This article is compiled and organized by BlockWeeks
Galaxy Research has released an in-depth report on Ethereum staking, the first in a three-part series, systematically outlining the mechanics of staking, the participants involved, sources of yield, and the risk structure. Subsequent reports in the series will separately analyze how restaking operates on Ethereum and Cosmos and its main risks.
Ethereum Staking Panorama: $111 Billion and a 28% Staking Rate
Ethereum is the world's largest proof-of-stake (PoS) blockchain by total value staked. As of July 15, 2024, the value of Ethereum staked by ETH holders has exceeded $111 billion, accounting for 28% of the total ETH supply. This staked asset is also referred to as Ethereum's "security budget"—in the event of a double-spend attack or other violations of protocol rules, these assets face the risk of being slashed by the network.
As a reward for maintaining network security, stakers can earn rewards through protocol issuance, priority tips, and maximal extractable value (MEV). Liquid staking pools allow users to stake ETH without sacrificing asset liquidity, and the convenience-driven staking demand has exceeded the expectations of Ethereum protocol developers. Based on current staking dynamics, developers expect the staking rate (i.e., the proportion of staked ETH to total supply) to only continue rising in the coming years. To curb this trend, developers are considering significant adjustments to the protocol's issuance policy.
Six Types of Staking Participants, with Lido Dominating
The report categorizes Ethereum users who earn staking rewards into six main types. The most numerous are "managed stakers," i.e., users who delegate ETH to professional staking node operators. Professional staking node operators, while fewer in number than their clients, are the participants managing the highest total amount of staked ETH.
It is worth noting that liquid staking, restaking, and liquid restaking protocols are excluded from the staking entity analysis in this report, because these protocols do not directly operate staking infrastructure nor fund its use. However, they take a cut from the rewards earned by professional (or amateur) stakers who use their platforms—they act as intermediaries between managed stakers and professional/amateur stakers, and thus remain important players in the Ethereum staking industry. Among them, Lido is by far the largest staking pool operator on Ethereum, with approximately 29% of total ETH staked delegated through it to professional and amateur stakers. Given the high penetration and critical role of liquid staking pools, understanding their risks is essential.
Three Staking Methods and Their Risk Gradients
The level of staking risk is largely determined by the staking method and the technology used. The report divides staking methods into three main categories:
Direct staking: Users or institutions build their own staking hardware and software to stake themselves. Risks include staking penalties and slashing risk. Penalties caused by prolonged machine downtime can cause users to lose part of their staking rewards; slashing events triggered by validator software misconfiguration can cause users to lose part of their staked ETH, up to 1 ETH.
Delegated staking: Users or institutions delegate ETH to professional or amateur stakers to stake on their behalf. In addition to bearing all the risks of direct staking, they also bear counterparty risk—the delegatee may fail to fulfill their staking service responsibilities. Users can also choose to delegate to "trust-minimized" staking-as-a-service providers, whose operation is mainly controlled by smart contract code, but this introduces additional technical risk because the code may be attacked or contain vulnerabilities.
Liquid staking: Users delegate ETH to professional or amateur stakers while receiving a liquid token representing their staked ETH. Risks encompass all the risks of direct staking and delegated staking, plus additional liquidity risk—market volatility and long delays in validator entry or exit can trigger depegging events, causing the value of liquid staking tokens to deviate significantly from the value of the underlying staked assets.
The report emphasizes that there is another important risk for all three types of staking activities: regulatory risk. The greater the "distance" between ETH holders and their staked assets, the higher the regulatory risk of the staking activity.
MEV: Validator Revenue That May Be Severely Underestimated
Charts presented in the report show that validator rewards from MEV account for about 20% of other types of income such as issuance and priority fees. This definition treats MEV as additional value obtained by block proposers beyond priority fees and issuance. However, some argue that high-priority-fee transactions themselves may represent MEV profits—if the high priority fees are funded by successful frontrunning or backrunning. To account for the MEV potentially contained in priority fees, another methodology instead compares the value of blocks built through MEV-Boost software with blocks built without MEV-Boost.
Such methodologies suggest that the scale of MEV may be far more than 20% of validator rewards. An analysis by Ethereum Foundation researcher Toni Wahrstätter in October 2023 pointed out that, compared with locally built blocks, if validators obtain blocks through MEV-Boost, their median block reward increases by 400%.
Staking Rate Expected to Exceed 30%, Issuance Reform Debate Heats Up
Assuming Ethereum staking demand continues its linear growth of the past two years, the staking rate is expected to exceed 30% in 2024. As mentioned earlier in the report, a higher staking rate dilutes rewards from issuance. Liquid staking services on Ethereum make staking effortless for users and bypass conventional limits such as entry queues—users can simply buy stETH directly to gain exposure to staking yields. When large purchases of stETH cause an imbalance between its market price and the value of the underlying staked assets, stETH trades at a premium until more ETH is staked on Ethereum. Unlike buying stETH, staking directly on Ethereum involves delays: only 8 new validators can be added per epoch (with a maximum effective balance of 256 ETH).
The report also notes that modifying Ethereum's monetary policy under the PoS consensus protocol may be more controversial than adjusting network issuance in the previous PoW era, because the affected user base is much broader. In the past, mainly miners were affected, whereas today issuance adjustments affect a growing number of ETH holders, staking-as-a-service providers, liquid staking token issuers, and restaking token issuers. As the stakeholders involved in maintaining Ethereum's security continue to expand, it will be difficult for Ethereum protocol developers to modify its monetary policy as frequently as before. The debate around this issue will drive staking-related policies and reward mechanisms toward gradual "ossification." Therefore, the window of opportunity to modify this part of the code is narrowing, and as the staking industry built on it grows and matures, this window will not remain open for long.
Still Early: From Beacon Chain to Pectra
The staking economy built on Ethereum is still young and experimental. When the Beacon Chain first launched in 2020, users who staked ETH could not guarantee retrieving their ETH or transferring funds back to the Ethereum mainnet. After the Beacon Chain merged with Ethereum in 2022, users began earning additional rewards through priority fees and MEV. After ETH staking withdrawals were enabled in 2023, users could finally exit validators and cash out staking rewards. There are also a series of changes on the Ethereum development roadmap that will affect the staking business and individual home stakers, most of which (such as increasing the maximum effective balance of validators in the Pectra upgrade) do not affect staking's financial incentives, but some will.
For this reason, as Ethereum's development roadmap continues to evolve and is implemented through hard forks, carefully assessing the risks and rewards of staking becomes especially important. Since the number of stakeholders covered by Ethereum's staking economy has surpassed that of the mining industry of yesteryear, it will become increasingly difficult for developers to push through changes that frequently affect staking dynamics. But Ethereum is still a relatively young PoS blockchain, and significant evolution is expected in the coming months and years, requiring all parties involved to carefully consider the changing staking dynamics.
