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Ethereum’s staking yield after The Merge will be lower than expected

Ethereum’s staking yield after The Merge will be lower than expected

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The merger is expected to happen within the next two weeks, and one of the common discussions has been what return to expect from Ethereum as it moves to proof of stake.

It is a bit of a misconception that Ethereum staking pays up to 12% after compounding. This is largely based on historical data that has changed dramatically over the past year, such as the amount of ETH staked. Current network usage and input data give a much lower return figure.

That doesn’t mean the return can’t reach higher estimates. It depends on several factors, such as the amount of fuel and the activity of the network. But unless there is a significant increase in market activity, those numbers are unlikely in the short term.

How is Ethereum’s Return on Stake determined?

Let’s first understand where the return on Ethereum comes from and how the return is determined.

For proof of stake to work, ETH must be staked to run the validator. Validators create and validate new blocks, and without them the network could not function.

The revenue paid to validators comes from: block rewards, transaction tips paid for prioritized transactions, and Maximum Extractable Value (MEV) tips.

All validators share block rewards. Ethereum’s return on block rewards is determined by the amount of ETH invested.

How the return decreases if there is more ETH in the network. Photo: EthHub.

Transaction tips are also distributed to validators. When the network is congested, users can instruct reviewers to encourage their transactions to prioritize and select others.

MEV rewards are the final part of Ethereum’s revenue. Validators sending new blocks can reorder transactions, and users can try to pay validators for a particular subscription that they can benefit from.

Where the current numbers place us

According to Dune Analytics, about 13.51 million ETH have been staked, which is about 11.3% of the total supply. This would increase the validator’s block rewards to around 4%.

Other factors affecting ETH stake return, MEV and transaction tips, are largely dependent on network usage.

More transactions and higher transaction costs lead to bigger tips. This also results in higher amounts of MEV gross profit and more ETH burned.

Over the past year, trade prices were sometimes as high as $200 for a token swap. Compared to today, that figure has been dramatically reduced to around $5-$10. This suggests that additional income will remain much lower than it was before.

Selini Capital SIO Jordi Alexander published his prediction of Ethereum stake APY in 2023 based on current data.

By 2023, he expects Ethereum validators to receive around 3.2% APY, accounting for block rewards, MEV and transaction tips.

© 2022 The Block Crypto, Inc. All rights reserved. This article is for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial or other advice.

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