Asset manager Grayscale is overly bullish on plans to cap Ethereum staking rewards.
In a latest report, Zach Pandl, the firm’s Head of Research, said the proposed changes would be “positive for $ETH price.”
If implemented, the change would likely reduce nominal rewards for stakers. We think that such a change would be positive for the price of Ether ($ETH) over time because a) it would help control $ETH inflation, and b) would bolster the use case of $ETH as a store of value.
Backing his argument, Pandl noted that current $ETH net issuance (primarily driven by staking rewards) has been rising higher than the burning rate. He linked the dislocation to the shift of transactions from mainnet to Layer-2 (L2s).
Source: Grayscale
Excessive staking is ‘counterproductive’
Secondly, Pandl acknowledged that staking is necessary for Ethereum [$ETH] security and protocol function. But he warned that beyond a certain point, it becomes ‘counterproductive.’
The report didn’t state any particular threshold for the staking level that is optimum. But it’s worth noting that in mid-April, staked $ETH hit a record high of 39 million $ETH or 32%.
Source: Beacon Chain
Although the percentage of staked $ETH has slightly tapered to 31.6% as of writing, the annual net issuance comes to about 1 million $ETH.
With ETFs and treasury firms aggressively seeking yield, Grayscale argued that the net issuance rate will increase if staking is not capped.
For the firm, leaving things as they are would dent $ETH as a store of value due to high inflation. Besides, it could increase centralization risk if so much $ETH is staked at a handful of validators.
However, addressing the inflation could boost the value of unstaked $ETH, Grayscale noted.
Ethereum may change its staking reward model to contain long-run supply growth and reduce certain tail risks. If so, we think the shift would be positive for the price of $ETH.
Source: Grayscale
The upgrades, including the above planned staking model, are part of Ethereum’s Strawmap long-term vision, an explicit attempt to improve speed and cost to rival Solana [SOL] and other competitive chains.
It aims to fix gaps like the cost of transactions that drove users to other chains.
But only execution of these changes will determine whether Ethereum wins, noted Lucas Tcheyan, VP of research at Galaxy Research.
Execution will determine whether the current period is remembered as a turning point or the beginning of a longer decline.
Final Summary
- Grayscale backed proposed caps on Ethereum staking rewards as they could boost $ETH value by reducing annual inflation.
- The firm cautioned that the current $ETH staking boom could be ‘counterproductive’ and heighten centralization risk in the long run.