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It’s hard for projects to beat the returns offered by staked ether on a risk-adjusted basis.
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Consequently, the asset and its yield are becoming a benchmark for the crypto economy in similar fashion to the fed funds rate and the traditional economy.
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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 – one that resembles sovereign bonds.
“The ETH staking yield is a gauge for smart contract activity and economic cycles in the digital asset space, much like the fed funds rate in traditional finance,” wrote Lorenzo Valente, a research associate at ARK Invest.
Comparing staked ether to 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 generating a 3.27% annualized yield, according to CoinDesk CESR data.
There’s also a so-called liquid staking token, stETH, from the Lido project, that Ethereum stakers can redeploy into DeFi protocols.
The fact that staked ether produces a yield makes the asset comparable to sovereign bonds, which are debt securities issued by governments to finance themselves. Investors can buy up this debt and earn interest on it over time.
But staked ether differs from bonds in several crucial aspects, the report said.
Some of the distinctions are positive. For example, while governments can default on their debt obligations – like Argentina did in 2020 – Ethereum cannot default on staked ether. The network is programmed to let users access their funds whenever they want, and the yield is designed to keep being issued no matter what happens, though the interest rate will vary depending on on-chain activity. Another big risk for bonds is inflation. If the government prints too much money, and the inflation rate outstrips the yield on bonds, investors end up losing purchasing power.
Ether can also suffer from inflation (as is currently the case) if network activity slows down so much that ether issuance ends up exceeding the ether burn rate – a mechanism that removes a fraction of ether from circulation every time a transaction is made. However, on-chain data makes ether’s inflation rate much more transparent. Data aggregator ultrasound.money shows, for example,
