Ethereum ecosystem is on a journey that could redefine staking for its validators due to the Shanghai upgrade.
By March, validators can withdraw ETH that has been locked since December 2020, which could happen partially or wholly. Partial withdrawal will mean validators can only withdraw the accrued rewards, not their initial staked Ethereum. Those who opt for a full withdrawal will completely exit the network.
The upgrade requires validators to update their withdrawal credentials beforehand. Currently, only 60% of the half-million validators have done so, and the rest needs to do this seen.
The rewards will automatically be sent to the address of those who have updated their credentials. In case of a full withdrawal, a validator must manually request an exit.
A maximum of seven exits can be processed in the network per epoch every ~6.4 minutes, which works out to 1600 validators' exits daily. If many validators chose to exit simultaneously, the difficulty and delay could be longer as the process is slow.
An influx of liquid staking protocols like Likdo has also been seen. These protocols enable ether holders to stake fractions of Ethereum without the need to post a minimum of 32ETH threshold.
Not only that, these liquid staking protocols provide liquidity for staked assets that would otherwise be locked. By the time the upgrade goes live, the derivative token of these liquid staking protocols should converge in parity with the underlying asset.
The shanghai upgrade and liquid staking protocols have created opportunities for retail investors that could not previously stake due to the 32 minimum stake amount threshold. That has led to these protocols becoming some of the biggest DeFi players, with Lido surpassing MarkerDAO in terms of Total Value Locked (TVL).
All in all, the coming months will be an exciting time for the Ethereum network, with staking getting a much-needed boost in the form of the Shanghai upgrade and liquid staking protocols providing much-needed liquidity for staked assets.
Lido's Dominance of the Liquid Staking Space Raises Concerns
The ethereum network is constantly evolving, and with this evolution comes opportunities. Last September, "The merge" was a monumental part of this evolution, bringing considerable benefits such as reducing power consumption and Ethereum's inflation rate.
Unfortunately, this merge has also increased centralization as a select few entities, such as liquid staking protocols, now hold a majority of the staked Ethereum. Currently, Lido is the largest liquidity provider in the staking space, commanding more than 30$ of the market share of staked ETH and a higher share in the overall liquid staking space.
This concentration of ETH has caused some concerns among people within the ecosystem, leaving them to ask how this might impact the security and health of the Ethereum network, which is yet to be seen; this will be an important issue to watch in the coming months.
Shanghai Upgrade to Increase Ethereum Staking Yield Significantly
The upcoming Shanghai upgrade is expected to cause a major shift in Ethereum's staking ability & yield. Currently, each validator with 32 ETH is getting a total staking yield of 7.4%, including variable rewards from transaction fees, tips, and MEV (Maximum Extractable Value).
Compared to other Major PoS networks such as Avalanche (AVAX), BNB, Polkadot, and Solana. Ethereum has a relatively low staking ratio of only 14%, so after the upgrade, there's room for the staking ratio to increase to the average of the networks, which is ~60%
If that happens, the number of validators would jump from 0.5 million to 2.2 million, and the yield would decrease from 7.4% to around 5%, therefore with the Shanghai upgrade, Ethereum has the potential to become one of the leading PoS players within the crypto space and offer rewarding yields to validators.
Monitor The Standard Block Rewards and Variable Rewards
Explaining this graph of the validators and the yield
Assume you are a validator on the Ethereum network, responsible for confirming and processing transactions. As a validator, your main goal is to maximize your staking yield, which is determined by the number of validators present in the network. The graph illustrates how the staking yields correlate with the number of validators in the network.
The increase in standard block rewards to the validator set as the number of validators increases that increases the standard block reward helps to offset the variable rewards such as transaction fees, fee bumps given by the users to prioritize certain transactions, and MEV, which are rewards earned through reordering transactions before sending them into a block on the network. As more people use the network and more activity is present, the variable rewards earned will also increase and contribute to your overall staking yield.
By keeping track of the rewards earned along with the stand block rewards, you can be sure to experience the highest staking yield possible, helping you to take advantage.
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