EXPLORING ETHEREUM, ITS STAKING MECHANISM, AND STAKING REWARDS

KEY INSIGHTS & TAKEAWAYS

A year of changes. A year of growth. A year of innovations. This is what first comes to mind when you think about what 2023 meant for the Ethereum ecosystem. From long-awaited features enabled during the upgrade to x2 staked ratio growth and new staking mechanics, the year had a massive effect both on the Ethereum staking ecosystem and the entire Web3 industry.

• The total stake in Ethereum surged to almost 25% in 2023, reaching an all-time high in Q4. The high popularity of staking reflects the community and institutional players' interest both in passive income from their ETH assets and in the network’s well-being and further development.

• The staked ratio grew significantly, influencing the proportional annual percentage rate (APR) decrease as per ETH tokenomics.

• New staking mechanics, including the introduction of non-custodial non-liquid pools, DVT staking, and restaking, opened a whole bunch of novel staking opportunities to the existing ETH stakers and holders, whose assets ranged from 0.1 ETH to institutional-grade amounts.

This is the first report in a series, and Everstake intends to publish regular updates on the Ethereum staking ecosystem. Our previous reports on Polygon, Cosmos, Solana, and Tezos staking are also available on our website for a more comprehensive understanding of the Web3 ecosystem. 

If referencing or using materials from this report, please attribute Everstake and provide a link to the original.

For any inquiries, contact our Blockchain Manager Irina on X.

ESSENTIAL DEFINITIONS

Below is a brief explanation of the basic terminology used in this report.

• Stake – the amount of staked ETH (in order to start staking on Ethereum, one should deposit 32 ETH);

• Validators – node operators that deposited 32 ETH. The validator handles attestations and block proposals. They accrue rewards or lose ETH via penalties or slashing.

• Delegators – ETH holders who delegated their tokens to a staking provider who stakes ETH and runs validators on behalf of delegators to get rewards and secure the network;

• Staked ratio – a percentage metric representing the portion of a cryptocurrency's total supply staked in PoS or DPoS networks;

• APR – annual percentage revenue available on the blockchain for staking.

WHAT IS ETHEREUM STAKING AND WHAT IS ETHEREUM REPORT?

The classic definition of ETH staking according to ethereum.org

Source: ethereum.org/en/staking

Staking allows you to earn ETH rewards for helping the network reach consensus, properly batching transactions into new blocks, and checking the work of other validators. 

Staking ETH is a prerequisite for ensuring the network’s proper performance.

• Better security. The more ETH is staked, the more resilient the network is against possible attacks. A malicious actor would be able to hijack the network only if they exercised control over the majority of validators (and therefore control most ETH), and the more ETH is staked, the more difficult it is to do that.

• Higher sustainability. Stakers don't need to do energy-intensive proof-of-work computations to participate in securing the network, meaning validators can run using very little energy.

Any user with any amount of ETH can help secure the network and earn additional ETH tokens as a reward in the process.

This report takes a comprehensive look at all the events and stats that made up the year 2023 in the realm of Ethereum staking. Learn what the staking ecosystem lived and breathed for the past 12 months and enjoy lots of valuable insights, some of which are unique and have never been published before.

SIGNIFICANT YEARLY EVENTS AND THEIR INFLUENCE ON THE ETHEREUM STAKING ECOSYSTEM

What defines Ethereum in 2023? Strings of code? Or maybe millions of blocks on the chain? We believe it’s neither. 

At the end of the day, it’s all about people behind the screens. They are the driving force creating this brave new world, pushing the boundaries, setting up a new economy, and figuring out its rules and standards. They are the lifeblood of the Ethereum blockchain, the biggest Proof-of-Stake (PoS) implementation ever. 

This report is our homage to those shaping Ethereum in 2023: core devs and client teams, founders and developers, analysts and traders, influencers and enthusiasts, and, of course, stakers.

The next section explores the events that defined 2023 in Ethereum.  

WITHDRAWALS ENABLED BY SHAPELLA UPGRADE

“The first simultaneous upgrade of Ethereum's Execution Layer (EL) and Consensus Layer (CL),” “the most anticipated and the most speculated to date”—all these grandiloquent bynames describe one and only Shanghai-Capella upgrade, often referred to as the Shapella.

Among other important improvements to the protocol, this upgrade enabled ETH withdrawal, which meant that Ether staked on the CL could be withdrawn to an Ethereum execution address for the first time since the staking became available 3 years ago, in December 2020.

Pessimists scared the community, predicting disastrous Ethereum unstakes and a massive deprecation of ETH as everyone would want to collect their rewards after waiting for so long. The reality, however, turned out to be completely different.

So, 8 months later, where are we now?

Providing stakers with the ability to unstake their ETH had the opposite effect. During the first month after withdrawals were enabled, the amount of staked Ether increased by around 3m ETH or +15.5%. One of the reasons was the general rule of behavioral economics: those interested in staking but not feeling confident in locking their tokens for an unclear period of time had been waiting for this opportunity to appear and now were using it. 

The same was applicable to institutional clients, who had some precautions on a lock-up with no end date and, on the other hand, had some of their assets working in DeFi and other applications.

At the same time, ~2.8m ETH were withdrawn over the first month, including 970k ETH of withdrawn rewards (partial) and 1.96m ETH withdrawn by exiting the Ethereum validating set (full), which corresponded to 61k validators exiting the blockchain over the same period.

ACTIVATION QUEUE AND THREATS OF VALIDATOR GROWTH

New staking highs resulted in the situation that put the amount of ETH in the activation queue and its length in the spotlight of community attention in late spring and early summer. It was back then when many of us discovered the concept of “churn limit.” 

The churn limit is a parameter that defines how many validators can exit (how many staking withdrawals can be initiated) or enter (how many ETH can be staked) in one epoch. It protects the network's stability, ensuring that the validator set remains stable and that the chain's finality guarantee is not affected by many validators joining or leaving the network at the same time. 

The churn limit depends on the number of validators that are already active on the network. The more validators are active, the more new validators can enter or existing validators exit, and the more of these actions can be processed per epoch.

Source: Serenity Design Rationale by Vitalik Buterin, 2021

Therefore, any simultaneous demand to stake or withdraw beyond that number must wait in an activation/exit queue before processing. Simply put, an activation queue is a set of validators waiting to begin staking on Ethereum. 

Prior to the Shappela upgrade, the community was really concerned about the exit queue and how long it may take to withdraw rewards or stop a validator, unstaking 32 ETH.  Still, as was mentioned above, the launch of withdrawals had the exact opposite effect, and the activation queue was of much greater interest to the broader community.

While the exit queue rarely exceeded 1 day, the activation queue peaked at 47 days in early June following mass inflows of stakers and a huge stake of 395k ETH from Celsius.

It was only in mid-October 2023 when the activation queue caught up to the exit one at the 1-day mark, never to exceed this value again within the year. One may conclude, therefore, that the demand for ETH staking was fulfilled.

The next graph depicts how many validators have been entering, exiting, or waiting to enter Ethereum every day ever since the Shanghai-Capella upgrade on April 12, 2023. On the day when the activation queue reached its maximum length, there were ~97k, which corresponded to 3M ETH waiting to be staked. Meanwhile, there usually were less than 1K validators per day in the exit queue. 

The only times when there were more than a thousand validators in the exit queue were during the first weeks after withdrawals had been enabled and from mid-November till Christmas.

In the summer of 2023, however, certain Ethereum core devs started expressing concerns about whether the network consensus could withstand the growing number of validators. Their reasoning was as shown in the screenshot below.

Source: Paths Toward Reducing Validator Set Size Growth by Christine Kim, 2023

To mitigate this in the short term, dapplion, Core Dev at Lodestar, Merge Coordinator at Gnosis Chain, and OG Dev at Dappnode, suggested setting the activation churn limit to 8. The churn limit for validator exits would have continued to scale with the active validator set. This proposal was approved for inclusion in the Deneb-Cancun (Dencun) upgrade planned for Q1 2024. 

At the same time, core devs launched a new Ethereum testnet, Holešky, with an active validator set size twice as large as in the Ethereum mainnet and Holešky’s predecessor, Goerli (1.5m vs 700k validators at the time of planning). The new testnet also enabled core devs to battle-test whether a larger validator set size could result in issues with finalization and insufficient attestations caused by an excessive number of duties and late block arrivals.

NEW STAKING SOLUTIONS

In 2023, one of the most promising and inclusive staking solutions finally came to the Ethereum mainnet, creating a buzz among the community. They provided stakers with new options and empowered the network with additional decentralization, resilience, and security.

NON-CUSTODIAL POOLS

This year, non-custodial, non-liquid Ethereum staking pools finally became available for stakers who were not ready to stake 32 ETH traditionally or lower amounts with liquid solutions. Although there are only several on the market so far, they provide inclusive staking solutions substantially lowering the entry barriers for non-liquid Ethereum staking.

This is a huge milestone for the staking ecosystem as such solutions enable the staker to retain complete control over their assets. 

It is especially important since the impact of custodial solutions on an ecosystem may be adverse, primarily due to the combination of massive token accumulation by such services and the fact that they often handle those funds in a questionable manner. Effectively, this means that, currently, more than a half of all staked ETH is not controlled by their owners. Additionally, the transparency of these platforms is often called into question, as they may underreport their holdings to downplay their influence. 

Discover the difference between custodial and non-custodial staking and which option is better both for the staker and the Ethereum network.

On the other hand, non-liquid Ethereum staking pools remove the challenges of liquid solutions, which include, but are not limited to:

• depegging risk (the derivative/staked tokens price may deviate from the original price, usually due to the lower market price of the new token), 

• network centralization (an intermediary platform or service through which liquid staking is provided could disrupt the balance of validator shares in the network, potentially leading to undue control or centralization by powerful validators),

• smart contract vulnerability (an additional smart contract is used to stake ETH and provide liquid tokens, imposing additional security risks due to possible internal issues or bugs or as a target for attacks by malicious actors).

Check out the comparison between liquid and traditional staking in our recent article, which will equip you with the knowledge to make informed decisions. 

At Everstake, we recognize the evolving demands of the blockchain community and pioneer new opportunities for the stakers. Thus, we were the first on the market to present a non-custodial Ethereum staking within Everstake’s pooling solution, allowing users to stake as little as 0.1 ETH in a non-liquid manner. We lowered the entry threshold for ETH staking, which benefits the ecosystem through distributing control and reducing centralization. On top of that, Everstake’s solution ensures competitive rewards and offers one of the highest APRs among top-tier providers, all via a user-friendly interface.

DVT

Undoubtedly, 2023 was the year of the rise of DVT (Distributed Validator Technology), which aims to ensure the highest security, distributing key management and signing responsibilities across multiple parties. It effectively minimizes single points of failure and increases the resilience of the Ethereum network. Two projects stand out as early pioneers and developers of this novel technology.

One of them, SSV.Network, was among the earliest initiatives to adopt DVT (which had initially been referred to as SSV itself, meaning Secret Shared Validators). It blossomed into a community-fueled initiative with the primary goal of bolstering Ethereum's security and decentralization. Everstake is proud to have been selected as a Verified Operator for its Mainnet Limited Launch phase as a recognition of our prior contributions to Ethereum, such as active participation in all SSV testnets, successful validator operations, and reliable infrastructure.

Everstake’s performance on the SSV.network mainnet is available in real-time via the official explorer. We also provided a detailed guide on how to run a validator on the SSV.network.

Another trailblazer of the DVT is Obol. Obol Network is a protocol seeking to foster trust-minimized staking through multi-operator validation. This would enable low-trust access to Ethereum staking benefits, which can be used as a core building block in a variety of Web3 products.

Obol is focused on scaling consensus by providing permissionless access to Distributed Validators (DV). Everstake has been a part of the Obol testnet among 45 validators since the Alpha version. We are proud of our performance in the Alpha phase clusters, contributing as one of the operators for the validator 870469. Currently, the project is in its Beta Mainnet phase. 

RESTAKING

What’s the first word that comes to mind when you think of restaking? As for many of you, for us, it is EigenLayer. EigenLayer is a protocol built on Ethereum that introduces restaking, a new primitive in crypto-economic security. Restaking enables staked ETH to be used as a security source for ecosystems other than Ethereum in exchange for protocol fees and rewards. This reduces capital costs for a staker to participate and significantly increases the trust guarantees to individual services.

Users that stake ETH natively or with liquid solutions can opt-in to EigenLayer smart contracts to restake their ETH or liquid staking tokens (LST) and extend crypto-economic security to additional applications on the network to earn additional rewards. 

The available LSTs include stETH, rETH, cbETH, swETH, ETHx, osETH, wBETH, oETH, and ankrETH. On December 18, 2023, when EigenLayer revealed new staking opportunities for the latter, as well as uncapped stETH, rETH, and cbETH to 200k, the community’s enthusiasm drove Ethereum gas prices well above 50 gwei.

Currently, the TVL in EigenLayer is more than 903k ETH or $2 billion at the time of writing.

Source: EigenLayer App

EigenLayer's next phase will introduce Operators, who will be responsible for performing validation tasks for AVSs (Actively Validated Services) built on the EigenLayer protocol. 

EigenDA by EigenLabs, the first AVS to launch on EigenLayer, is a secure, high throughput, and decentralized data availability (DA) service built on top of Ethereum using EigenLayer’s restaking primitive. In the third phase, the protocol will facilitate the launch of multiple AVSs.

Restakers will be able to delegate their stakes to node operators validating for EigenDA in exchange for service payments. At the same time, rollups will be able to post data to EigenDA in order to access lower transaction costs, higher transaction throughput, and secure composability across the EigenLayer ecosystem. 

Everstake became one of the 30 node operators during the EigenDA launch on the Goerli testnet as a testament to our impeccable level of professionalism, solid experience, and performance. 

ETHEREUM'S STAKING TOTAL ACROSS THE YEAR

The Shanghai-Capella upgrade, which brought about withdrawals and unstaking, became a game changer for the Ethereum staking,  doubling the core metrics from the past 3 years.

On January 1, 2023, there were 15,853,472 ETH staked. On the day before the Shapella launch (April 11, 2023), there was 18,141,408 ETH. This means that over the first quarter of 2023, Ethereum gained 2.29 million staked ETH. Over the year’s remainder, the staking gain was over 10M, resulting in 29,013,856 ETH as of December 31, 2023, or +83% YoY (Year-over-Year). 

This growth rate is just shy of equal to the results of 2021 and 2022 put together. Another thing to note is that unstaking was unavailable at the period, and only 8M ETH was unstaked in 2023.

ETH staked in 2021 + ETH staked in 2022  > ETH staked in 2023

6 662 816 + 7 014 784 > 13 166 624

13 677 600 > 13 166 624

For detailed numbers and calculations, see the table in Appendix 1 (find it by clicking DOWNLOAD REPORT in the upper right corner).

One can only speculate that the monthly growth rate (peaking at 15.47% in May 2023) could have been even higher had it not been limited due to the churn limit discussed above.

The same applies to the number of validators since it directly correlates with the amount of ETH staked. As a single validator can only have a stake of 32 ETH, the overall number of validators is 32 times lower than the total stake, numerically.

PRICE FLUCTUATIONS AND STAKING RESILIENCE

Core devs, client teams, developers, builders, and enthusiasts are working hard to ensure Ethereum’s network resilience. But what is really resilient is the ETH staked ratio, as it is growing regardless of the ETH token’s price.

As seen from the chart above, despite all the ups and downs the price experienced in 2023—with the lowest on March 10 at $1,429 to the highest on December 27 at $2,379—the staked ratio has never changed its uptrend. Looking back, the staked ratio has been on the rise ever since staking became available in December 2020.

INFLUENCE OF STAKED RATIO ON THE ETHEREUM STAKING REWARDS: IS STAKING ETHEREUM WORTH IT?

Put aside that question because the answer would definitely be yes – staking ETH is 100%  worth it – despite Ethereum APR experiencing a rollercoaster during 2022.

Ethereum APR is a dynamic metric shaped by internal network mechanisms and the collective behavior of its validators. It is calculated as the average APR of all validators being active on the network during a certain period of time. Wherein, please keep in mind that:

• The more validators are active, the lower the reward-receiving frequency for each of them. This happens because the randomizing mechanism has to choose between a bigger number of validators to ensure that the same validator is not selected too often or too seldom.
  
  

• The more new validators join the network, the lower the average APR is. This is the result of the same mechanic: when a new validator joins and starts earning rewards, it gets attestation rewards (approximately 0.00001 ETH per epoch), which is significantly less than block proposal rewards, priority MEV, or fee. It needs some time to get the right to propose a block and receive the main share of rewards. As a result, this lowers the average network APR.
  
  For example, a validator with an index of 1 000 000 entered the chain on November 2 and exited on December 30 with a 31-day APR of 2.14% and a yearly APR of 0.40% only. In the case of the validator 495 250, who entered the chain on January 1, 2023, the 365-day APR is 4.38%. 

  Another benchmark for comparison is the validators operating since genesis (December 1, 2020). For example, Everstake’s early validator (indexed 156) has a yearly APR of 6.95%. 

Those were the primary reasons why Ethereum-wide APR lowered from above 4% to 3% by the end of 2023. 

That said, APR can vary significantly (from 1% to 10%) between validators or staking providers. As an extreme case, one of our validators that has been active for approximately 3.5 months, showed an impressive APR of around 13%, which is reflected in our recent case study.

On average, Everstake offers an APR of 4-10% both for those willing to stake as little as 0.1 ETH with our pool and for those who prefer to stake 32 ETH and more to activate their own validator.

PERFORMANCE ANALYSIS OF TOP VALIDATORS

For the purposes of this report, a “top validator” is an entity that consists of ranked operators handling the 85th percentile of the staked ETH. There are 25 of them, which can be interpreted as 25 entities managing 84.39% of staked ETH (24.51 million ETH or 766 thousand validators).

These 25 entities do not include the following:

1. Lido as a single entity. If it were included, Lido would be #1 by staked ETH with 9.25M ETH staked or 315,406 active validators. Instead, to accurately represent the actual state of Ethereum and its validators, in this report the data includes Lido validators within the statistics of the 35 staking providers that actually run the nodes and operate the stake allocated from Lido. For details on the distribution of Lido validators, please refer to Appendix 2 (find it by clicking DOWNLOAD REPORT in the upper right corner).

2. Unlabeled validators. Those are black horses of Ethereum staking. They account for 5.41M ETH (15.11% of all staked ETH) and run 169,124 validators, none of which can be attributed to any identified entity. Still, we can’t assume they all are individual stakers. Most usually, they are professional players hiding behind the Unidentified label rather than minor solo stakers.

The top 25 validators can be categorized as follows.

Across the top 25 entities by ETH stake, 42.5% of validators are operated by centralized cryptocurrency exchanges. This means that their delegators lose immediate control of their assets as exchanges gain access to their private keys. This means the tokens, initially owned by the customer, end up controlled by the exchange, allowing them to handle the tokens as they see fit. This concentration poses another potential risk, as users are effectively sidelined from governance decisions and remain at the mercy of the custodial service's security measures. Learn all the benefits and disadvantages of custodial and non-custodial solutions from our article.

A third of validators (32.4%) from the top 25 are operated by liquid staking solutions like Lido, RocketPool, and Abyss Finance. The rest are mostly staking pools.

Other important metrics to consider while analyzing top entities are APR and missed blocks. The latter may occur if a validator is offline or opts not to propose a block in their allocated slot. There is no penalty or slashing for failing to propose a block, but it is still a missed profit since block proposers receive 8 / 64 * base_reward for each valid attestation included in the block, so the actual value of the reward scales with the number of attesting validators.

In total, the top 25 entities by ETH staked missed 22,287 blocks. Notably, 90% of these were missed by just 13 operators. That means that half of the top 25 entities responsible for running 427k validators or 13.67M staked ETH missed 20k blocks over 2023. 

The Unidentified operators, however, missed 33k blocks, considering that they run 5 times fewer nodes (146k validators with 4.67M ETH staked).

The chart below shows the blocks missed by those entities in 2023.

The top 5 by the number of missed blocks is:

1. Coinbase – 5,388 blocks

2. Binance – 2,845 blocks

3. Kraken – 2,733 blocks

4. Rocket Pool – 2,214 blocks

5. Staked.us – 1,815 blocks

Particularly, the top 3 are all centralized exchanges, and in the top 5, there is also a liquid staking provider. Let’s dive a bit further.

In fact, there is no linear dependency between the number of validators the operator runs and the amount of missed blocks. The chart shows that the Coinbase, operating the biggest number of validators as a single entity, also missed the biggest number of blocks. But at the same time, Binance and Kraken, which are #4 and #6 by the number of staked ETH, respectively, are the second and third in terms of missed blocks. 

The table below compares all 5 entities with the largest number of missed blocks and other operators responsible for 90% of all missed blocks.

FUTURE PROSPECTS OF ETHEREUM STAKING

The year 2024 will be pivotal for Ethereum. Hybrid rollups, LSTs, and an imminent upgrade are just a few of the anticipated novelties planned for the next 12 months.

Here is what we believe will become the key developments in the ecosystem. For more predictions, refer to our feature.

DENEB-CANCUN UPGRADE

The Cancun-Deneb (Dencun) upgrade will likely be the biggest event in Ethereum in early 2024. The testnets’ upgrade dates were successfully implemented: January 17 on Goerli, January 30 on Sepolia, and February 7 on Holešky. Following that the mainnet date has been planned for March 13, 2024.

This upgrade will mainly focus on improving the network's scalability and modularity, bringing along

• scalability improvements,

• gas fee reduction,

• security advancements,

• optimized data storage, and

• cross-chain enhancements.

HYBRID AND INTERCONNECTED BLOCKCHAINS

Optimistic and Zero-Knowledge (ZK) rollups, along with the first zkEVMs, took the spotlight in 2023.  In 2024, the community will likely keep its eyes set on interconnected blockchains – L3s, Superchains, and Hyperchains. They are tailor-made for specific dApps, bypassing the known bottlenecks of traditional blockchains, including Ethereum.

Hybrid rollup solutions are also expected to take center stage in Web3 in 2024 due to their ability to balance security and decentralization, maintain system security, and ensure a high decentralization degree.

ETHEREUM DECENTRALIZATION

Currently, Ethereum L2 rollups use centralized sequencers, unlike Ethereum's decentralized validator set. The use of shared, decentralized sequencers could potentially address concerns regarding centralization and offer a decentralized solution as a service.

In addition to mitigating issues related to censorship, MEV extraction, and liveness, shared sequencers introduce cross-rollup composability.

Projects like Espresso, Astria, and Radius are going to launch new features within shared sequencing frameworks.

The Ethereum community will likely continue pursuing greater decentralization on the Beacon Chain with DVT from well-established projects like SSV.Network and Obol.

LIQUID ETH

LSTs currently hold $26 billion in deposits. In 2024, LSTfi, a financial ecosystem based on liquid staking tokens like stETH and BETH, may usher in new ways of leveraging staked ETH. It, therefore, has the potential to become a new driving force in DeFi. 

ETHER RESTAKING

Restaking lets Ethereum validators easily switch between different tasks, potentially making the network more secure and flexible. This could attract more people to stake their ETH, further strengthening the network.

There are potential downsides, however. While the added flexibility can foster decentralization, there's a risk of increasing centralization. Additionally, new features may introduce complexity and associated risks, such as the accidental loss of staked ETH.

Nevertheless, the potential benefits of restaking for Ethereum's economy are substantial. So, it's just necessary to approach these advancements with careful management, recognizing and mitigating potential risks along the way.