The change of the Ethereum (ETH) blockchain to a proof-of-stake (PoS) protocol opened up new opportunities for developers and investors to explore, including burning Ether. Now, Ethereum PoS transactions are validated by staking instead of mining.
Staking influences the supply and price dynamics of Ether differently than mining. Staking is expected to create deflationary pressure on Ether, unlike mining which induces inflationary pressure.
The increase in the total amount of funds locked in Ethereum contracts could also drive up its price 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 merger. This means that, Since the merger, nearly all of the new minted supply has been burned through Ethereum’s new PoS burn mechanism, which is expected to fizzle out when the network sees a spike in usage.
According to Bitwise analyst Anais Rachel, “all ETH issued since The Meltdown will have been withdrawn from circulation by the end of this week.”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
1/ All ETH issued since the Merger is likely to have been withdrawn from circulation by the end of this week.
While the chart covers the 43 days since the Ethereum meltdown, the tokenomy is poised for Ethereum to deflate. Ultrasonic money shows that the peak.
The reduction is attributable to the movement of Ethereum from PoW to PoS. The total supply difference shows that Ethereum is still inflationary with a positive 1,376 ETH minted since the merger.
Ankit Bhatia, CEO of Sapien Network, explains how staking impacts supply. Bhatia told Cointelegraph:
“Most likely, the retail market will buy Ether from exchanges like Coinbase, which will likely offer buyers the option to stake immediately after their purchase and further reduce the circulating supply.”
There is evidence of an increase in locked Ether. For example, DeFiLama shows that more than $31.78 billion worth of Ether is currently locked in smart contracts.
In addition to Ethereum PoS locked tokens, Token Terminal data provides a breakdown of staked tokens across the Ethereum ecosystem.
The main protocols are Uniswap, Curve, Aave, Lido and MakerDao. For example, Lido’s TVL is $6.8 billion, while MakerDao has $8 billion.
Showing increased interest in proof-of-stake, Ether holders depositing in PoS are taking Lido to new heights. Lido’s TVL increased from $4.52 billion before news of the merger on July 13, 2022 to $6.8 billion at press time.
As the month of October comes to a close, the TVL continues to rise as many investors lock up Ether.
DeFi protocols see increased TVL and daily active users
Uniswap’s TVL and DAU have been increasing over time. In most cases, the increase in the TVL of a protocol is accompanied by an increase in daily active users on the platform. The most likely cause of the increase in TVL and DAU is the lucrative Ether staking rewards.
An increase in DAUs on Uniswap can cause more Ether to be burned due to an increase in transactions and can also help take more Ether out of circulation as Uniswap TVL grows. The best pairing on Uniswap with Ether is USD Coin (USDC), which currently provides over 34% APY.
Lucrative returns from staking
Ether paired with stablecoins on Uniswap is the best option for liquidity providers. The pair 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 in liquid staking derivatives include Coinbase, Lido, and Frax. In these cases, the return reaches 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. As usual, smaller amounts have higher APYs than larger amounts. Performance is also protocol dependent.
For example, validators earn more than those who invest in cryptocurrency exchanges and staking with pools. However, validators must stake 32 ETH and constantly maintain their nodes, which is why platforms like Lido are helping smaller ETH holders earn.
Ether’s TVL surge from rising yields, the move to PoS, and DAUs on major Ethereum DApps could eventually lead to an Ether rally.
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