In the past two months, Ethereum network validators have faced a significant challenge as their annual earnings from cryptocurrency staking have sharply declined, reducing the APR from 5.16% to 3.73%.
This decline corresponds to a 25% drop in the annual interest rate, impacting network participants who have chosen to lock their ETH in staking.
According to statistics from the Staking Rewards website, Ethereum staking has been experiencing a steady increase over time.
In staking, validators commit ETH as collateral in validating transactions and blocks, an essential component of the proof-of-stake (PoS) network.
A significant shift in this scenario occurred after the Shapella update, which allowed for withdrawals of staked funds for validators. This has led to an increase in user interest in joining staking as an investment method to take advantage of rewards in the form of interest.
Staking Ethereum, however, has a notable feature that annual interest decreases as more ETH is allocated to staking. This is part of the network’s economic model since its transition to the proof-of-stake algorithm in September 2022.
This automatic reduction in incentives aims to balance the network by reducing the need for new validators as its supply grows. However, this self-regulation can be compared to Bitcoin’s mining difficulty, which increases as miners’ computational power grows.
Furthermore, the decline in Ethereum staking profits also affects staking pools, which have seen their interest rates continuously decrease since May. This trend raises concerns about the concentration of power in the liquid staking pool of Lido, which already controls 32% of the Ethereum staking market.
Ethereum developers are aware of these challenges and are working on improvement proposals, such as EIP-7514, which aims to reduce the number of validators added each epoch to mitigate centralization and resistance to censorship in the network.
As Ethereum continues to evolve, investors and validators are closely monitoring fluctuations in staking profits, seeking ways to adapt and maximize their returns in an ever-changing environment.