Author: Marcin Kazmierczak, co-founder of RedStone and Warp.cc, CoinDesk; Translated by Tao Zhu, Jinse Finance
Staking has become increasingly popular in recent years due to the growth of staking as a service, staking pools, and liquidity re-staking. As of July 2024, Ethereum's security budget is as high as $110 billion in ETH, which is about 28% of the total ETH supply. Exchanges and financial applications have also widely adopted staking features, allowing people to allocate their ETH to protect the Ethereum network. Many people believe that staking is a low-risk investment return, which is attractive to ETH holders. Ethereum co-founder Vitalik Buterin holds a portion of ETH staked, although he still has a portion of ETH unstaked.
As staking through liquid staking derivatives grows in popularity, there is a need to better quantify staking returns across different platforms and how they change over time. One approach is to use the Composite Ether Staking Rate (CESR) oracle feed, a standardized on-chain Ethereum staking rate. This can serve as a useful benchmark when considering staking trends. It is critical to better quantify staking trends and consider their impact, while also noting the benefits of generating additional income for ETH holders.
Why should we consider reducing the issuance of ETH?
While staking is critical to Ethereum’s security, there are compelling reasons to reduce ETH’s issuance rate.
1. Diminishing security returns: Beyond a certain point, the contribution of adding validators to network security decreases. Marginal benefits decrease, while costs (mainly through ETH issuance) continue to rise.
2. Increased validator costs: As more stakes are staked, operational costs such as hardware maintenance will also rise. These costs are usually passed on to users, making network maintenance more expensive.
3. Centralization risk: As large entities or staking pools control a large amount of staked ETH, centralization risk increases. This may harm the decentralization that Ethereum seeks to maintain.
4. Dilution and Inflation: Excessive issuance of new ETH to reward validators will lead to inflation, thereby diluting the value of existing ETH holdings.
The Future of Staking
Staking, especially through liquidity re-staking, is growing rapidly. As Ethereum continues to innovate, it will be important to better quantify trends in this market segment.
