DeFi is Working as Intended

DeFi is Working as Intended 

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Despite the market turmoil caused by fraudulent off-chain activities, Ethereum continues to operate as intended, and stakers are earning record-breaking yields on their ETH deposits. Increased activity on Ethereum is responsible for the increase in APR rates, specifically on the Execution Layer, which manages block rewards containing tips (priority fees) and MEV*. In simple terms, Ethereum’s users are sending, swapping, and interacting with smart contracts more than usual. As a result, the net yield from consensus layer rewards for validators (~4.0%) and execution layer rewards (+/- 2-7%) can result in a 24-hour average of ~ 10% APR. Users of liquid staking solutions such as Rocket Pool and Lido are automatically exposed to the increased rates, and can further compound their yield by depositing their staked ETH derivative tokens in DeFi platforms. Apart from smart contract risk*, this strategy is relatively low-risk and independent of off-chain contagion, which may impact the dollar value of ETH. 

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Source: https://dune.com/LidoAnalytical/Lido-Finance-Extended

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*MEV is the sum of rewards a validator receives for proposing a block. A majority of MEV rewards result from utilizing implementations such as flashbots and MEV boost. 

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*Liquidation risk is present in some DeFi staking solutions (outside of Lido & Rocket Pool) where borrowing occurs (example). 

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Ethereum is Deflationary 

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Increased on-chain activity also results in more burning of ETH, offsetting the issuance and resulting in a deflationary total supply. Since ETH’s transition to PoS roughly two months ago, net issuance of ETH has been negative. What this means is that staking yield is “real yield”- getting 8% APR means actually increasing network ownership by 8%/ year. 

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Source: ultrasound.money

Source: ultrasound.money

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DeFi Continues to Operate as Intended 

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There has been no impact on the operation of top DeFi protocols including, but not limited to, Uniswap, Maker, Aave, Lido, Curve, Compound, Rocket Pool throughout the turmoil. Although most DeFi platforms have reduced month-on-month TVL, they remain by design fully collateralized and healthy. Despite the severity of the situation, this illustrates the benefits and safety of decentralized smart contracts. A significant spike in DEX (decentralized exchange) volume was driven by centralized exchange users who rushed to self-custody their assets. 

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Source: DeFiLlama

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Conclusion

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Demand for Block space is one of the main factors affecting the yield validators earn on their staked ETH. Demand for block space is dynamic and varies based on many factors. As such it’s difficult to provide an accurate and long-term APR estimate for stakers. It can be said that the adoption of DeFi and blockchains continues to rise so it stands to reason that APRs will consistently stay within an average range. Throughout “black swan” events that do not impact the consensus of the Ethereum blockchain, ETH stakers benefit from the increased activity on the execution layer brought on by increased usage, priority fees, and MEV. 

Interested in Staking Ethereum? 

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Alloy Capital provides regulated custodial solutions for investors, funds, companies, and corporations interested in staking digital assets such as Ethereum. Learn more at alloy.capital and get in touch with our team to get started. 

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