After Ethereum’s Shanghai upgrade on the mainnet just over a month ago, which introduced the ability for Ethereum validators to partially or fully withdraw their staked Ether (ETH) tokens from the staking smart contract, the appeal of ETH staking has skyrocketed.
Data from wenmerge.com reveals that the waiting time for an ETH holder to join the Ethereum network as a new validator has extended to nearly 28 days, with a whopping 50,398 potential validators lining up.
Ether holders have the opportunity to become network validators, gaining a yearly yield of roughly 4-5% through token staking.
While ETH staking was introduced on the Beacon chain back in December 2020, it was only during the recent upgrade that the withdrawal of staked amounts became possible.
The newfound ability to withdraw staked ETH has lowered its perceived risk for numerous investors. Previously, concerns about their funds being inaccessible for extended durations might have discouraged them from staking their ETH tokens.
The influx of validators eager to join the network coincides with an increase in the amount of ETH tokens committed to the staking smart contract.
As of the recent data from Monday, the staking smart contract holds a total of 21.652 million ETH tokens. This represents a significant rise of approximately 3.5 million within a month following the Shanghai upgrade, based on figures from Glassnode.
Considering the entire ETH supply stands at roughly 120.08 million, the current staking participation rate has reached slightly above 18%.
This marks a growth from the earlier rate of approximately 15% before the upgrade took place. At that time, around 18.1 million ETH tokens were staked, and the total circulation of ETH tokens was about 120.4 million.
Dual Deflationary Trends Set to Provide Major ETH Price Tailwind
Proof-of-stake rivals, such as Cardano, which offer more flexible staking contract withdrawals, boast staking participation rates between 60% and 70%.
Ethereum’s current staking model permits the withdrawal of only slightly more than 50,000 ETH from the staking contract daily. Given this limitation, ETH staking might not have the elasticity to reach the high participation rates seen in platforms like Cardano.
However, if the current momentum continues and Ethereum’s staking participation rate climbs to 50% – a feasible scenario considering it’s growing by approximately 3% monthly – it could achieve this milestone in under a year.
This would imply an additional 38.4 million ETH tokens being transferred to the staking contract, which inherently has lower liquidity.
The immediate consequence would be a drastic reduction in the availability of unstaked ETH tokens in the market, which could act as a significant upward pressure on its price.
Adding to this scenario, one must consider the ongoing decrease in the Ether supply.
As per Glassnode’s insights, there was a recent uptick in transaction fees, majorly due to the traffic associated with meme coins. This heightened activity led to a surge in the ETH burn rate. With the implementation of EIP-1559 in August 2021, the Ethereum network adopted a mechanism that burns the ETH used for transaction fees. Consequently, Ether’s deflation rate peaked at more than 8% earlier this month.
So, with a decrease in available unstaked ETH and a rising deflation rate, Ethereum’s economic dynamics could be on the brink of a significant transformation.