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.


All Comments

Recommended for you

  • Advancing Towards ZK Fraud Proof - zkGo: Compiling L2 Geth into ZK-Compatible Wasm

    Optimistic Rollup stands out as a widely adopted Layer 2 solution designed to scale Ethereum. This approach optimistically posts L2 transactions and their execution outcomes on the Ethereum mainnet, substantially reducing the costs associated with on-chain execution.

  • AirBit Club Co-Founder Sentenced to 12 Years in Prison for $100 Million Cryptocurrency Pyramid Scheme

    The co-founder of AirBit Club, a cryptocurrency pyramid scheme that defrauded investors of over $100 million, has been sentenced to 12 years in prison for his involvement in the scheme. He pleaded guilty to wire fraud conspiracy charges in March and was sentenced in September. The scheme purported to be involved in crypto mining, but instead, the co-founder used victims' money to line his own pockets through a complex laundering scheme. The convicted fraudster was ordered to pay a forfeiture of $65 million and to forfeit other items, including 3,800 Bitcoins worth $100 million. Other defendants in the case have also pleaded guilty and are awaiting sentencing verdicts.

  • a16z ·

    What Builders Talk About When They Talk About AI

    The most common refrain across those building AI is that AI is emerging as the next computing platform, and we are still very, very early in that process.

  • US SEC Delays Approval for Bitcoin Spot ETF Applications Again

    The US Securities and Exchange Commission (SEC) has once again postponed the approval of several Bitcoin spot ETF applications, including GlobalX's and Ark/21Shares'. The SEC has set a final deadline of January 10, 2024, to either approve or deny Ark's application. This delay comes after a group of congressmen sent a letter to SEC chair Gary Gensler demanding an end to discrimination against spot Bitcoin exchange-traded products. The delay may have dashed hopes of a spot ETF being approved by the end of the year, according to Bloomberg ETF analyst James Seyffart.

  • People familiar with the matter: The U.S. Department of Justice has been investigating Binance for a year, and Binance and CZ may be subject to criminal charges and billions of dollars in fines

    According to sources cited by The Wall Street Journal, the US Department of Justice has conducted a year-long investigation that could result in criminal charges and billions of dollars in fines for Binance and CZ. Binance also faces a lawsuit from the US Securities and Exchange Commission, accusing Binance and CZ of illegally operating and misusing customer funds in the United States. The company has admitted to past mistakes but says customer funds are safe and is committed to compliance. A Binance spokesperson said, "We work tirelessly not only to learn from our mistakes but also to invest in teams and systems that ensure user protection." Binance.US's activities in the United States have largely disappeared. Its CEO, general counsel, and chief risk officer have all recently resigned. According to sources, Binance and the Department of Justice have been discussing for months whether CZ should step down.

  • The Chairman of the U.S. SEC will testify tomorrow at the House Financial Services Committee’s hearing on SEC oversight issues

    On September 26th, it was announced that Gary Gensler, the Chairman of the US Securities and Exchange Commission (SEC), will testify on SEC oversight issues at a hearing of the US House Financial Services Committee on September 27th at 22:00 Beijing time. According to a committee memorandum, the hearing will examine regulatory developments, rulemaking, and activities at the SEC during a period since October 5th, 2021, including the issuance of Staff Accounting Bulletin No. 121 on March 24th, 2022, which requires reporting entities engaged in digital asset custody activities to record the corresponding assets as liabilities, and the proposal to amend the definition of "exchange" on March 18th, 2022, to expand SEC authority over digital asset trading platforms.

  • The second fund of venture capital company P1 Ventures has raised US$25 million and plans to focus on financial technology and other fields.

    Venture capital firm P1 Ventures announced that its second fund has completed a first round of fundraising of $25 million. The new funds will focus on investing in financial technology, SaaS, artificial intelligence and other fields. P1 Ventures has previously invested in several Web3 startups, including leading a $2 million pre-seed round of financing for encrypted payment company Kotani, and participating in a $3 million seed round of financing for NFT sports and entertainment platform Eksab.

  • Hong Kong Monetary Authority: It is expected that the mBridge CBDC project will gradually transition to commercialization

    On September 26th, Eddie Yue, the Chief Executive of the Hong Kong Monetary Authority, gave a keynote speech at the 2023 Shanghai Securities Market Forum, where he provided detailed information about mBridge. The platform is a joint development project between Thailand, China's Hong Kong, the United Arab Emirates and the International Clearing Bank. The mBridge project is a digital platform developed by central banks from different countries, aimed at using blockchain technology for cross-border payments. Some people believe that it has the potential to challenge the traditional globally-based payment system that relies on the US dollar. It is expected that more central banks will join and expand the scope of the project. Yue said, "We look forward to more central banks joining this open platform, and soon we will launch what we call the minimum viable product to pave the way for mBridge's gradual commercialization. Recent pilot tests have shown that central bank digital currency (CBDC) platforms can accelerate cross-border payments while reducing costs and increasing transparency."

  • Encrypted blockchain project Fhenix received $7 million in financing, led by Multicoin Capital

    Fhenix, a confidential blockchain driven by fully homomorphic encryption (FHE), announced the completion of a $7 million seed round of financing led by Multicoin Capital and Collider Ventures, with participation from Node Capital, Bankless, HackVC, TaneLabs, and Metaplanet. These funds will be used to introduce the Fhenix network to the public testnet in early next year and support the development of ecosystem applications.

  • Ethereum Staking in 2023: A Year of Growth and Transformation

    Ethereum staking saw strong demand from institutions following the Merge. Even if the adoption rate slows down in a few months, its future looks promising, say Vivek Chauhan and David Lawant, of FalconX.