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Hi Readers, In today's newsletter, Marcin Kazmierczak from RedStone dives into why there is a need to better quantify staking returns for different platforms and how they change over time. Then, Fadi Aboualfa from Copper examines the role of the often overlooked middleman in the world of tokenization and how their position is poised to shift as old-world institutions dive into new-world technology. As always, looking forward to your thoughts. |
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Are Ethereum Staking Yields Too High? |
Staking has grown in popularity in recent years due to the availability of staking-as-a-service, pooled staking, and the growth of liquid re-staking. As of July 2024, Ethereum's security budget amounts to a staggering $110 billion worth of ETH, representing roughly 28% of the total ETH supply. There is also a general adoption of staking features within exchanges and financial applications allowing people to allocate their ETH to secure the Ethereum network. Many view staking as a low-risk return on investment, which makes it appealing to ETH holders. Vitalik Buterin, co-founder of Ethereum, holds a portion of his ETH staked, although he still keeps a part of it unstaked. As staking grows in popularity through liquid staking derivatives, there is a need to better quantify staking returns for different platforms and how they change over time. One way to do this is using the Composite Ether Staking Rate (CESR) oracle feed which is a standardized on-chain Ethereum Staking Rate. This can act as a useful benchmark when considering trends in staking. It is crucial to better quantify trends in staking and consider their ramifications, while also pointing out the benefit of generating additional revenues for ETH holders. Why Might We Consider Lowering ETH Issuance? Although staking is essential to Ethereum's security, there are compelling arguments for reducing the ETH issuance rate. |
- Diminishing Returns on Security:
Beyond a certain point, adding more validators contributes less to network security. The marginal benefit decreases while the costs — mainly through ETH issuance — continue to rise.
- Increased Costs for Validators:
As more staking occurs, the operational costs, such as hardware upkeep, also rise. These costs often trickle down to users, making the network more expensive to maintain.
- Centralization Risks:
With large entities or staking pools controlling significant portions of staked ETH, the risk of centralization increases. This could compromise the very decentralization that Ethereum seeks to preserve.
- Dilution and Inflation:
Excessive issuance of new ETH to reward validators leads to inflation, which dilutes the value of existing ETH holdings.
- The Future of Staking
Staking, particularly through liquid re-staking, is rapidly evolving. As Ethereum continues to innovate, it will be important to better quantify trends in this corner of the market. Please visit our latest research report for an in depth analysis on recent liquid staking and re-staking yields.
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The Middleman's Shadow in the Tokenization Complex |
In the world of crypto, digital assets, and the dream of decentralization, the middleman is a figure of scorn. We speak of peer-to-peer networks, of unmediated transactions flowing freely across borders, with no need for gatekeepers. Yet, whether we like it or not, intermediaries haunt every corner of this landscape. Some extract rent for their services; others simply maintain order in the chaos. But let's be clear — whenever there's a hiccup, a wallet vulnerability, or a glitch in a smart contract, someone must step in. And that someone, whether you call them a middleman or not, holds the keys to the updated and secure system. Of course, as markets mature, the hope is that the role of these intermediaries becomes less overpowering. Bitcoin, Ethereum — these titans of decentralization — have grown vast networks, with developers who can troubleshoot problems out of a sense of duty or altruism. In this sense, scale may soften the blow of centralization, but the presence of intermediaries never truly vanishes. They are merely transformed. As we venture into the tokenization of real-world assets the concept of intermediaries takes on new dimensions, and not just in technical terms but in the realm of regulation. Sandbox regimes are emerging across various jurisdictions, and they make one thing clear: Central Securities Depositories (CSDs) will not only persist but may become more central than ever before. Their larger, more globally connected counterparts, the International CSDs, are poised to take on an even more crucial role. Brass tacks: some have dismissed these tokenization efforts as mere theater. After all, these tokens are not natively minted on a blockchain but are instead representations of assets still residing with the very intermediaries that Distributed Ledger Technology (DLT) was supposed to render obsolete. It's true that non-native tokenization hinders the full potential of the technology, limiting its ability to unlock the kind of streamlined, decentralized future many envision. These efforts, imperfect as they may be, offer an olive branch, a starting point that allows industry players to engage with DLT while keeping one foot in the world they know. Some may rush to point out the redundancy of a CSD's internal ledger, which must be reconciled against a blockchain that is theoretically already immutable and automatic by design. But this is a redundancy regulators are more than comfortable with. Efficiency is not always the endgame here — stability and familiarity are. Complaints may fall on deaf ears. Instead, the challenge for industry participants is to show how tokenization, even within this framework of intermediaries, offers a path forward. We see this path being forged today by behemoth asset managers, even as they grapple with the limitations of the blockchain technology they've chosen: limited scale, lack of interoperability, and a glaring absence of privacy. Either these obstacles no longer matter (spoiler: they do), or tokenization is managing to realize its potential despite them. The latter seems the more realistic conclusion, as it highlights the ways in which collateral access management and asset mobility are already providing tangible operational efficiencies in the real world. Perhaps it is not about erasing the middleman but reshaping their role — refining the interplay between old-world institutions and new-world technology, until native tokenization finds its rightful place. In the meantime, blockchain-based financial market infrastructure is already a reality, though never entirely trustless. And that, ironically, is a reality you can take to the bank. |
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