The shift of the Ethereum (ETH) blockchain to a proof-of-stake (PoS) protocol opened new opportunities for developers and investors to explore, including the burning of Ether. Now, Ethereum PoS transactions are validated through staking rather than mining.
Staking impacts the supply and price dynamics of Ether in ways that are different from mining. Staking is expected to create deflationary pressure on Ether as opposed to mining that induces inflationary pressure.
The increase in the total amount of funds locked in Ethereum contracts could also push its price up in the long term. This is because it affects one of the fundamental forces that determine its price, supply.
The percentage of newly issued Ether versus burned Ether has increased by 1,164.06 ETH since the merge. This means since the merge, almost all new minted supply has been burnt through the new PoS Ethereum burn mechanism which is expected to turn deflationary when the network sees an uptick in use.
According to Bitwise analyst Anais Rachel, “all the ETH issued since The Merge will have been taken out of circulation by the end of this week.”
1/ It’s likely that all ETH issued since The Merge will have been taken out of circulation by the end of this week pic.twitter.com/WqRASUwi4i
— Anais Rachel (@Anais_Rchl) October 27, 2022
While the graph covers the 43 days since the Ethereum merge, the tokenomics are set up to turn Ethereum deflationary. Ultrasound Money shows that the peak.
The reduction is attributable to Ethereum’s movement from PoW to PoS. Total supply difference shows Ethereum is still inflationary with positive 1,376 ETH minted since the merge.
Ankit Bhatia, CEO of the Sapien Network, explains how staking impacts supply. Bhatia told Cointelegraph:
“The retail market would most likely acquire Ether from exchanges like Coinbase, which will probably offer the option for buyers to immediately stake their purchase and further reduce circulating supply.”
There is evidence of an increase in locked Ether. For example, DeFiLama shows that over $31.78 billion worth of Ether is currently locked in smart contracts.
In addition to Ethereum’s PoS locked tokens, Token Terminal data provides a breakdown of staked tokens throughout the Ethereum ecosystem.
The leading protocols include Uniswap, Curve, Aave, Lido and MakerDao. For example, the TVL on Lido is $6.8 billion while MakerDao has $8 billion.
Showing an increased interest in proof-of-stake, Ether holders depositing to PoS are moving Lido to new heights. Lido’s TVL increased from $4.52 billion before the Merge news on July 13, 2022 to $6.8 billion at the time of writing.
As October comes to an end, the TVL continues to increase as many investors lock Ether.
DeFi protocols see an uptick in TVL and daily active users
The TVL and DAUs of Uniswap have been increasing over time. In most cases, the rise in a protocol’s TVL is accompanied by increases in daily active users on the platform. The most likely cause of the increase in TVL and DAUs are the lucrative Ether staking rewards.
An increase in DAUs at Uniswap may trigger more Ether to burn due to an increase in transactions and it may also help take more Ether out of circulation as Uniswap TVL grows. The top pairing on Uniswap with Ether is USD Coin (USDC), which currently provides 34% APY.
Lucrative staking yields
Ether paired with stable coins on Uniswap is a top choice for liquidity providers. The pairing is generating at most 72.20% APY when looking at Ether paired with Tether (USDT).
It is worth noting that some staking platforms that deal with liquid staking derivatives include Coinbase, Lido and Frax. In such cases, the yield is as high as 7% per year.
Data from EthereumPrice.org shows that Lido pays 3.9% APY, Everstake 4.05%, Kraken 7% and Binance 7.8%.
It is important to note that the rate of return also varies with the amount invested. Usually smaller amounts have higher APYs than larger amounts. The yield also depends on the protocol.
For example, validators earn more than those who invest on crypto exchanges and pooled staking. However, validators are required to stake 32 ETH and constantly maintain their nodes, which is a reason platforms like Lido are helping smaller ETH holders earn.
The increase in Ether’s TVL from increased yields, the move to PoS and DAUs on the top Ethereum DApps could eventually lead to an Ether rally.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.