Cointime

Download App
iOS & Android

Explaining Ethereum's 'Risk Free' Rate of Return

Validated Individual Expert

One sliver of the crypto market seems to be rebounding: staking. Despite the doom and gloom cast over the entire blockchain industry after the cascading crisis that was 2022 and the fact that the global economy is in uncharted territory, as noted by Federal Reserve Chair Jerome Powell at Jackson Hole, proof-of-stake (PoS) revenue generation has almost rebounded to all-time highs.

As Bloomberg’s Sidhartha Shukla noted in a recent article, the total value locked, or TVL, for liquid staking protocols has surged 292% to $20 billion over the past year and some months. That’s just shy of the $21 billion locked in leading decentralized staking protocols Lido and Rocket Pool in April of 2022, right before the TerraUSD stablecoin death spiral.

To some extent, a rebound in Ethereum staking valuations makes sense – even at a time of general disinterest in decentralized finance (DeFi).

If you remember, Ethereum went officially live with staking on Sept. 15 in an event forever commemorated as “the Merge.” That date shifted the narrative on crypto, at least somewhat, after Ethereum nullified the longstanding criticism of crypto’s carbon footprint by ditching energy intensive miners. (Bitcoin being Bitcoin, it still has its eco critics — but perhaps not for long.)

While it took a few weeks for the withdrawal/unstaking fervor to die down, staking has so far served Ethereum users well – paying out an annualized rate between 3%-4% to anyone with the spare 32 ether (ETH) needed to stake to become a validator. And lest we forget that staking exists in part to shield the World Computer from attacks, it hasn’t failed yet.

Liquid staking – or a democratized form of staking that allows smaller holders to pledge ETH to companies or smart contracts that collate funds and pay out staking rewards commensurately to people otherwise priced out – is such an attractive proposition that many have begun calling it “the on-chain equivalent of government bonds.”

The lingo actually used is “crypto’s risk free rate of return,” but Bloomberg being Bloomberg there’s no way an editor would let a comparison to three-month U.S. Treasury bonds fly — even if the whole concept of a “risk free” rate is an economic impossibility (and essentially a marketing term for U.S. government debt).

Useful fiction or not, staking on Ethereum is comparatively safer than pledging funds to say a DeFi lender. Or worse, a centralized lender like Gemini Earn, BlockFi or Celsius (all defunct). And in a year where liquidity is hard to source and DeFi hacks keep on happening, staking is the obvious choice for many who want to put their capital to work.

Protocols like Lido even give out a proxy token to stakers (i.e. stETH, or staked ETH), which can be used across DeFi while staking rewards roll in.

None of this is to suggest that staking is by any means riskless. Lido’s dominance of the sector in particular is a massive red flag for many, who are concerned about any vector of attack that could put Ethereum security at risk. But given the hardware and capital requirements to become an Ethereum validator, it’s unlikely the trend will reverse and people will choose to spin up nodes the old-fashioned way.

To some extent, staking is where the crypto industry was skating even before Ethereum’s embrace. Investor favorites like Cardano and Solana beat Ethereum to the punch in rolling out their at one time “experimental” staking systems while pre-existing chains like Dogecoin and Zcash are studying how to make the shift. Most if not all blockchains built to run crypto-powered apps launched in the recent market upcycle, like Sui and Aptos, launched with some version of proof-of-stake in place.

Comments

All Comments

Recommended for you

  • Hong Kong Financial Secretary: Bill to Establish Licensing System for Virtual Asset Trading and Custody to be Submitted This Year

    On October 5, Hong Kong's Secretary for Financial Services and the Treasury, Christopher Hui, stated that in response to the innovative development of financial technology, a bill to amend regulations will be submitted within this year to establish a licensing system for virtual asset trading, custody, advisory, and management services. The Financial Secretary's Office, along with the Monetary Authority, is also studying how to optimize the legal framework to encourage industries such as technology and telecommunications to enhance the detection and removal of content related to fraud, including the misuse of AI-generated content.

  • BTC Falls Below $86,000

    Market data shows that BTC has fallen below $86,000, currently reported at $85,997.76, with a 24-hour increase of 1.36%. The market is highly volatile, so please ensure proper risk management.

  • BTC Surpasses $86,000

    Market data shows that BTC has surpassed $86,000, currently priced at $86,220.01, with a 24-hour increase of 1.74%. The market is experiencing significant volatility, so please ensure proper risk management.

  • Michael Saylor Releases Bitcoin Tracker Update

    On October 4, Michael Saylor, founder and executive chairman of Bitcoin treasury company Strategy, once again released information related to the Bitcoin Tracker, captioned 'More orange than ever.' According to previous patterns, Strategy typically discloses changes in Bitcoin holdings the day after such announcements.

  • Iran Responds to U.S. Proposal

    On October 4, an Iranian Foreign Ministry spokesperson stated that Iran has responded to the U.S. proposal. The U.S. proposal is similar to previous ones, focusing on nuclear issues, while Iran wishes to emphasize the Strait of Hormuz.

  • Tom Lee: The Current Crypto Bull Market Has Begun, Tokenization and AI Applications May Drive Growth Beyond Previous Cycles

    Tom Lee, Chief Investment Officer at Fundstrat, explained in an interview why the current crypto bull market is different from previous cycles. He stated, "The cryptocurrency bull market that is beginning has been confirmed. As of the third quarter, cryptocurrency-related stocks are undoubtedly the best-performing assets." Discussing the differences in this cycle, he noted: "The 2016-2017 cycle had ICOs; the cycle during the COVID-19 pandemic featured NFTs and meme coins; last year's minor cycle involved stablecoins. These all belong to relatively narrow application scenarios, and the participants were mainly those who returned to the crypto industry after previous losses." Regarding the changes in this cycle, he said: "Tokenization will develop on a very large scale; the regulatory environment is becoming more supportive of the crypto industry; the government is also providing support; meanwhile, AI, intelligent agent systems, and related applications are being built around the crypto industry. This means a much larger user base will be involved." On the current market environment, he remarked: "The market has undergone significant price consolidation, in some cases lasting up to five years. With the arrival of this bull market, not only will there be decisive breakthroughs, but its duration and growth potential will far exceed previous cycles."

  • BTC Surpasses $85,000

    Market data shows that BTC has surpassed $85,000, currently priced at $85,004.01, with a 24-hour increase of 0.42%. The market is experiencing significant volatility, so please ensure proper risk management.

  • CFTC Chair Discusses Next Steps for CLARITY Act: Regulators to Continue Issuing New Crypto Regulations

    On October 4, WOLF Terminal reported that Michael Selig, Chairman of the U.S. Commodity Futures Trading Commission (CFTC), discussed the follow-up work on the CLARITY Act: "Regulatory agencies already possess a significant amount of existing statutory authority. While working with the Presidential Working Group on Digital Assets, we also examined the statutory and legislative powers. The report includes an entire chapter dedicated to explaining how to utilize our existing regulatory authority." Regarding the current regulatory landscape: "The President has a plan in place, and we are prepared. The time for action has come. We will continue to roll out regulatory rules to ensure we are ready for the arrival of new financial sectors."

  • Bitcoin ETF Ends Nine-Day Net Inflow with $148.7 Million Outflow

    On October 1, Farside Investors reported that the Bitcoin ETF experienced a net outflow of $148.7 million yesterday, ending a streak of nine consecutive trading days of net inflows. Additionally, the Ethereum ETF saw a net outflow of $59.6 million yesterday.

  • WTI Crude Oil Drops Over 1.00% Today, Currently at $88.55 per Barrel

    On October 1, WTI crude oil dropped over 1.00% today, currently priced at $88.55 per barrel.