ON–138: The Merge (Part 2)

Coverage on Liquid Staked ETH, ETH Staking, and ETH PoW.

Sep 16, 2022

The Beacon chain staking contract, a validator destination for depositing PoS ETH since 2020, has collected over 14m ETH so far. In the month before the merge, this contract saw 2.5k-100k daily ETH deposits, with September bringing a 3.5x average increase over the prior 2 weeks. Liquid staking dynamics differed from this validator trend. Deposits to Ethereum liquid staking protocols peaked with Rocket Pool in August. Yet, competitor Lido continued receiving up to 2k ETH a day through the Merge.

In the month ahead of the merge, liquid ETH staking deposits on some days equated to 60% of all staked ETH2. Despite Lido being the market leader, Rocket Pool overtook it in August, but soon faded. Deposits to Lido continued to reach 1/10 to 1/3 compared to total staked ETH leading up the Merge.

32 ETH to operate a validator on PoS Ethereum can be a barrier for individual users. Liquid staking has been a solution for some. On several decentralized liquid staking protocols, an average user deposited just over 2 ETH during the pre-Merge month – and an average pStake user only staked 0.4 ETH.

A successful merge increased confidence in liquid staked ETH tokens. While previously trading at steep discounts, the ETH derivative tokens have gained value against ETH. Lido and Rocketpool are the strongest. rETH and wstETH are worth slightly more than ETH, and cbETH (Coinbase) is still trading at a discount, but trending up.

Lido continues to take the majority of whale DEX volume in the ETH staking derivatives sector. As of Thursday evening, 58 of the latest 70 DEX (82%) whale swaps between ETH and staking derivatives above 150,000 USD were for Lido’s stETH.

At current staking levels, about 1.67k ETH is now being issued a day, an 88% reduction in issuance compared to pre-merge. Factoring in ETH burned due to EIP-1559, Ethereum would have theoretically been deflationary for most of the past year and will likely often be deflationary moving forward.

With Ethereum moving to PoS, a key concern has been the centralization of staked Ether (ETH). A relatively small proportion of ETH’s total supply is currently staked (~11.3%), of which 65% is liquid staking and 35% is illiquid. Despite there being a very high number of validators (426k) and unique depositors (~80k), approximately 64% of ETH is staked with 5 entities. Lido holds the greatest amount of staked ETH (31%), followed by Coinbase, Kraken, and Binance with a combined ~30%.

Ownership of Lido’s governance token is relatively concentrated. The top 9 addresses hold ~46% of governance power, and a small number of addresses typically dominate proposals. The stakes for proper decentralization are very high for an entity with a potential majority share of staked ETH.

Centralized exchanges have been gaining on Lido more recently. Over the past 3 months, 41k ETH has been staked on Lido, compared to Coinbase (116k), Binance (59k), and Kraken (43.5k). To put this in perspective, the big 3 CEXs grew their stake by 218.5k, compared to Lido’s 41k - approximately 5.3x.

The merge finally happened, moving Ethereum from Proof of Work to Proof of Stake. Over 5,620 miners mined 15,537,393 blocks through the past years. The number of blocks mined per month was relatively stable (ranging from 180k-200k blocks per month, with a few notable exceptions). However, since January 2020, the average block size has seen an increase of 79% since its peak in June 2022.

As Ethereum’s PoW validation became more expensive, fewer miners were active. 72 miners were active this month, a decrease of 43% since January of 2020. Shockingly, there were 4 new miners this month.

9 miners mined ~70% of the network’s blocks. Ethermine mined 3.27m+ blocks (21% of blocks). While most of these miners were selling ETH to take profits, this could be concerning if such centralization is seen in PoS validation.~40% of miners mined 1 block and 65% of addresses mined less than 10.

④ Liquid Staked ETH