Erik Weijers, 8 months ago
Previously we wrote that Ethereum could become the 'bond of the internet'. Now that the Ethereum merge is coming (September 19 is mentioned as the date) it is time to look at the implications of this. What will the Ethereum staking percentages mean for the perception of Ethereum in traditional markets?
If Bitcoin is gold - like gold, it does not earn you interest - then after the merge, Ethereum will be a bond. The comparison is not as far-fetched as you might think. In the same way that you can lend money to a government in exchange for interest - this is a government bond - you can soon put away ETH and receive interest, paid out by a smart contract. The validators who put ETH away help to keep the network safe and receive a reward for doing so. Incidentally, you do not necessarily have to be a validator: you can outsource the staking to, for example, crypto exchanges.
It is not yet known how high the rate is that stakers of Ethereum will be paid after the merge. Estimates range from 4% to 10% or more. This figure depends in part on the number of ETH holders who choose to stake: the higher this is, the lower the staking yield.
As is well known, there are several proof-of-stake protocols that are currently paying staking yields. For example Solana, Polkadot and Cardano. Compared to Ethereum, they are still less developed and have fewer applications and users. In short, the future of these protocols is more uncertain than that of Ethereum. To compensate for that risk, the yields they pay out should be higher than Ethereum.
If Ethereum is the United States among blockchains, then chains like Cardano and Solana are emerging market countries. U.S. government bond rates are the benchmark for the rest of the bond market. Because the exchange rate risk of the dollar is lower than that of, say, the Argentine peso, investors settle for a lower interest rate on U.S. government bonds. Similarly, the Ethereum staking rate can begin to act as a benchmark for the entire proof-of-stake crypto market.
(Note that staking rates in crypto depend not only on the risk you take but also on the inflation rate of the coin in question. The reason DOT pays out around 13% is also because the amount of DOT in circulation increases by 10% each year. With Cardano, the inflation rate is much lower, and so is the staking rates are. Ethereum is likely to have negative inflation after the merge: so on balance, ETH disappears from circulation).
In short, the dynamic that Ethereum and other chains will create together is familiar to institutional investors. They are not used to anything else in traditional markets. They are used to dividends (when it comes to stocks) and interest (when it comes to bonds).
Another reason why institutional parties will be extra interested in Ethereum after the merge is that it no longer uses proof-of-work and thus much less energy. This fits in with the sustainability requirements of many investors.
By the way, in the run-up to the announced merge next September, the price of Ethereum has taken a big jump. We will see whether the actual merge will be a case of 'buy the rumor, sell the news'. In short, a (temporary) price drop after the merge. But for the long term, the merge - if successful - promises much good for Ethereum and the rest of the proof-of-stake market.
Mar 22, 2023
Things are looking good on many fronts for Ethereum. Both censorship resistance and deflationary issuance are surpassing expectations. When in April users will be able to unstake their Ethereum, every Eth holder can breathe a sigh of relief.
Mar 17, 2023
After over two years since staking Ether became possible, stakers may finally withdraw their Ether. It all hinges on the proper execution of the Shanghai hardfork, which now has a date: April 12.
Mar 06, 2023
Lido is the biggest provider of liquid staking, with only a few competitors who are starting to conquer some of its market shares. Liquid staking has many advantages. One of them is being able to invest or spend Ether that is being staked. Recently, Lido set a record that is notable and also tells about the long-term sentiment of market participants.
Mar 02, 2023
Ethereum underwent a lot of changes when switching to proof of stake and the roadmap to finalize Ethereum 2.0 is still long. Other improvements that are in the making haven’t caught much attention because the Merge and its aftermath stole the whole show. Yesterday, a groundbreaking improvement was announced that is believed to have the potential to drive user adoption of Ethereum by improving its overall usability.
Sign up to stay informed via our email updates