It is no secret that Ethereum staking (or more accurately, ETH staking) is quickly becoming the leading attraction for institutional investors looking to get stable, predictable returns in the crypto space.
In fact, it is also becoming a driving force in onboarding institutions that weren’t previously buying crypto at all.
But despite the fact that institutions are already flocking to ETH staking, I’m here to say that it’s just the beginning, and there’s MUCH more to come.
Here’s why..
Why The Merge Will Attract Big Institutional Money To Ethereum Staking
While 4-5% predictable interest rates in the form of staking rewards are not too shabby, they are still not as lucrative as some other investment opportunities out there, let’s be honest.
But once The Merge happens, this number is expected to rise to around 10% in the short term. This is a significant increase. Once institutions see this opportunity, the floodgates are going to open. A solid, predictable 10% interest in a ‘blue chip’ crypto is just too good to ignore.
In addition, the biggest catalyst is going to be the ability to withdraw ETH. This feature is expected to be introduced a few months post-merge. Right now, staking ETH is a one way street. Even with liquid staking, you don’t actually end up withdrawing your original stake. Your deposit stays locked indefinitely, until The Merge comes around, and the upgrade that enables withdrawals is implemented.
While this is almost a non-issue for many, for significant net-worth investors and mainstream institutions, this is a huge entry barrier. It’s already very difficult to commit funds or offer services in a cutting edge technology like Ethereum, but its even harder to do so with ETH staking, where despite the huge progress that’s happening towards The Merge, is still a relative unknown.
These are the main factors that are currently keeping a significant amount of big institutional investors capital on the sidelines, that will be solved by The Merge.
We could even start seeing mainstream investors pour into ETH in prior to The Merge, if they buy into the “Tripe Halevning” narrative.
“The Triple Halvening” is the community name given to the large drop in ETH issuance that will occur once “The Merge” occurs and Ethereum is fully upgraded to the proof-of-stake (PoS) consensus algorithm. “The Triple Halvening” is a play on Bitcoin’s “Halvening”. While Bitcoin halves its issuance rate every 4 years, Ethereum will see its issuance rate reduced by roughly 90% at the time of “The Merge”. That’s equivalent to *3 Bitcoin “Halvenings” happening at once! Ethereum will experience an issuance reduction in an instant what will take an additional 12 years to be matched on Bitcoin’s network.
Under the current proof-of-work (PoW) model Ethereum issues roughly 13,500 ETH per day — an annual issuance of about 4.3% of the total ETH supply. However, the PoS issuance model is determined based on how much ETH is actively being staked on the network. Current projections predict a drop to between a 0.3% to 0.4% issuance rate when “The Merge” occurs. For comparison, Bitcoin currently issues 900 BTC per day — an annual issuance of about 1.7% of the total BTC supply.
The next two “Halvenings” will reduce Bitcoin’s issuance to approximately 0.8% in 2024 and 0.4% in 2028. With Ethereum’s expected drop in issuance after “The Merge” to between 0.3% – 0.4% it will not be until 2028 that Bitcoin’s issuance is again within range of Ethereum’s. When “The Triple Halvening” is combined with the BASEFEE burn mechanism of EIP-1559 (live as of August 2021) it is projected that Ethereum’s issuance will actually become deflationary during periods of high user activity.
How A Post-Merge Institutional Money Influx Affect ETH Staking Rewards & The Price Of ETH
Here’s the thing – the more validators we have coming online, the lower staking rewards are going to go.
True, we’re probably going to see staking rewards of 10% or even more at first, but that’s not expected to last as long as we all hope. Read more about it in Justin Drake’s prediction below.
Once big money starts flowing into ETH and we max out the validator queue every single day, we can expect to add roughly 28,000 new Ethereum validators per month, equal to roughly 875,000 ETH being deposited into the staking contract every month.
That means that at the current rate, we’ll get to around 14-16 million staked ETH on the day of The Merge, with staking rewards expected to be around 10% (best guess), with a long-term forecast of settling somewhere around 6% (Justin Drake currently predicts 5.4%) within about 3 years after The Merge, assuming roughly 10M ETH gets staked yearly.
At the same time, such buying pressure on ETH and spinning up validators by institutional investors in large quantities is expected to positively influence the price of ETH.
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This is an opinion column, not financial advice. Please make sure to read our Disclaimer before making any financial decisions.
