April 2, 2023

  • Ethereum recently modified its protocol from a proof-of-work to a proof-of-stake model.
  • Industry analysts predict that the upgrade could triple the current staking yield on Ethereum.
  • Here’s how staking will change based on the Ethereum merger — and what that means for returns.
  • This article is part of Insider’s series “Mastering Your Cryptocurrency”, designed to help investors improve their skills and knowledge in cryptocurrency.

Ethereum long awaited merger superior Thursday, September 15 — The blockchain transitioning its protocol from proof-of-work to a more energy-efficient proof-of-stake consensus model — is sure to go down as one of the most important events in crypto history. Thomas Perfumo, head of strategy at Kraken, said it represents the next evolution in digital assets and future growth in the field, which is currently the Fourth largest cryptocurrency exchange in the world.

Perfumo told Insider there is another reason the merger is so important — ultimately, it will single-handedly increase the total market value of collateralized crypto assets from 25% to 30% to more than 50%.

For context, proof-of-work protocols like Bitcoin validate blockchain transactions by having miners solve computational puzzles, while proof-of-stake systems like those used by Solana, Cardano, and Polkadot randomly select validators that are already staked or locked people their crypto assets — up to two to three weeks. While validators are chosen at random, they are more likely to be chosen if they have a larger stake and they hold their stake longer than others.

How Investors Can Make Money with Staking

Similar to holding dividend stocks, investors who hold cryptocurrencies can theoretically benefit in two ways – from the price appreciation of the underlying asset, and from an additional reward (called an annual percentage) each time they validate a transaction. rate) or April.

Because Ethereum validators can also earn Gasoline, higher trading volume means higher returns. And since there is only a fixed amount of rewards per block, the reward rate decreases as the total number of validators and staked cryptocurrencies competing for those rewards increases.

Investors shouldn’t buy cryptocurrencies just for the potential APR, Perfumo said, as validators take risk through exposure to the underlying asset. “However, if you have confidence in Ethereum over the time horizon and you feel that staking provides you with a way to increase the returns on your assets while you hold them, that sounds like a good idea,” he added.

Before the merger, ethereum holders were able to stake on their beacon chain with one big caveat – they couldn’t withdraw their assets, meaning the percentage of ethereum staked will only increase over time . However, Perfumo estimates that withdrawals should be allowed once the merged Shanghai fork is completed within the next six to nine months.

While theoretically, every cryptocurrency holder can pledge yourself In practice, staking alone is much more difficult than staking on an exchange, as validators must constantly monitor the software or risk paying inactivity penalties.Ethereum also requires all individual validators hold at least 32 ether The cost of nodes and servers can add up quickly before they can stake, Perfumo said.

On the other hand, exchanges like Siren and Lido – Charge a yield fee – Allows users to contribute an amount of their choice, and also minimizes slashing penalties through redundancy mechanisms. Because Lido provides users with a derived ETH token for every ether they hold, users can even unwind their tokens by simply trading back both currencies. But since these exchanges effectively manage the custody of user assets, Perfumo emphasizes the importance of choosing trusted exchanges to minimize counterparty risk.

Perfumo explained that Lido currently lists its ethereum APR at 3.8%, while Kraken advertises its ethereum annual return of between 4% and 7% due to the difference between transaction demand and validator supply. He added that rewards differ between blockchain protocols, as newer protocols may offer higher underlying yields for circulating the money supply, while more established networks with large validator networks (like Ethereum) offer of new tokens is a small percentage of the total supply.

Stakeholders will now receive all combined rewards

One of the biggest takeaways from the merger is that the reward pool for validators is now significantly increased, said AD, the pseudonym used by Lido’s head of marketing and community.

“The yield is expected to rise because fees that used to go to miners will now go to stakers,” he explained to Insider. “The yield is currently around 3.8% — it’s a little different — but our model shows it could be doubling or even tripling.” Lido’s estimate is in line with estimates made by other crypto analysts earlier this year that combined staking yields could balloon to as much as 7% to 15%.

However, Perfumo said the exact reward rate after the merger is difficult to predict, especially as ether becomes more liquid over a few months.

“If people were allowed to wager, the reward rate would be more variable, in the sense that it could go up and down depending on the number of people betting. Over time, the reward rate could be skewed to the downside of , because the liquidity that can unstake encourages people to stake,” he explained.

Additionally, the platform may reduce the reward rate to compensate for the fact that mining is much more energy-intensive than staking. “You don’t have to have such a big incentive model to encourage validators to work on the platform,” Perfumo said.

Since he doesn’t think Ethereum’s returns will necessarily increase post-merger, Perfumo emphasized that investors should still keep their personal time horizon in mind when staking Ethereum, and only if they’re willing to lock up their assets for at least six more moon.

This article is intended to provide general information intended to educate the general public; it does not provide personalized investment, legal or other business and professional advice. You should always seek your own financial, legal, tax, investment or other professional advice on matters affecting you and/or your business before taking any action.

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