ARK Invest: Ethereum staking has become a benchmark

According to ARK Invest, Ethereum staking has become a benchmark for the so-called “crypto economy,” with a role similar to that of the US federal funds rate in the traditional economy.

This is what emerges from a report published a few days ago on the official website of ARK Invest.

The report by ARK Invest on Ethereum staking

The report, published on Tuesday, is titled “Why Ether Stands Out Among Digital Assets,” and is specifically dedicated to Ethereum and its cryptocurrency Ether (ETH).

The long report analyzes the role of Ethereum and ETH within the current crypto sector, stating that if Bitcoin (BTC) is a digital store of value, and the only digital asset with a monetary policy based solely on rules, ETH, on the other hand, is emerging as an institutional-level asset with yield generation potential.

In September 2022, Ethereum abandoned Proof-of-Work to switch to the more streamlined Proof-of-Stake, which allows staking. Staking, in turn, generates a yield, in ETH, for those who place their ETH on a validator node that validates transactions. 

According to ARK Invest, ETH now seems to have unique and distinctive characteristics that position it as a “benchmark indicator” within the digital asset space. And so it ends up playing a fundamental role in private and public financial markets, influencing the monetary policy of adjacent networks and digital applications, and measuring the health of the digital asset ecosystem on a large scale. 

Ethereum staking: a benchmark for crypto according to ARK Invest

Staking on Ethereum began precisely in September 2022 with the transition to Proof-of-Stake, although it was already possible a few months earlier on the testnet. 

At this moment, there are in total more than one million validators, with almost 34 and a half million ETH in staking, on a total circulating supply of just over 120 million. Therefore, more than a quarter of all ETH existing in the world are currently locked in staking on the validator nodes. 

The key point, for ARK Invest, is the APR, or the annual percentage rate, which stands at 3.3%. This means that every ETH staked is generating an average return of 0.033 ETH per year. 

This is by no means an unusual percentage, not even when compared to that of the returns of traditional assets. 

This rate of return according to ARK Invest should now be considered a benchmark within the crypto sector.

The role of Ethereum in the cryptoeconomy

All this would lead the yield of ETH staking not only to be an indicator of smart contract activity and economic cycles in the digital asset sector, but also to assume a role similar to that of the yield rate of US federal funds (Treasury) in traditional finance.

For example, at this moment the yield on 10-year United States bonds is 4.1%, thanks to the Fed’s interest rates still being particularly high. 

However, this rate is expected to decrease, thanks to the interest rate cut policy initiated by the Fed in September, while the APR of ETH should remain slightly above 3%, as historically it has been so until now. 

The ARK Invest report, however, also adds another important factor. 

In fact, the APR of ETH is indeed variable, but staking is certain, in the sense that as long as the Ethereum network continues to exist and is based on Proof-of-Stake, there will always be returns, by necessity. Validators, in fact, need to be paid for their transaction validation activity, and staking serves precisely this purpose. 

Instead, government bonds can also implode, in case of, for example, the insolvency of the State, as has happened several times in the past (although not to the USA). 

The only real risk of staking Ethereum is when you entrust your ETH to a third-party validator node, because in that case the node managers could end up losing them, for example, if they were to lose access to the node itself in the event of a hack or issues with the machine on which it operates. 

The inflation of ETH

Since the ETH that are paid as APR to those who stake them are created out of thin air, there is always the risk that Ether is an inflationary cryptocurrency. 

For this reason, it was decided months ago to burn a portion of the fees paid by those who make a transaction and therefore request that it be validated. In fact, the fees are also collected by the validator nodes, so burning them only means slightly reducing their earnings, without eliminating them. 

And so when there are many transactions, and many fees are paid, ETH temporarily becomes a deflationary cryptocurrency, while when there are few, it returns to being inflationary. 

Its circulating supply has now remained substantially unchanged from September 2022 to today, while in the previous two years, for example, it had grown by 7%.

This reasoning is not related to the fact that the APR of ETH should now be considered a benchmark, but it is still necessary to keep it in mind because if ETH had remained inflationary, the risk that the selling pressure on the markets would remain on average higher than the buying pressure, causing its price to drop, was real.