The widely anticipated Ethereum Shanghai upgrade is scheduled for early April 2023. The upgrade will unlock staked Ether that, for some, was inaccessible since December 2020. The results of the upgrade will have direct implications on Ether’s price, staking ratios, liquid staking and Proof of Stake community, and the industry as a whole.
Staking Ratio
The staking ratio is the total amount of staked tokens of a given protocol to the total amount of said protocol's tokens in supply.
ETH staking ratio only recently surpassed 15%, equating to approximately 17.5M ETH or 29B dollars. It is a low staking ratio when compared with other PoS chains. For example, over 70% of Solana (SOL) and Cardano (ADA), as well as half of Avalanche (AVAX), are staked.
Not entirely wrong, but rather short-lived is the assumption that a higher staking ratio correlates with a higher staking yield. An influx of new stakers due to a high perceived staking reward increases the staking ratio in the short term. But in the long term, the more people stake, the lower the staking reward.
For example, even though Cardano has a high staking ratio of 70.13%, the staking reward is about 4.6%.
On the other hand, despite Ethereum's low staking ratio, the rewards are around 5.5% and can be even higher due to liquid staking; more on that in a bit. Therefore, other factors, such as the network's overall health, immutability, security, decentralization, consensus, performance, and promise, play a significant role in staking interest.
Ethereum's staking ratio is projected to rise post-Shanghai for several reasons. At first, the previously locked-up ETH collateral will re-enter the market.
Early stakers will realize their gains and re-enter with even more stake. In addition, the uncertainty around undetermined ETH lock-up periods will perish, and new stakers, small and large, will enter the playing field. In the long run, a higher staking ratio will improve the network's security, an essential indicator of the blockchain's health, and take some ETH out of circulation. As a result, a more liquid, less risky ETH in demand will rise in price.
Liquid Staking
Liquid Staking gained traction during the locked-up ETH period and has been increasing in popularity ever since and especially now, leading up to the Shanghai upgrade.
The top three Liquid Staking protocols ranked by Total Value Locked (TVL) are Lido, Coinbase, and RocketPool. Liquid Staking further democratizes staking for Ethereum investors by facilitating smaller stake amounts than the 32 ETH stake amounts required to run a validator node.
For example, the fully decentralized staking protocol RocketPool, allows investors to stake as little as 0.01 ETH through its derivative token rETH in the Rocket Pool.
The rETH tokens can be exchanged back to ETH at any time, keeping investors liquid with benefits from staking rewards. The protocol enables even higher monetary gains for investors that run their own Minipools, which require 16 ETH and soon only 8 ETH.
The other 16 ETH come from liquid stakers in the Rocket Pool, generating additional ROI for the Minipool stakers. So, if the staking rewards for ETH validators are around 5.5%, a Minipool can yield an extra percentage on top of that. But that’s not all. All Rocket Pool participants are asked to provide a minimum collateral of 10% for their 16 ETH stake in the protocol’s coin RPL. Since RPL is also a PoS protocol, Minipool stakers earn additional RPL rewards.
Currently, there is no indication that liquid staking will decrease in popularity following the Shanghai upgrade. On the contrary, all signs indicate its continuous growth and broader adoption of staking as an investment strategy.
The Ethereum network has been prudent in rolling out its updates, and rightfully so.
There are many moving parts in such a grand network; doing it right versus quickly is better for everyone involved. Assuming the Shanghai upgrade is successful, we can anticipate many new improvements in months to follow.
These include speedier transactions, lower transaction costs, lower regulatory pressures, and increased network decentralization that will positively impact not only the price of ETH but also the overall health of the protocol and the blockchain sector as a result.