Buterin Proposal Could Turn Ethereum Staking Into $160 Million Industry

Ethereum 2.0 is by far the biggest upgrade on the horizon for the ethereum blockchain, today valued at $17.5 billion.

Rather than relying on a proof-of-work consensus protocol whereby miners compete to bundle together blocks of transactions and add them to the ever-growing chain, ethereum 2.0 will rely on a proof-of-stake consensus protocol whereby validators stake their own funds and attest to blocks and transactions being created on the network.

As proposed by Ethereum Foundation researcher Justin Drake in recent days, the targeted amount of staked wealth on the network is around 32 million ETH And based on that amount of targeted staked wealth, roughly $160 million in ETH could be earned annually by the entities that would, as planned, replace the network's current ecosystem of transaction miners.

How do you get that much value set aside in order to keep the network secure? In order to incentivize that kind of behavior, ethereum developers need to set a return rate - akin to an interest rate - that rewards validators who lock up their ETH and contribute to the security of the blockchain.

Taking into account the minimum staking requirement of 32 ETH, computing costs, code risk, general uptime and maintenance costs, and more, Myers concluded the current ethereum 2.0 specifications resulted in net yields "That are highly unlikely to attract a small validator." Rhea adds that the same conclusion was reiterated by "Several different people" including miners and financial experts in the ethereum community.

This would mean that ethereum 2.0 validators collectively would receive a maximum annual reward issuance of close to 100,000 ETH, which by today's estimates would be worth around $160 million.

By comparison, mining on ethereum today is estimated to be a nearly $700 million annual industry.

Compared to mining on ethereum, the targeted valuation of validating on ethereum is considerably lower.

At the same time, so is the overall inflation rate of ETH. "The base inflation would be ~1 percent and the base return [rate] ~3.2 percent," estimated ethereum researcher Justin Drake in response to Buterin's proposal.

In Buterin's proposal, the validator return rate can be as high as 18.10 percent if only 1 million ETH are staked in the network to as low as 1.56 percent if there's over 100 million ETH staked in the network.