The Ethereum merge is done. The hype is down, and what are we left with?
Well, two things. One is 7.5% rewards on staked ETH. Two, North Rock Digital is playing 3AC hedge fund tunes in Ethereum.
What does any of this mean? And why should it be important to you?
Check this tweet:
That is the new breakdown of Rewards by Anthony Sassano, the founder of Daily Gwei.
Normally, Ethereum’s staking rewards are issued according to how much ETH is staked and what rewards the network is offering at that time period. Officially, the rewards rate is currently around 4.1%.
So why do validators receive as high as 7.5% for their staked ETH?
As users stake their ETH, their 7.5% APR consists of three components. The official 4.1% reward, Tips worth 2.3%, and MEV rewards which is 1.1%.
The tips and MEV rewards are ethically interesting.
The official 4.1% is usually made up of issuance and fees. When the Ethereum network issues new tokens, the tokens are only shared with the staked portion of ETH. Currently, only 13% of ETH’s supply is staked. Thus, out of the 120.5 million, only 16 million are staked. And they are the only ones that receive issuance rewards.
The inflationary rate is set at 0.6% based on the new ETH assets issued yearly. Thus the issuance protocol is 7.5x, which is the total supply divided by the staked value. 7.5 multiplied by the inflation rate of 0.6% equals 4.1%.
Official rewards aside, during periods of network congestion and slow processing, the Ethereum network has added features that allow users to tip validators that staked ETH, to prioritize their transactions over others.
So it's no longer on a first-come-first-serve basis… we are allowed to cut lines now, once u have the dollars for it.
On the other hand, MEV rewards are for validators that reorder blocks on the network. If users want a specific block arrangement, they can pay the validator to arrange the blocks specifically in their favor.
Sounds more like “bribe” the validator to me… but I ain't no Vitalik.
Adding the official 4.1% to the 2.3% Tips for validators, and MEV 1.1%, would total 7.5% rewards on ETH staked assets.
So the question becomes… do you want to stake your ETH and cash out?
Don’t be in a rush to answer.
In North Rock Digital’s opinion, the ETH token is not fully appreciated in the crypto space. The reasoning is that the ETH token has a 7.5% yield for hodling the asset, as we discussed. It deflates due to the portion of fees that get burned, and has a 30% px downside, with multiple px upsides.
Though the px calculation is questionable, it sounds appealing.
Another upside to the ETH asset is its value as collateral for lending and borrowing in DeFi platforms, many of which are built on Ethereum.
With the recent Ethereum merge, stakers of the ETH token are the natural sellers of futures and perpetual futures, which increases hedge fund activities and yield rewards even more.
So, according to traders, one of the side effects of the merge upgrade is that the futures market would be closely tied to the high 7.5% staking rewards earned on ETH. The higher the rewards, the higher the demand for the ETH asset, and the stronger the demand for shorting and selling futures.
This would naturally lead to more people staking to earn high rewards... Or at least that's what would happen in a perfect world.
First of all, the staked ETH cannot be withdrawn until the next Ethereum fork in the middle of the year. So ETH stakers would deviate towards hedging their exposure and protecting themselves by selling futures contracts tied to their staked ETH. this means your options in the space would drop drastically whiles turning the centralized ETH in your hand/wallet into a Security, with the SEC on its trail.
If the SEC is not a problem, then an ETH staking rewards gold rush would do the trick.
During situations of network congestion, users are allowed to tip validators and “donate” MEV rewards. But if the higher staking yield attracts more users to stake their ETH, that would mean more validators and fewer downtimes or opportunities for MEV rewards, which would mean fewer rewards in the long run.
This means rewards would fall, and if 2022 has taught us anything, expect another 3AC-look-alike that has been capitalizing on the increased situation would “crash” and leave their users holding the bag.
Now I ask the question from before. Do you want to stake your ETH and cash out?