Ethereum’s Transition to Proof-of-Stake and What it Means for Investors

Ethereum is expected to transition from Proof-of-Work to Proof-of-Stake around mid-September. PoS will fundamentally alter supply issuance dynamics of ETH, conservatively reducing net issuance by over 90%, and likely leading to ETH’s total supply being deflationary since a portion of transaction fees are “burned”- meaning they are taken out of circulation.

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The move to PoS will immediately cut energy usage of the network by ~99.95%. Investors can participate by “staking” their ETH to participate in the consensus mechanism of the network. We estimate a yield of 8.5%-11% on staking of ETH, driven by rewards paid by the network for validating transactions, MEV, and net transaction fees (the tips paid by network users after the base fee has been burned).

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Here is an overview of what is covered in the Report:

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• What is the Merge?
• Consensus Mechanisms compared, PoW vs. PoS
• Energy usage of Ethereum in PoS vs PoW
• Supply Dynamics of ETH Post-Merge
• Estimating Staking yield
• Sensitivity Analysis for transaction fees and total staked ETH
• Maximum Extractable Value
• Summary and Estimates
• The Opportunity for Institutional Investors
• Combining Staking and DeFi

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