Slowly but surely, staked ether (stETH) is becoming a benchmark for the entire on-chain economy. According to a new report from investment management firm ARK Invest, Ethereum’s monetary policy has turned staked ether into a unique type of asset that resembles sovereign bonds.
Ethereum is designed in such a way that ether (ETH) holders can stake their tokens, essentially locking them up in the network in exchange for a yield. At the time of writing, the yield on staked ether is generating a 3.27% annualized yield, according to CoinDesk CESR data. This yield makes staked ether comparable to sovereign bonds, which are debt securities issued by governments to finance themselves.
However, there are key differences between staked ether and traditional bonds. While governments can default on their debt obligations, Ethereum cannot default on staked ether. The network allows users to access their funds whenever they want, and the yield is designed to keep being issued regardless of on-chain activity. Another risk for bonds is inflation, which can erode purchasing power if the inflation rate exceeds the yield on bonds. On the other hand, staked ether’s inflation rate is transparent and can be monitored through on-chain data.
Despite the advantages, exposure to staked ether comes with risks such as slashing, where staked ether can be destroyed by the network due to operational malfunctions or harmful behavior by validators. In contrast, government bonds are not at risk of being obliterated by an automated system if issues arise.
The growing use of staked ether in DeFi protocols is reshaping the crypto financial ecosystem. Investors can stake ether through specialized DeFi protocols like Lido (LDO) or Rocket Pool (RPL), which provide liquid staking tokens (LSTs) that represent the staked amount of ether. These LSTs offer investors the flexibility to use their stETH tokens as collateral in lending protocols while earning yields on their staked ether.
With stETH becoming widely used across major DeFi protocols, staked ether is setting a benchmark for the crypto economy. Projects now need to offer higher returns than staked ether on a risk-adjusted basis to attract investors. Competing Layer 1 projects like Solana (SOL) and Avalanche (AVAX) are offering higher interest rates to incentivize investors to stake their tokens, highlighting the importance of compounding returns.
The demand for staked ether has also impacted lending protocols in the DeFi space. Protocols like MakerDAO and Aave have adjusted interest rates on stablecoins in response to the popularity of stETH as collateral. This shift indicates that the crypto economy is beginning to make decisions based on staked ether’s yield, similar to how the Federal Reserve’s funding rate influences the global financial system.
In conclusion, staked ether is becoming a key indicator for the crypto economy, reshaping investment strategies and incentivizing projects to offer competitive returns. As stETH gains market share, its influence in the crypto space is expected to grow, mirroring the role of traditional benchmarks like the fed funds rate.