Ethereum
Ether emerges as the new “internet nexus” amid growing interest in crypto assets
The Ethereum network generates over a million dollars per day in transaction revenue, up 35% compared to a year ago. Participants can stake their asset to become a validator and earn income or yield. ETH’s all-time high was $4,729 and currently stands near $1,000.
Christopher Perkins from CoinFund explains how ether and staking are part of an emerging on-chain financial product.
Alex Ryvkin by Rho Labs covers common questions on the topic in Ask an Expert.
In this article, we refer to Ethereum, ether and ETH – for clarity, Ethereum refers to the blockchain network while ether and ETH refer to the cryptocurrency.
With over $10 billion in inflows in less than two months, the Spot Bitcoin ETF is already considered the most successful product launch in ETF history, bringing mainstream attention to the exciting class of crypto assets. With its supply cap of 21 million tokens, the narrative of bitcoin as “digital gold” or store of value is easy to understand. Today, investors are asking, “What’s next?” »
Enter ether, the second largest crypto asset by market capitalization. Ethereum pioneered “smart contracts” that now include decentralized finance (DeFi), non-fungible tokens (NFTs), and other applications across the ecosystem. These applications have exploded since the creation of Ethereum. conceived nearly 10 years ago, spurring demand for its native token, ether (ETH), which is needed to pay for the “gas” needed to record transactions on its blockchain. Like Bitcoin, Ethereum has taken steps to stabilize its monetary offerand today, its symbolic offer is slightly deflationary:
Any asset with stable supply, growing demand, and obvious utility could be worth investing in. Ethereum also offers an attractive return to those who participate in its security as network validators through a process called “staking.”
Unlike Bitcoin, which relies on miners to solve mathematical equations known as “proof of work” to validate transactions, Ethereum has migrated to a “proof of stake” validation mechanism in 2022. Under this approach, those who participate in securing the network by “staking” their tokens are rewarded by the protocol, and validators also receive rewards known as priority transaction fees , as an added incentive to include a user’s transaction in the upcoming block.
Today there are almost 1 million validators on the Ethereum network, and the combination of protocol rewards and priority transaction fees, in the context of a stable currency supply, results in a compelling solution. [real] return for investors.
So as bitcoin became known as “digital gold,” Ether’s narrative shifted to “internet bond” because of this underlying staking yield. To fully understand the investment case, it is important to understand the factors that determine its performance: 1) protocol or consensus layer rewards and 2) priority transaction fees or execution layer rewards.
Consensus rewards are awarded to validators by the protocol to secure them. The size of the rewards correlates to the number of validators securing the network. Since these rewards are shared among validators, the more validators, the lower the rewards. Ethereum has seen the number of validators increase significantly since its transition to proof-of-stake. As a result, consensus rewards declined over this period.
Figure 3: Ethereum Consensus Layer Rewards (Source: CoinDesk Indices)
Priority transaction fees are the second component of Ethereum’s native yield and these rewards are generated by processing transactions, paid by users. The volatility of these execution rewards is correlated with the level of activity and demand across the ecosystem. Notably, transaction fees increased during the insolvencies of FTX (November 2022) and Silicon Valley Bank (March 2023) and during a frenzy of memecoin trading activity (May 2023), as users are rushing to confirm their transactions on the blockchain.
Figure 4: Ethereum transaction fees (Source: CoinDesk Indices)
Today, the yield from Ethereum staking is fueling the new “Internet Bond.” Like traditional rates, the real yield of staked ether can generate competitive returns, unlock structured products and enable new classes of derivatives. As investor attention turns to ether, “total return” products that incorporate its native yield will certainly take center stage.
Q. Despite timely Bitcoin ETF approvals and the impending halving, Ether is still outperforming Bitcoin year-to-date. What could be the reasons for this?
A: In recent days, bitcoin has stolen the spotlight from ether, as its price hit a new all-time high on Tuesday. However, ETH remains the best performing asset, with an exceptional return of 68.13% year to date.
While Bitcoin has perhaps the strongest and most dedicated community in crypto, Ethereum has become the infrastructure layer for the vast majority of blockchain applications. As network adoption grows, Ethereum offers ETH holders the opportunity to participate in network fees through native staking. Ether’s widespread adoption, deflationary nature, and native yield make up a large part of the asset’s appeal.
Depending on network usage, the native yield of ETH tends to fluctuate significantly depending on the state of the crypto market. To enhance the attractiveness of ETH as an asset, particularly to the institutional and non-crypto-native audience, products enabling staking of ETH at a fixed yield may be necessary.
Q. What does the future of ETH staking look like?
A: In traditional finance, yield is king. With growing institutional interest in ETH and the growing popularity of staking-focused DeFi protocols such as Lido and EigenLayer (the latter toppled Aave this week to become the second-largest DeFi protocol behind Lido), the importance of Native yield of ETH will also continue to grow.
More recently, asset managers such as ETC Group and CoinShares have begun offering total return ETPs that add a yield advantage on top of the performance of ETH tokens. In the United States, Franklin Templeton and Grayscale are also looking to integrate staking into their proposed ETFs.
In the non-ETH space, Grayscale recently announced its actively managed Dynamic Income staking fund, proving the importance of income-focused products to the ecosystem. It is safe to say that as investor familiarity with the asset class increases, staking returns will become table stakes for serious ETH-based products and services.
The Securities and Exchange Commission has again delayed his decision on the ETH spot applications of BlackRock and Fidelity.