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$100m Daily Inflows: Ethereum Staking Thrives After Shapella

TL;DR

• ETH staked increased by 11% after the Shapella Upgrade

• Validators are restaking their unlocked Ether, contrary to concerns of a price drop

• The Memecoin craze led to increased on-chain activity and a decrease in circulating ETH supply

The Ethereum network successfully completed the Shapella Upgrade on April 12, which introduced the ability for validators to withdraw their staked ETH. The Merge, which transitioned Ethereum to a proof-of-stake model, required validators to lock up their ETH and rewards until a subsequent chain update. Validators have been staking ETH since December 2020, when the Beacon Chain was launched.

Price-wise, there were speculations that the Shapella update would cause a drop in Ethereum’s price due to the unlocking of a significant amount of staked coins. However, most validators have chosen to restake their unlocked Ether. Following the completion of the update, Ethereum briefly surged above $2,100 but subsequently experienced a decrease of approximately $300. As of now, the second-largest cryptocurrency is struggling to stay above $1,900.

Since The Merge, the total supply of ETH has decreased by 103,092 coins, equivalent to approximately $200 million at current prices. The current burn rate of Ethereum is approximately 123 ETH per hour.

Had Ethereum continued to be mined, its supply would have increased by over 2.52 million coins today, representing a yearly increase of 3.53%. Instead, Ethereum has become a deflationary asset, with its supply decreasing by 0.321% per year after The Merge.

After the Ethereum Shanghai update, the growth of ETH deposits accelerated, surpassing previous rates. The upgrade resulted in a remarkable influx of ETH deposits for staking, reaching a record-breaking level in the past week. This surge was primarily attributed to institutional staking service providers and investors who reinvested their rewards after withdrawal. According to data from Dune Analytics, investors deposited approximately 571,950 ETH tokens into staking contracts, which amounted to a value exceeding $1 billion.

The recent influx of ETH deposits for staking, following the Ethereum Shanghai update, marked the largest weekly token inflow in the history of ether staking, spanning almost two-and-a-half years. This information is based on blockchain data provided by 21Shares.

Since the upgrade, the five leading institutional-grade staking service providers, namely Bitcoin Suisse, Figment, Kiln, Staked.us, and Stakefish, collectively staked a total of 235,330 ETH, equivalent to approximately $450 million.

However, it’s crucial to examine where the withdrawn ETH funds are being directed. Let’s summarize and analyze the observations from various wallets to gain a comprehensive understanding of the flow of these funds.

1.7M ETH has already been withdrawn, and 1.36M ETH deposited, resulting in net withdrawals just of 340k ETH, according to TokenUnlocks.

The behavior observed in whale wallets, with a significant amount of ETH being sent to centralized exchanges (CEXs), could be indicative of confidence in the Ethereum network and the long-term expectations of major players regarding ETH.

While a substantial portion of the ETH sent to CEXs may be intended for selling, it’s important to note that not all of it will be liquidated. A considerable portion of these funds might be allocated for handling the withdrawal and rewards associated with their staking services.

To provide some specific figures, approximately 107,000 ETH has been sent to Binance, 45,200 ETH to Huobi, 23,000 ETH to Kraken, and 11,900 ETH to Coinbase. These exchanges likely play a role in facilitating the withdrawal and management of staking-related rewards for the whale wallets.

Drivers of Deflation

Memecoins

The demand for trading the PEPE meme coin has led to a surge in Ethereum’s gas fees, surpassing a one-year high. On May 5, the average cost of a single transaction on Ethereum rose above $27. The increased gas fees can be attributed to the excitement surrounding meme coins, particularly the PEPE token. Additionally, the PEPE token has achieved significant success, becoming the top #77 cryptocurrency by market capitalization on May 29, with a valuation exceeding $600 million. As a result of the PEPE coin’s success, numerous copycat meme coins inspired by various internet memes have emerged. This proliferation of meme coins has contributed to the heightened gas fees on the Ethereum network. In the past 24 hours, the increased gas fees have resulted in the burning of approximately 3,278 ETH, reaching levels comparable to the one-year high. The increased gas fees witnessed 3,278 in ETH burned over the last 24 hours, at par with one-year high levels.

MEV bots

The ‘jaredfromsubway.eth’ MEV bot has accounted for nearly 7% of the total gas spending in the past month, amounting to over $28 million to cover gas fees. MEV, which stands for Maximal Extractable Value, involves a process where a bot identifies potentially profitable transactions in the mempool. Typically, transactions are ordered based on transaction fees, with higher fees prioritized for processing. MEV bots can access transaction data in the mempool and exploit or front-run these transactions to extract maximum profit. In the case of the ‘jaredfromsubway.eth’ MEV bot, it seems to be employing a “sandwich attacking” strategy on several low-cap altcoins and memecoins. During April, this Ethereum MEV bot was actively engaged in pumping gas, coinciding with the pumping of lesser-known memecoins like $PEPE and $WOJAK.

Impact on Ethereum’s Staking Reward

The rewards in ETH staking primarily come from two sources: base layer rewards and execution layer rewards. Base layer rewards are generated by the underlying Ethereum protocol and are distributed to validators based on their staked ETH and their overall network contribution. These rewards are influenced by various factors, including global economic conditions, on-chain activity, and the number of validators. However, it is worth noting that post-Merge, staking rewards have averaged around 7%. Additionally, the increasing number of new validators joining the ecosystem signifies the growing interest in staking ETH and the potential benefits it offers. Staking provides an opportunity to earn a passive income while actively participating in the Ethereum network and supporting its decentralized infrastructure.

The ETH staking inflow has exhibited a consistent and robust trend, surpassing 100 million per day, as depicted in the accompanying graphic. This sustained influx of ETH into staking is indicative of the growing interest and participation in Ethereum’s staking ecosystem. The continuous flow of ETH into staking demonstrates the confidence and long-term commitment of participants, further solidifying Ethereum’s position as a leading blockchain platform for staking and decentralized finance.

Staking Options for ETH

Staking ETH offers several options tailored to individual preferences and requirements. Solo home staking provides full participation rewards and decentralization but requires technical expertise and a dedicated setup. Staking-as-a-service allows delegation of the staking process while earning rewards, with users retaining control of withdrawal keys. Pooled solutions, including liquid staking, offer accessibility for users with less than 32 ETH, providing easy exiting and custody of assets. Centralized exchanges also offer staking services as a simpler option for those not yet comfortable with holding ETH in personal wallets.

Solo Home Staking

Full participation rewards and improved network decentralization. Requires a dedicated computer connected 24/7 and at least 32 ETH. Simplified with user-friendly tools but may require technical know-how.

Staking-as-a-Service

Delegate the staking process while earning block rewards. Walkthroughs for creating validator credentials and depositing 32 ETH. Requires trust in the provider, but withdrawal keys are kept in your possession.

LSTs & Pooling Solutions

Suitable for users without 32 ETH or who prefer simplicity. Offers ‘liquid staking’ with ERC-20 liquidity tokens representing staked ETH. Allows easy exiting and custody of assets in users’ Ethereum wallets. Built by third parties, carries inherent risks.

Centralized Exchange Staking:

Ideal for those not ready to hold ETH in personal wallets. Provides a fallback option for earning yield with minimal oversight.

Conclusion

The withdrawal feature introduced in the Shapella upgrade has had a significant positive impact on staking service providers. Prior to the upgrade, the inability to withdraw staked ETH posed a considerable risk, deterring risk-averse investors, prudent institutions, and whales from participating in ETH staking. However, the Shapella upgrade has provided users with a definitive exit channel, alleviating concerns about the depreciation of staked funds in extreme scenarios and eliminating the long-term withdrawal risks associated with staking. As a result, more long-term investors are likely to seek stable annual returns through ETH staking. The upgrade has also boosted confidence in the Ethereum network, with increased ETH deposits and growing interest in staking options such as solo home staking, staking-as-a-service, and pooling solutions. Additionally, the emergence of MEV bots and the memecoin craze has influenced gas fees and on-chain activity, highlighting Ethereum’s prominence and potential for profitability. Overall, Ethereum’s staking ecosystem continues to evolve, providing various options and rewards for participants while driving network decentralization and stability.