one year After one of the most talked about software upgrades since 2017 Y2K Conversion Cryptocurrency’s most important business highway more than two decades ago threatens to become a victim of its own success.
The revamp of the Ethereum network, known as the “merge,” proved to be a seamless transition to a more energy-efficient blockchain transaction ordering system. One of the incentives offered to participants is the ability to earn revenue from tokens used to help run the network. The surge in demand for the so-called staking feature now increases the likelihood that the network will go into trouble.
As part of the staking process, the ether that underpins the network is “locked” in digital wallets to help order transactions and earn yield. According to data tracking company Stake Rewards, about 20% of the ether in circulation (worth approximately $41.5 billion) is currently staked.
If current rates continue, this number will increase to 50% by May 2024 and 100% by December 2024. Paper Two of the book’s authors include Tim Beiko, who coordinates Ethereum developers.
Driving demand is the fact that staking has become one of several reliable ways to earn returns on cryptocurrencies. Most token prices are still less than half of the all-time highs set in late 2021. Ethereum owners can currently earn around 4% by staking.
“We all like to only go up, but when the security of Ethereum is compromised,” said Dapplion, another author of the paper. Xthe social platform’s official name is Twitter.
The worst-case scenario is that there won’t be any Ethereum available to actually conduct transactions on the network. At the very least, it adds stress to the part of the network used to order transactions.
This is why Ethereum developers are working hard to slow down the influx of staking. On September 14, developers agreed to limit the number of new validators running staking wallets, allowing them to join the network every six minutes. This change will be marked as the next major Ethereum software upgrade later this year. The paper claims that with so-called churn changes, Ethereum will not reach the theoretical point where 100% of all circulating ether is collateralized for several years.
“We want to slow things down to buy us some time,” Matt Nelson, product manager at Ethereum infrastructure builder Consensys, said in an interview.
The temporary respite will allow developers to find longer-term solutions. The paper says that with staking experiencing “unprecedented success, exceeding the original intended target for staking rates,” developers may consider adjusting validator rewards “to discourage staking beyond a certain point.”
Most people don’t stake their ether directly and act as validators. Instead, they offer their tokens to various services operated by companies such as Kraken, Lido and Coinbase Global Inc., which pool the tokens and share the rewards. Lido issues another token to Ether holders, allowing them to trade on the exchange while staking the token. 33% Market share according to data service Dune.
“The knock-on effect is that it brings current staking providers into the fold,” said Jim McDonald, CTO of Attestant, one of the largest Ethereum staking providers.
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