Anchorage on Staking: Ethereum Goes Deflationary

Digital asset bank Anchorage Digital has posted its perspective on Ethereum – post Merge. Anchorage as a service provides Ethereum staking following the transition from Proof of Work to Proof of Stake. While touting its own services, Anchorage notes that Ethereum has gone deflationary for the first time.

According to the post:

“In proof-of-work, the entities who secure the network incur heavy capital expenditures in the form of mining equipment and energy needed to run the equipment. For incentives to mine to work effectively, the block rewards have to exceed the expenses necessary to keep the network secure. For the Ethereum blockchain, previously, this was 2 ETH per block. With proof-of-stake, those costs are nonexistent, so the block reward can be much lower. As a result, the token burning mechanism introduced in EIP-1559 can cause the amount of ETH burned to outpace the amount minted. When this occurs, the network becomes deflationary … In the months immediately following the Merge, new reward types were enabled that allowed the network to go deflationary for the first time ever. It is expected that withdrawals will be enabled within a year, which should remove another commonly cited reason for hesitancy around staking.”

Anchorage adds that as more entities participate in the Proof of Stake network for Ethereum, rewards will decline. At the same time, it notes that choosing a partner to participate in staking is key… and the reward rate for staking ETH currently ranges from 4.1% ~ 4.8%.

 

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