Stacking Ethereum is rapidly losing its appeal due to declining returns caused by the growing number of locked coins.
In December 2020, when it was launched staking ETH, which could have earned an average of 18,03% per annum by locking up cryptocurrency, now yields only 2,87%. Thus, in less than five years, staking profitability has fallen more than sixfold.
Change in Ethereum block reward (pink line)
The decline in Ethereum staking profits is partly due to the growing number of locked coins. This year, the number of staked digital assets increased by 5,5% to 36,2 million, while the yield on cryptocurrency staking, conversely, fell by 13,6%.
The second factor that negatively impacted profits was a 9,3% reduction in the amount of rewards paid to stakers due to a decline in blockchain user activity.
Changes in the number of staked Ethereum (purple line) and the ETH price (black)
Grayscale recently sent out staking 857,600 ETH purchased to replace existing Ethereum-based fund units. If issuers of other cryptocurrency-based investment instruments follow the company’s example, the amount of locked digital assets will increase even further, and staking returns will decline.
Considering the risk of losing cryptocurrency when it is locked using a smart contract, and the losses caused by the coin’s price drop during the unlocking waiting period, which has reached 45 days, it becomes clear that an APY of 2-3% does not outweigh the potential threat.