Analyst Note: Staking Done Well

Key Insights

• With Ethereum’s successful transition to Proof-of-Stake, validators’ real returns have spiked considerably from nearly 0% to 6%. As a result, the stETH discount has evaporated, and there have been greater inflows to the staking contract.
• Lido has had the highest absolute contribution to this growth, while Rocket Pool has grown the fastest on its small base.
• Layer-2 (L2) liquidity is becoming more critical, and there has been a surge in stETH L2 liquidity after Lido announced an incentive plan.
• While there are exciting avenues for growth, concerns about censorship have cast a shadow over the runaway success of Ethereum and its staking protocols.

Ethereum successfully transitioned to Proof-of-Stake in September, and since then, validators and stakers, not miners, have secured the network. As such, validators and stakers now earn transaction fees and MEV rewards that would accrue to the miners in Proof-of-Work. Consequently, staking returns have received a boost. However, this increase has not been as significant as expected because of lower-than-expected MEV and tips in this bear market. The increase in real returns from 0% to 6% is much more tangible, as ETH inflation has fallen to near zero from 4% earlier.