Staking rates are a new innovation in the crypto industry that can drive economic activity and adoption by providing standardized benchmarks and enabling new financial products. Staking rates are similar to interest rates in traditional finance, but they are determined by proof-of-stake (PoS) blockchains like Ethereum.
Staking rates measure the returns paid to validators who secure PoS blockchains by locking up their tokens and processing transactions. Validators receive rewards in the form of newly minted tokens and transaction fees. Staking rates depend on various factors, such as the total amount of tokens staked, the inflation rate, the network activity, and the protocol design.
Staking rates can be calculated and published by using different methodologies and sources. For example, CoinFund’s CESR composite ether (ETH) staking rate is based on observing the average, annualized protocol awards and transaction fees received by eligible validators. CESR is calculated, published, and licensed by CoinDesk Indices.
Why are staking rates important for the crypto economy?
Staking rates can serve as a fundamental pillar of economic activity in the crypto industry by delivering several benefits, such as:
- Providing a standardized benchmark for borrowing and lending in the decentralized finance (DeFi) sector. Staking rates can be used to price loans, deposits, derivatives, and other financial products that involve crypto assets.
- Enabling risk management and hedging strategies for stakers and investors. Staking rates can help assess the opportunity cost and trade-offs of staking versus other alternatives, such as holding, trading, or lending tokens. Stakers can also hedge their exposure to staking risks, such as slashing penalties or network downtime, by using derivatives or insurance products.
- Unlocking new functionality and utility for institutions and consumers. Staking rates can create incentives for participation and governance in PoS networks, as well as enhance the security and scalability of these networks. Stakers can also benefit from additional services and rewards offered by staking providers, platforms, or protocols.
How will staking rates evolve in the future?
Staking rates are expected to grow in significance and impact as more PoS blockchains emerge and mature. The most anticipated event is Ethereum’s transition to PoS following “The Merge,” which will create a standardized staking rate for the largest and most influential blockchain in the crypto industry.
Staking rates will also become more dynamic and diverse as different PoS protocols adopt different mechanisms and parameters to adjust their staking rewards and fees. Moreover, staking rates will be influenced by the supply and demand of tokens in the market, as well as the innovation and competition in the DeFi sector.
Staking rates are a key innovation that can drive the crypto economy forward by creating new financial products, improving risk management, and unlocking new functionality. Staking rates are to crypto what interest rates are to traditional finance.
