lack of client diversity.
The U.S. Securities and Exchange Commission proposed revising the definition of a securities dealer.
- WHY IT MATTERS: The SEC’s proposal expands what it means to be a “dealer” to include traders and liquidity providers that utilize automated and algorithmic trading technology. A footnote in the 200-page document said the proposal would include any digital assets deemed as securities, which has been interpreted by some legal experts as a shadow attack on DeFi.
American policymakers are pushing to create a digital dollar through the introduction of the ECASH Bill.
- WHY IT MATTERS: The Electronic Currency And Secure Hardware Act would put the U.S. Treasury Department in charge of piloting digital dollar technologies that replicate the privacy-respecting characteristics of physical dollar bills. This digital dollar would be deemed legal tender and identical to a physical greenback.
Axie Infinity's Ronin Network has been exploited for 173,600 ETH and 25.5 million USDC.
- WHY IT MATTERS: The attacker compromised Ronin validators by using hacked private keys to forge fake withdrawals, making this one of the largest exploits in DeFi history. This attack highlights how the crypto space can be a vulnerable industry as the open-source nature of crypto creates a perfect environment for attackers to exploit.
Google Searches for “Ethereum Merge” hit an all-time high.
- WHY IT MATTERS: CoinDesk’s Omkar Godbole wrote, “Google Trends, a widely used tool to gauge general or retail interest in trending topics, recently showed a peak value of 100 for the worldwide search query ‘Ethereum Merge’ for the past 12 months.” Peak popular interest in the “Ethereum Merge” highlights the ongoing discussions and conversations about Ethereum post-Merge, which includes ETH’s supply decreasing and the impact proof-of-stake will have on the environment.
Factoid of the week
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Open comms
Valid Points incorporates information and data about CoinDesk’s own Eth 2.0 validator in weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.
You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is:
0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.
Search for it on any Eth 2.0 block explorer site,
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Andrew Thurman was a tech reporter at CoinDesk with a focus on DeFi.
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Sage D. Young was a tech protocol reporter at CoinDesk. He owns a few NFTs, gold and silver, as well as BTC, ETH, LINK, AAVE, ARB, PEOPLE, DOGE, OS, and HTR.