Investors are attracted to DeFi because they can earn income from crypto assets. Michael Nadeua examines ETH staking, and what the future may hold.

Scott Sunshine explains why it is difficult to learn about this asset class and how you can overcome the challenge.

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What advisors need to know about the ETH stake rate in 2024


The ETH stake is the beating heart of the Ethereum Network. The new standard will be able to bring about a new age of yield-based financial instruments as we move into 2024.


Background

The ETH stakerate is the yield received by the nearly 900,000.000 validators who approve transactions for “staking” ETH on the network. The yield is made up of user fees + consensus rewards.

Consensus Rewards = Tokens issued by a network to encourage a decentralized network validators.

Transaction fees = Fees paid by users (in ETH), to access services in the network.

The graph below shows the fee vs. consensus reward (token incentives), over the past year.

We can see that transaction fees (purple), have been higher than rewards for most of the past year. This is a sign of a network in good health, which can support its decentralized validator network with user fees and not consensus rewards.

If you were an “staker”, (i.e. Validator of network transaction, over the same time period.

The yields peaked in May at over 8% and dropped to around 3.5% by October last year.

The stake rate is also a good indicator of the transaction fees in the Ethereum network. This is why it’s called “Ethereum’s heartbeat.”

The first peak, in spring 2023, coincided with the Silicon Valley Bank Crisis. The second peak, in May, was a result of a spike in DeFi trading. The recent increase is due to renewed crypto interest as we (hopefully), head out of bear market.

Coindesk released ” CESR ” – designed to give participants in the Ethereum eco system a standard benchmark for staking as well as a settlement rate of derivatives contracts.

It may seem trivial to standardize the ETH stake rates calculation using “CESR”, but we believe it could be a catalyst for a benchmark rate in all crypto — and ignite a frenzy with new financial products “on top” the new standard.


Why CESR Standards are Important

Interest rates are at the core of finance. Interest rate standards like LIBOR and SOFR are the foundation on which trillions of dollars worth of financial products is built.

The first step towards a DeFi forward yield curve is the creation of a standard benchmark for the Ethereum ecosystem. This would be similar to what treasuries do in traditional markets.

The creation of interest-rate swaps, which is the largest derivative market in the world, could also allow users to swap fixed liabilities for floating liabilities. This would make fixed rate products possible , as with mortgages on traditional markets. Interest rate swaps could unlock the possibility of fixed-rate DeFi products and attract a wide range of participants, from institutional investors to sophisticated speculators.

It’s not unreasonable to expect an ETH ETF, especially with the possibility of a Bitcoin ETF being approved next year. Investors are likely to demand an ETH ETF with a total return powered by standard stake rates.


A Look Forward to 2024

The approval of an ETF for Bitcoin next year could spark renewed interest in cryptocurrency. We’re seeing green shoots already. You can expect that your clients will start asking you about Ethereum, the second largest network in terms of market cap and the only cryptocurrency network with a real yield.


Eigen Layer & Re-Staking

Next year, we expect “re-staking”, a popular topic. This is due to the introduction Eigen Layer – a new protocol in the Ethereum ecosystem which allows layer-2 networks to “rent” the economic security of the decentralized and more secure Ethereum network. Investors can “re-stake”, earning an additional yield, while also taking on smart-contract risks.

We believe “re-staking’ could catalyze next leverage cycle and play an important role in next bull market.

Finance is the future. The ETH stake-rate is the starting point.

Ask an Expert


Q. Why are advisors reluctant to dip their toes into the crypto pool?

Financial advisors are reluctant to recommend crypto to their clients. This is similar to the historical reluctance they have shown in recommending non-correlated asset classes, such as hedge funds, venture capital, and private equity.

Many advisors, however, have recently incorporated these asset categories into their portfolios, as investors sought a broader exposure to the market, non-correlated investment options, and a higher return potential. This shift is a reflection of the benefits that these asset classes offer and a willingness to explore a wider range of investment options.

As the crypto market matures, and as regulatory frameworks are developed, attitudes towards it will change as people gain a better understanding about risk, transparency and potential returns.


Q. How can advisors better familiarize themselves with cryptocurrency?

1. Education Learn how blockchain technology works, the different types cryptocurrencies, and about crypto.

2. Stay informed: Follow the latest news and developments within the cryptosphere. Stay informed by reading reputable sources.

3. Networking: Connect to professionals in the crypto-space. The benefits of networking include practical insight and the chance to learn from other people’s experiences.

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Google updated its search policies with to include crypto, in anticipation of the January surge in search volume.

Bradley Keoun is the editor.