Economics of Staking Ethereum

How incentives work in staking cryptocurrencies like Ethereum

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Ethereum will soon switch to Proof-Of-Stake. “The Merge” is a big development event where the Proof-Of-Work consensus algorithm will shift to a new model PoS, allowing people to stake their assets to earn rewards.

While recently listening to Hall Press’ episode on Bankless podcast, a few key insights were shared about staking Ethereum

If there is value to the asset outside of staking (spending the token, etc) then the staking rate will be lower.

This is true of Ethereum and Ether the asset.

Ethereum’s use cases make it in high demand

Because Ethereum is a useful asset in web3 ecosystem, there are many other demands for ether.

Think of all the use cases that Ethereum has – from NFTs to DeFi and more.

Many people need to use Ethereum to do these sorts of things, so not everyone will want to lock down their ETH and just stake it.

Because of this, demand for staking probably won’t ever be super high.

Lower rate of staking means higher returns for those that do stake

If demand for staking is low, then value to those that decide to stake is higher.

Stakers want the network stake rate to be as low as possible.

As of now, Ethereum only has around 10% of staking participation rate.

After The Merge, staking incentives will go up, and is likely to have higher income margins.

Only expenses in Ethereum are paying developers (what EF pays out in salary). The EF report showed that the expenses are quite low.

According to Hall Press on Bankless podcast, he thinks that paying stakers does not count as an expense because it is not leaving the system.

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