Ethereum Yield Drops Below 3%: Is ETH Struggling for On-Chain Returns?

Ethereum (ETH) has been trading within a range of $2.4k to $2.8k, showing resilience despite significant price volatility. However, the staking rewards for ETH have dropped below 3%, raising concerns about its attractiveness compared to other blockchains. This analysis looks at the implications of the current staking environment and how Ethereum compares to alternative networks.

Key Takeaways

Ethereum is experiencing a price range of $2.4k to $2.8k, with significant volatility in recent weeks.
Currently, 34.9 million ETH, approximately 29% of the circulating supply, is staked in the Proof-of-Stake consensus.
The annual staking reward for ETH has fallen to 2.987%, while competitors like Solana and Polkadot offer higher returns.
Despite lower staking rewards, Ethereum maintains a strong position in the DeFi landscape, with over 55% of the total value locked (TVL) in DeFi applications on its network.

Ethereum yield drops below 3% - Is ETH losing the battle for on-chain returns?

Ethereum's Current Market Situation

Ethereum [ETH] has been fluctuating between the $2,400 and $2,800 marks, with bullish investors managing to maintain this range despite noticeable short-term volatility. During the past month, there were instances where daily highs and lows varied by nearly 10%. According to AMBCrypto's analysis, Ethereum is currently undergoing a consolidation phase. Previously, the significance of the 50-week moving average was emphasized, with ETH still trading below this dynamic resistance level.

Staking and Reward Dynamics

A notable number of long-term investors, confident in Ethereum's underlying fundamentals, have chosen to stake their ETH. As of now, 34.9 million ETH—representing about 29% of the circulating supply—are engaged in the Proof-of-Stake consensus.

Recently, the Ethereum staking reward has experienced a decline since the beginning of 2023, reaching an annual rate of 2.987% as of June 17. It’s important to note that this figure represents the consensus staking rewards, not those from the execution layer. Generally, as more ETH gets staked on the network, the reward per validator sees a reduction.

Comparative Rewards of Other Blockchains

Other blockchain networks are currently presenting higher staking rewards. For instance, Solana [SOL] offers an impressive 7.54%, while Polkadot [DOT] boasts 11.82%, and Cosmos Hub [ATOM] offers around 20.2%. However, these networks come with significantly higher inflation rates compared to Ethereum, as Solana's inflation is 4.5%, Polkadot's is 7.78%, and Ethereum maintains a modest inflation rate of just 0.7%. Consequently, while these alternative chains may seem appealing, they pose less of a threat to Ethereum in the broader context.

Exploring Yield-Bearing Stablecoins

Holders of stablecoins such as UST or USDC do not earn passive income on their assets. In contrast, yield-bearing stablecoins provide an opportunity to retain a dollar-pegged asset while earning income. For example, Ethena's staked USDe [SUSDE] is among the leading yield-bearing stablecoins by market capitalization, currently yielding 5.81%. Historically, it has delivered substantial returns, ranging from 10% to 25% APY.

DeFi Lending Opportunities

Prominent decentralized finance (DeFi) lending protocols like Aave [AAVE], MakerDAO [MKR] (now known as Sky), and Compound [COMP] allow users (lenders) to deposit their cryptocurrencies into “liquidity pools” on their platforms. Other users (borrowers) can then take out loans from these pools, using crypto as collateral. As it stands, the staking reward rate for AAVE is at 4.63%, which outpaces Ethereum's staking rewards of 3%.

This higher return could attract users to DeFi lending platforms rather than staking ETH directly. Nevertheless, this doesn't imply that Ethereum is losing value; on the contrary, many of these DeFi products are built on the Ethereum network. As these applications gain popularity and utilization, this will likely enhance Ethereum's adoption and increase transaction fees, ultimately supporting the long-term value of ETH.

Ethereum's Strong Position in DeFi

Despite Ethereum's staking rewards being lower than those of its competitors, the platform still commands an impressive 55.8% share of the total value locked (TVL) in DeFi. Compared to alternative networks, Ethereum continues to lead the DeFi space, maintaining its position as a dominant force, even as the direct staking rewards may leave something to be desired.