Interest-ing Times (Part III)
Generating Positive Cash Flow with Liquidity Mining and Staking.
by Ryan Shea
- This research note examines two additional methods for crypto users to generate positive cash flow: liquidity mining and staking.
- In return for depositing their tokens in liquidity pools that underpin the automatic market makers that DEXs rely on to allow their users to trade in a decentralized manner, liquidity miners receive a share of the pool’s transaction fees.
- Staking, which is only possible on cryptocurrencies that run PoS consensus protocols, are rewards given the validators tasked with ensuring the integrity of the underlying blockchain. Post-Merge Ethereum is the most popular staking token.
- Moreover, in Ethereum, the way its issuance schedule is composed means staking rewards are likely to be correlated with fiat money interest rates. This helps provide some compensation for the damping effect higher fiat money interest rates have on crypto prices.
- Of the three crypto cash flow generating methods, in my view, staking is the best way for crypto users to insulate themselves from the vagaries of the global macro backdrop. This makes the SEC’s recent decision to ban US CEXs from offering staking-as-a-service rather hard to rationalize.
In the previous research note I took an in-depth look at crypto lending, a method to generate cash flow in crypto that has been very much in focus during the latest cryptowinter. Of course, crypto lending is not the only avenue for crypto users to generate positive cash flow. The industry is nothing if not innovative. In the final research note of this series analyzing the impact of the shifting macro backdrop on the crypto sector, I explore two other methods: liquidity mining and staking. Let’s dive in.
Traditionally exchanges rely on an order book system to match buys and sells, typically via a “best execution” algorithm. By their very nature, order book systems are centralized. Given the decentralized ideals upon which DeFi was created, DEXs (decentralized exchanges) required a different way to allow their users to trade with each other. The solution was automated market makers (AMM), which are underpinned by crowdfunded crypto deposits known as liquidity pools (LP). Although pioneered by Bancor in 2017, the approach really become popular when Uniswap launched in 2018. Several years later, and despite some challengers along the way, Uniswap remains the dominant player with a 70% share of the total DEX market.
The way AMMs work is they follow a mathematical formula tying the relative price of the assets to the ratio of tokens (typically two but can be more) within the LP. The most basic formula is known as a constant product market maker:
In order to withdraw one of the tokens from the LP, users must deposit an amount of the other token in the LP such that the product of the two quantities is constant (k). Due to how the maths works, this introduces convexity into the relationship between the two token prices in the LP, i.e. it is non-linear – see chart below. To be clear, the relative price (or exchange rate) of the tokens within the LP is not influenced by the price of these tokens on the open market but by their relative quantities within the pool, although they tend not to deviate too markedly because of arbitrage opportunities.
Illustration of AMM
Liquidity Ain’t Free
Like many things in life, liquidity is not a free good. People need to be rewarded for providing it. In the case of liquidity pools, users who deposit their crypto in these pools – equal values of both tokens must be provided - earn rewards derived from revenues associated with trading activity in the liquidity pools. For example, Uniswap charges a 0.3% fee on every transaction and part of that is paid out to liquidity providers. Naturally, the greater the trading volumes conducted via the LP, the greater the revenues or interest earned by liquidity providers.
Liquidity mining is certainly an innovative and interesting development that fits well with the decentralized goal of DeFi projects. For users it has the advantage that, unlike crypto lending, tokens do not have to be locked up; they can be withdrawn from LPs on demand. That said, there are downsides. In addition to the standard DeFi smart contract risk, namely funds stolen by hackers exploiting code vulnerabilities, the most obvious one is rug pulls. Rug pulls occur when malicious actors list a new token on a DEX and establish a LP pool versus a more established cryptocurrency like ETH or WBTC. Having attracted other users to deposit their tokens in the LP - high APYs (annual percent yields) and aggressive social media marketing to create a sense of FOMO are the typical carrots used – they drain all of the ETH/WBTC liquidity from the pool, leaving the other liquidity providers with tokens that have little to no value.
Another risk related to liquidity mining is one that occurs even when the LP is legitimate. It is known as impermanent loss and arises when the price ratio of the tokens divergences from that when they were initially deposited. Due to the convexity introduced by using a constant product market maker, as the relative prices of the tokens in the pool changes the combined value of the tokens (shown in the chart below as the blue line) does not keep pace with the combined value of the tokens if held in the original ratio (the orange line). Note, this applies in whichever direction relative prices change.
Source: University of Orleans
In an ideal world for users depositing into an LP, the price ratio of the tokens in the pool would be the same as when initially deposited, meaning zero impermanent loss. Under such circumstances, profits would be maximized and equal their share of the LP’s total transaction fees. However, as long as fees earned from trading activity in the LP is greater then the impermanent loss (green line above the orange), providing liquidity to a LP is still a profitable exercise.
That’s the theory, but what about the practice? What sort of returns can crypto users expect to receive for providing liquidity to such pools?
The two charts below, taken from a DEX Pool Deep Dive dashboard for Uniswap and Sushiswap on Dune Analytics, give some idea of the recent trends. The top chart shows the yield earned expressed as a percentage of the TVL across the various LPs, i.e, the share of transaction fees distributed to users depositing in said pools. The bottom chart shows the impermanent losses associated with the underlying LPs.
Net Pool Yield
Source: Dune Analytics
Pool Impermanent Loss
Source: Dune Analytics
Clearly, the yields that can be earned are attractive, up more than 115% over a 20 month period. However, as mentioned, one also needs to take into consideration impermanent losses. Obviously, due to the slump in crypto prices last year impermanent losses have been considerable. Consequently, aggregate APYs from liquidity mining – at least amongst the more well-known LPs - have gone from high double digits in 2021 to negative double digits in 2022.
Many liquidity pool operators typically refer to the nominal yields when marketing their LPs, obfuscating these impermanent losses. In part, this is due to the fact that impermanent losses are only realized when the user decides to withdraw liquidity from the pool, until then they are analogous to a mark-to-market loss, but it is also for the rather obvious reason that they wish to attract new users in order to deepen their liquidity pools. Thankfully, help is at hand. External companies have started to produce data platforms to track both trading fees and impermanent losses for the various LPs in order to give crypto users a more informed picture.
Even though impermanent losses are an inherent feature of liquidity mining, there are ways to mitigate them. Given it is calculated by comparing the value of the tokens when withdrawn from the pool versus the value of holding them, stablecoins whose value is supposed to be, well stable, reduces a user’s exposure to impermanent losses. The impact can be quite substantial, equating to tens of percentage points. Another method that can be used to mitigate impermanent loss is to shift away from the most popular 50-50 weighting scheme to one that is slightly more unbalanced, namely 60-40, 70-30. Again the impact can be quite significant, although there are drawbacks to having an LP that is somewhat unbalanced by design.
The final mitigation method is to provide liquidity providers with rewards additional to their share of the transaction fees. One of the most popular options is to offer LP depositors rewards in the form of native governance tokens. This has proved to be a popular option and it’s not hard to see why. Giving users a share in the “equity” of the project – albeit in tokenized form – not only is a source of additional income to offset impermanent losses, but it is also positive for the dev teams building the protocols because they typically get allocated a sizeable proportion of the protocol’s native tokens. For example, in 2020 Uniswap minted one billion UNI governance tokens of which 60% are distributed to Uniswap community members over a four year period based up how much liquidity a user provides to the LP. Of the residual, 21.5% goes to the dev team with investors and advisors accounting for the remainder.
Mining Vs. Lending
As I outlined in the preceding research note, crypto lending is highly pro-cyclical due to the fact that demand for loans is strongly driven by speculative motives, which serves to exacerbate the boom-bust price dynamics in crypto prices. In my view, this means lending is a sub-optimal method of cash flow generation and it certainly does not constitute a robust defence against the negative impact of rising fiat nominal interest rates. Neither does it do much to undermine accusations by the crypto doomsters that the crypto sector is nothing more than a hi-tech Ponzi scheme.
Liquidity mining, by contrast, is different – it is an innovative step forward. Cash flows generated by liquidity miners may be correlated with trading volumes - as they drive aggregate transaction fees in the LP– but it is unquestionably more decoupled from speculation than crypto lending. Indeed, as I showed, due to impermanent loss liquidity mining returns are negatively impacted by speculative booms and busts. In a sense, liquidity miners are essentially short volatility – the payoff has a similar hump or Λ-shaped payoff to that of a short straddle/strangle option.
For an asset class whose fundamental value remains highly uncertain (above zero, for reasons I outlined in the first note in this series, but less than infinity) and hence prone to volatile price swings – both up and down - this is not ideal. In theory, LP providers could dynamically hedge impermanent losses via long straddles and strangles whose payoffs are the inverse (V vs. Λ – see chart below) but due to high price volatility the cost of hedging is often prohibitive.
Stylized Impermanent Loss vs. Long Straddle/Strangle Options
Source: Author calculations and Journal of Agriculture and Applied Economics
Liquidity mining is best suited for more mature, less volatile, asset classes with well-developed and liquid options markets to facilitate impermanent loss hedging. My expectation is that this will occur eventually in crypto, but we are not there yet. Until then, liquidity mining will remain a somewhat risky business and probably not the best way for crypto investors to protect themselves from the macro headwinds unleashed by rising fiat interest rates (unless, of course, they are prepared to take the long view and ride out the mark-to-market hit resulting from impermanent losses). With that in mind, let’s move on to the final crypto cash flow generating method – staking.
The reason why I limited my analysis to Bitcoin in the first article in this series is not only because it is the most important cryptocurrency – due to its longevity and dominant market cap (accounting for approximately 40% of the total) – but it is a reflection that other cryptocurrencies operate in markedly different ways. Lumping them all together is a mistake often made by those unfamiliar with the industry.
For example, following last year’s Merge, Ethereum went from being a Proof-of-Work (PoW) cryptocurrency, like Bitcoin, to a Proof-of-Stake (PoS) cryptocurrency. This switch in the consensus protocol may seem minor, but in reality it is radical and complex change, which is why the Merge was several years in the making. For one, it means that unlike Bitcoin, Ethereum holders are now able natively – by which I mean at the Layer 1 level - to earn income,.
Although all cryptocurrencies using PoS operate along broadly similar lines they have nuances and different tokenomics – ie how their token’s supply changes – which has different price implications, but to make the text easier to follow I will limit myself to commenting on Ethereum.
So, post-Merge, how is Ethereum able to generate a positive cash flow to its users?
As the name suggests, PoS requires some of its token holders to put down (up? - never sure which it is) a stake to participate in the consensus process. To qualify as a validator on Ethereum, users must stake 32ETH or around $50,000 at current prices. Once staked, users are unable to withdraw the ETH on-demand. This is not unusual. Some PoS cryptocurrencies have a pre-defined lock-in period, Polkadot for example sets a 28 day lock-in, but in the case of Ethereum the restriction arises due to throttling the exit process. Only six validators are allowed to exit the network each epoch (I will define this term in the next paragraph). Given there are currently 514,271 validators on Ethereum’s blockchain, this is an extremely low number. In return for providing a 32ETH stake, users are able to participate in validating and attesting (other validators confirming that the transactions are legitimate in order to achieve consensus) transactions to be included blocks, actions that earn them rewards denominated in ETH.
In Bitcoin, the time to produce blocks varies depending upon how long it takes a miner to solve the SHA-256 hashing algorithm to a pre-defined level of accuracy (aka the difficulty factor, which is adjusted every two weeks to ensure the average block time targets 10 minutes), whereas under Ethereum’s PoS protocol block times are fixed. The base time unit is called a slot, each lasting 12 seconds, and 32 slots form an epoch meaning it lasts just over six minutes.
Play Nice, Or Else
To ensure the integrity of the Ethereum blockchain, validators operate under the threat of penalties. Depending upon the severity of the action different penalities are applied. Minor transgressions, such as being offline for a period of time, incur small penalities. For more serious transgressions, like proposing multiple blocks in a single slot or submitting contrary attestations, the validator’s stake is slashed and they are then queued for exit after 213 epochs (~36 days). In extreme cases, such as an attempt by multiple validators to cheat over a relatively short period of time, up to 100% of a validator’s stake can be slashed. The reason for the lock-in period is it provides the protocol with the ability to impose – potentially very significant - costs on staking participants to incentivize good behaviour.
The yields that ETH stakers can earn is calculated according to a fairly complex equation, but in simple terms it is determined by gross ETH issuance, the number and value of transactions processed by the blockchain (which influences fees and burn rates) and, importantly, the amount of ETH that is staked. The latter is inversely related to the yield, so the more that is staked on Ethereum the lower the yield. At present, the staking reward for running an Ethereum validator is 4.3%. This is towards the low end of the range for for the most prominent PoS blockchains reflecting the fact that as one of the larger and more established blockchains it is a very popular choice for crypto users to stake. In the aforementioned article, I stated that between 10-30 million in staked ETH at the time of the merge seemed to be in the right ballpark and the current level – several months after the Merge - stands at just over 16mn ETH, worth almost $27bn at current market prices. This is at least 3X higher than the amounts staked on other PoS cryptocurrency blockchains. Smaller less established PoS tokens, such as Polkadot and Cosmos (with market caps of $6.9bn and $3.5bn respectively), by contrast, offer considerably higher staking rewards – see chart.
Staking Reward by PoS Token
Due to the way issuance is calibrated post-Merge, ETH staking yields should tend to be correlated with nominal fiat interest rates. For example, at times of rising nominal fiat money yields – like the present – ETH users are not incentivized to add to the pool of ETH staked because this will only serve to drive down the maximum annual return available to validators. The Merge only happened last September, so not a great deal of time has passed since then, but if we look at how staking APRs (annual percentage returns) on Lido have evolved since then they have tended to be between 4-6%, which is not a million miles away from the prevailing level of interest rates on US fixed income assets – see chart. (NB: The surge in staking APR mid-November was due to deleveraging following FTX’s failure).
Lido APR – Post Merge
Source: Dune Analytics
The returns from staking, however, are not limited to just the aforementioned yield. One common method for enhancing staking returns is to engage in what is known as MEV (Maximal Extractable Value) strategies. MEV is additional profit that can be extracted by a validator by including, excluding, or reordering transactions with the blocks they validate. It occurs because Ethereum users can add priority fees in order to get their transactions included expeditiously into the blockchain and this fee goes to the validator.
MEV is a controversial topic. One school of thought is that due to the public nature of blockchains MEV is unavoidable and because it ensures that blocks are produced that offer the greatest benefits to users (why pay up for priority fees otherwise), it helps ensure the full value of the network is realized. Conversely, given the potential for front-running and other arbitrage opportunities resulting in price slippage and/or higher gas prices, others take the view that it is negative as it exploits users. While the jury is out on the merits of MEV extraction strategies the simple fact is they exist and they can generate significant additional benefits to stakers.
The following chart shows the cumulative MEV extraction using Flashbots MEV-boost, an open source software that validators can use that aims to democratize access to MEV and stop MEV extraction becoming a centralizing force on the Ethereum blockchain. According to their calculations, MEV valued at more than $600mn was extracted over the past two years. To put this into context, Hasu – an well-known, albeit anonymous, crypto researcher and member of the Flashbots team – noted that validators running Flashbots MEV-boost can increase their staking rewards by 135%.
Cumulative Extracted MEV – Gross Profit ($mn)
Levelling The Staking Field
Obviously not everyone has 32ETH available to stake directly on the Ethereum blockchain, nor has the technical ability to run a validating node, but this does not mean that ETH staking rewards are only available to a small sub-set of ETH holders. The ecosystem has developed alternative methods for users to earn staking rewards. In fact, surveys suggest the vast majority of crypto users stake by delegating either to a non-custodial provider – such a Lido – or via an exchange/custodial provider such as Binance – see chart.
Survey: Are You Staking?
In terms of entities staking on Ethereum, Lido is by some margin the largest, accounting for just under 30% of the total ETH 16.5mn staked – see chart below. Part of the reason for its popularity is that Lido issues a token stETH for every ETH staked using its protocol. By issuing stETH for every ETH staked on the beacon chain, it turns what is, at least until the upcoming Shanghai fork is rolled out and withdrawals are permitted, illiquid ETH into a liquid token stETH.
ETH Staked By Entity
Source: Dune Analytics
Security Or Not?
The list of exchange/custodial providers offering staking-as-a-service was originally much longer but as I was finalizing this research note the SEC charged the US exchange Kraken for “the unregistered offer and sale of securities thru [sic] its staking-as-a-service program”. In response Kraken agreed to pay $30m to settle the SEC allegations and announced that it would discontinue offering staking services to US users.
In my view, and it is one shared by many in the crypto community, the SEC’s actions are somewhat disingenuous. Brian Armstrong CEO of Coinbase stated as much in a tweet posted following the announcement (see below), noting that the SEC provided no way for exchanges to register, a point reiterated by Hester Peirce, a Commissioner at the SEC who was extremely critical of the actions taken by her own agency.
By its actions the SEC has indicated that offering staking-as-a-service meets the definition of a security, however, it is important to note that this is not confirmed in law. Neither does it answer an even more fundamental question as to whether Ethereum and other PoS cryptocurrencies which users are able, or at least have the expectation of being able, to earn income passively via staking are securities.
Unlike Bitcoin, where regulators seem to be in broad agreement that it is a commodity, there is no clear-cut answer. SEC Chairman Gary Gensler last September at a Congressional hearing indicated that in his view, PoS cryptocurrencies should be considered as securities, which would require them to be registered and regulated as such. The key determinant in deciding whether a something is a security or not is if it passes the famous Howey test which...
“...requires an investment of money in a common enterprise with an expectation of profit derived from the efforts of others”.
While Gensler is of the view that PoS cryptocurrencies are securities not all his colleagues or former colleagues share this perspective. In 2018, William Hinman, Director of the Corporate Finance Division of the SEC at the time, made a speech where he stated:
“If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.” [Ed note: my emphasis]
Given the Ethereum is widely regarded by most as a decentralized protocol – albeit with an obvious figure head in the form of Vitalik Buterin and a core dev team – there certainly seems to be a strong case for arguing that it should not be considered a security. That said, this is not a regulation get out of jail-free card, Ethereum could easily be brought within the regulatory perimeter as a currency or commodity.
Best Of The Bunch
In my judgement, of the three cash flow generating methods covered in these research notes, staking is by far the best. Unlike crypto lending, its returns are not driven largely by speculation which fuels boom-and-bust price action that can have potentially serious negative consequences for one’s financial health (as last year aptly demonstrated). Instead, it is more likely liquidity mining, whose returns are driven by underlying activity – trading in the case of LPs, blockchain transactions in the case of staking. Moreover, because of the way Ethereum issuance is determined, arbitrage is likely to keep staking rewards correlated with the ebbs and flows of fiat money interest rates, thereby providing some compensation for the damping effect higher interest rates have on crypto prices, something that does not occur in liquidity pools due to impermanent losses. Finally, by sticking to larger blockchains – like Ethereum – stakers can not only have confidence they will not be rug-pulled but they can also maintain on-demand access to their funds due to the creation of liquid staking pools like Lido to which they can delegate their tokens.
Given all this, it is hard to see much merit in the SEC’s recent announcement to effectively ban US users from staking via centralized exchanges such as Kraken. US crypto users, who the SEC purport to protect, would be much better served if the regulator had gone after crypto lenders, whose business model is much riskier, earlier and more forcefully. Furthermore, it is not as if their actions will stop US users from staking because they are still able to stake either directly on-chain if they can come up with the required 32ETH, or if not via decentralized entities like Lido – entities that lie outside the US regulatory perimeter.
So we come to the end of this three part series looking at how crypto has been influenced by the shifting macro backdrop. What I have endeavoured to show is that the doomsters are wrong in anticipating that last year’s interest rate shock constitutes a crypto extinction event. In the case of Bitcoin, it is backed by something that gives it fundamental value – its ability to provide people with a way to hedge the erosion of fiat money’s purchasing power via inflation - just as gold has done historically. The extent to which people value this hedge naturally fluctuates in tandem with the economic cycle. However, in a world where government debt loads have risen to unprecedented levels only a fool-hardy person would ascribe such hedges zero value.
The second flaw with the crypto doomsters perspective is failing to recognize that cryptocurrencies are able to generate positive cash flows in a variety of different ways. Not all of these are perfect by any means. Crypto lending, in particular, is problematic because the underlying source of demand for loans is driven by speculative motives and, as such, it does have a Ponzi-like feel about it. This will remain so until non-speculative sources of crypto loan demand become more widespread. We are not there yet, but we are moving in that direction. For example, MakerDAO’s foray into real world assets (RWA) is certainly worth keeping an eye on. Of the two remaining methods, liquidity mining and staking, both hold promise, but until such time as crypto markets mature and become less volatile, staking appears the best method for crypto users to insulate themselves from the vagaries of the global macro backdrop. Perhaps this is something the SEC will come to realize in time and, hopefully, they will work with centralized exchanges operating within their borders to ensure US users are once more able to access such products in the future.
Until next time.
Ryan Shea, crypto economistFootnotes
 See: https://dune.com/hagaetc/dex-metrics
Balancer supports up to eight tokens in a single liquidity pool (LP) and allows its creators to set their own fees – see: https://balancer.fi/
 Actually because of trading fees, the value of K increases with every trade, but for illustrative purposes I will ignore this.
 Often associated with liquidity mining is yield farming. This is a more active strategy where users seek to maximize returns by either arbitraging between different liquidity pools or redepositing protocol native tokens into other liquidity pools in order to earn additional yields.
 Exiting the LP does incur gas fees, which depending upon demand for blockspace at the time, can be quite high.
 Listing on a DEX is much simpler than on a CEX because token owners are not required to seek approval to list. This makes them much easier venues to commit rug pulls.
 Most popular DEXs are built on Ethereum meaning BTC needs to be wrapped.
 FOMO = Fear Of Missing Out. Other flags of potential rug pulls include the transparency and experience of the team behind the token and the depth of the liquidity pool – the larger the pool, the less likely it is a scam.
 See: https://www.ic3.gov/Media/Y2022/PSA220721 and for a simple explanation of the mechanics – see: https://www.bloomberg.com/opinion/articles/2021-07-01/pump-and-dump-and-pull-the-rug
Sushiswap is a hard fork off Uniswap. It differentiated itself from Uniswap by establishing a native token – Sushi. By holding this token, Sushi holders earned an additional share of the transaction fees (0.05% of the 0.3% of trading fees), thereby providing an incentive to hold the native token. The change in payout structure saw many users migrate to Sushiswap from Uniswap, so in response Uniswap introduced UNI its native governance token.
 See: https://dune.com/hildobby/DEX-Pool-Deep-Dive
 One example of which I came across in composing this research note was APY.vision – see: https://app.apy.vision/
 I say should because obviously the algorithmic stablecoin Terra spectacularly failed to live up to its name when it plummeted in value last year, setting off a liquidation cascade that exacerbated the cryptowinter.
 Curve a DEX for stablecoins runs a different AMM called stableswap that has a more linear profile when the quantity of tokens are near parity with eachother, further reducing impermanent losses – see: https://classic.curve.fi/files/stableswap-paper.pdf
 For those interested – see: https://dailydefi.org/tools/impermanent-loss-calculator/
 See: https://medium.com/coinmonks/understanding-impermanent-loss-9ac6795e5baa
 To avoid spamming 1% of UNI total supply is required to submit a governance proposal. This is a fairly common threshold – Compound, a decentralized crypto borrowing and lending protocol, uses a similar threshold.
 See: https://uniswap.org/blog/uni
 Beyond 2024 UNI tokens will be issued at 2% per annum ie, that it the token’s inflation rate. It is a similar model to tail emissions in a PoW protocol like Monero in order to foster continued user engagement – see: https://blog.trakx.io/privacy-and-security/
 PoS cryptocurrencies accounts for around 28% to the sector’s market cap, of that Ethereum accounts for roughly two-thirds – see: https://cryptoslate.com/cryptos/proof-of-stake/.
 ETH holders do not have the right to a positive cash flow simply by owning ETH, they must participate in staking.
 Recall from the first article in this series that Bitcoin’s lack of positive cash flow was one of the reasons why the critics of the sector believe they cryptocurrencies are nothing more than a hi-tech Ponzi scheme – see: https://blog.trakx.io/interest-ing-times-part-i/
 DYOR as the saying goes.
 The merge actually resulted in a hard-fork of the Ethereum blockchain. The old Proof-of-Work chain continues to exist and people are still able to mine that chain but it is now called Ethereum Classic to differentiate it from Ethereum. With only a $3bn market cap, it is clear that the overwhelming majority of the Ethereum community view the protocol switch as a positive step, if they didn’t then the market cap of Ethereum Classic would be substantially higher relative to Ethereum.
 Certainly not all, otherwise transactions would be impossible.
 This threshold was set by the Ethereum foundation and is not exactly pocket change. Users can stake more than this but it attracts no additional staking rewards, meaning putting more than 32ETH is capital inefficient.
 See: https://dune.com/hildobby/ETH2-Deposits
 It would take roughly a year for the current number of validators to exit. NB: This only applies once the Shanghai upgrade (EIP-4895), which is slated for March this year, is implemented. Until then, all ETH staked is locked – see: https://decrypt.co/119201/ethereum-shanghai-upgrade-on-track-march.
 This is beyond the scope of this article, but for those interested I covered this in a previous research note – see: https://blog.trakx.io/peering-into-the-ether/
 See: https://www.stakingrewards.com/earn/ethereum-2-0/?page=1
 See footnote 29.
 Live data available here – see: https://etherscan.io/address/0x00000000219ab540356cbb839cbe05303d7705fa
 For the avoidance of doubt, the staking rewards referred to do not take into consideration the tokenomics of the blockchain in question, namely it does not adjust for any increases or decreases in the supply of tokens. Some sites, such as stakingrewards.com, also provide adjusted rewards, which takes this factor into consideration – see: https://www.stakingrewards.com/
 Lido is a decentralized smart contract protocol that allows users to stake on Ethereum, which I will discuss shortly.
 For PoW blockchains, which used to be the predominant consensus protocol, it is referred to as Miner Extractable Value.
 Under PoW the priority fees went to miners.
 Gas prices are the cost of having transactions included in Ethereum’s blockchain.
 See: https://twitter.com/hasufl/status/1571864292571357184
 See: https://stakingrewards.docsend.com/view/p3rp7zrpujdcu776
 Even though it was on twitter surely a government regulator like Gary Gensler should not use such informal language – see: https://twitter.com/GaryGensler/status/1623777842000539648
 See: https://www.sec.gov/news/press-release/2023-25
 Respected crypto thought leader Nic Carter in a guest post on the Pirate Wires substack published last week made the case that the Biden administration was quietly trying to ban crypto. Perhaps the SEC’s actions are part of something more co-ordinated – see: https://www.piratewires.com/p/crypto-choke-point
 See: https://www.sec.gov/news/statement/peirce-statement-kraken-020923
 See: https://www.sec.gov/news/testimony/gensler-testimony-housing-urban-affairs-091522
 See: https://www.sec.gov/news/speech/speech-hinman-061418
 Higher interest rates = higher staking yields, but lower prices.
 Albeit in stETh rather than ETH.
 In recognition of the usefulness of staking, Trakx will shortly be launching a staking yield CTI alongside our other Crypto Traded Indices – please get in touch if you wish to have more details.