ETH Staking Has a Bright Future, Despite Regulatory Uncertainty

Since Ethereum transitioned to a proof-of-stake consensus mechanism in 2022, the blockchain has been maintained and secured by users who stake ETH and run validators. The mechanism is simple. Validators deposit ETH in a smart contract, run software to validate and propose new blocks, and get paid for providing this service.

The Ethereum blockchain was designed so that staking can be accessible to any user that owns at least 32 ETH, with the hope that ETH owners around the world will choose to stake their assets, increasing the decentralization and security of the network.

This article is part of CoinDesk’s “Staking Week.” Jason Hall is the CEO of Methodic Capital Management.

ETH staking allows users to provide a service to the network, contributing value to the asset they already own. Payment for this service is accrued in ETH, which has the added benefit of compounding any returns generated by the underlying asset.

Importantly, this payment is incurred without many risks. At time of writing, only 279 of 805,945 (0.03%) validators have lost any portion of the 32 ETH they deposited which can happen in a process called slashing, essentially a penalty for compromising network integrity.

Despite the volatility of the asset class, the major technical upgrades and many other risks associated with the technology, it is relatively safe to run a validator and receive staking rewards in return.

However, additional risk is incurred when intermediaries stake ETH on behalf of owners. Exchanges and staking providers offering this service have not always transparently reported staking returns, failing to link payments to the ETH staking rate and disclosing the risks associated with staking.

Additionally, to provide better user experiences (i.e. by removing staking lockups), some providers managed reserves of customer funds, financializing the staking service. As such, a number of staking service providers have been targeted by the SEC for offering staking services, which we believe has tarnished staking in the eyes of many observers.

Much of this confusion has been propagated by U.S. Securities and Exchange Commission (SEC) Chief Gary Gensler. Last year, Gensler stated that staking “looks very similar — with some changes of labeling — to lending.”

However, lending and staking are…