While the crypto market has experienced sustained growth this year and most analysts share optimistic forecasts of even larger gains in the months to come, the path to new all-time-highs has proven rather volatile. Bitcoin has already topped its best performance, setting a new record of $73,750 in March, but has since dropped in value several times, moving between short-lived rallies and consequent pullbacks. As for the altcoin leader, its recent trajectory has been less spectacular, with the current Ethereum price still stuck under the $4K threshold and unable to get closer to former highs.
This, of course, comes as no surprise since corrections and sudden price swings are the norm in the crypto market. It’s completely unrealistic to expect digital currencies to do a 180 and change their ways or go on a path of uninterrupted appreciation. Even if the crypto sphere is abuzz with speculations of a new bull run in the aftermath of Bitcoin’s latest halving, price fluctuations are still bound to occur.
However, amid all the volatility and uncertainty, one trend seems to remain relatively constant and that is Ethereum’s rising staking rates. Users seem to be much more interested in keeping their ETH locked up in staking accounts and reaping the rewards than moving their funds on crypto exchanges for trading. This behavior caught the eye of industry experts who are now expressing their thoughts and opinions on the matter.
Ethereum in the staking era
In 2022, Ethereum successfully switched from the energy-intensive Proof of Work (PoW) mechanism it had been using since inception to the more sustainable Proof of Stake (PoS) model it currently employs, following a massive overhaul commonly known as the Merge. This helped Ethereum cut back its energy consumption by 99%, underscoring the network’s unwavering commitment to innovation and progress.
Using PoS as the underlying validation method had been the plan all along for Ethereum. This wasn’t a viable solution when the network went live in July 2015, but several years later developers finally got around to solving the issues that kept them from implementing this strategy and putting their vision into practice.
Unlike the PoW consensus which rewards users for the computational effort they put in to solve complex mathematical puzzles and validate transactions, thus creating competition among miners, PoS takes a completely different route by randomly selecting validators after they’ve staked a certain number of tokens. Staking implies locking up coins in an account as collateral for a period of time to unlock the ability to become a validator and receive rewards for it, while also maintaining the security of the network and ensuring its smooth running.
Given that users no longer have to compete against each other to solve intricate equations, the new PoS-based system is much more energy-efficient than the former PoW model. While Ethereum’s transition to PoS has been largely beneficial, it has also attracted a fair share of criticism, mostly centered around concerns over increased centralization. Judging by the fact that most users resort to the same popular staking pools and liquid staking solutions to increase their chances of being selected as validators, these concerns are not unjustified.
The rise and rise of staking
Despite the challenges and disapproving comments, Ethereum pushed forward with PoS implementation and so far, it seems things have worked out quite well for the platform. The transition was declared a success from the get-go, but it took a while for ETH users to adapt to the change and get on board the staking train.
Ethereum staking really took off after the Shapella Upgrade was rolled out last year. The update allowed users to withdraw their staked token along with the accrued rewards, a functionality that wasn’t available until then. With concerns regarding access to staked funds being finally removed, users became a lot more confident and eager to partake in the staking process.
From that point on, staking has increased steadily and the trend continues to this day. According to the latest data, the staking participation rate has reached 27%, up from 15% last year. This means that a considerable percentage of Ethereum’s circulating supply is locked up in staking accounts and contributes to the consolidation of the network.
Another noteworthy aspect to take into account is the decrease in the number of ETH available on exchange platforms. The figure dropped to a 5-year low recently, accounting for only 11% of Ethereum’s supply.
Trend interpretations
Things are taking an interesting turn in the Ethereum ecosystem, but what can we gather from these trends? Analysts interpret this to be a sign of growing investors’ confidence in Ethereum’s long-term prospects. The fact that an increasing number of users prefer to stake and hold on to their assets instead of trading them shows the market sentiment leans positive.
Also, since much of Ethereum’s supply is now staked on the network and only a relatively small amount sits on exchange platforms, ETH’s scarcity is increasing. Theoretically, this should drive prices up if demand remains constant. Looking at the asset’s evolution from this point of view, the underwhelming performance of the past few months doesn’t seem as bleak anymore.
Final thoughts
While Ethereum struggles to gain momentum and breach long-standing resistance levels, with price movements indicating a downward trend, other indicators such as higher staking rates and lower trading volumes tell a slightly different story. Whether users are right in not letting go of their assets and continuing on the staking path remains to be seen. For now, the anticipation building around the Bitcoin halving is enough to provide a glimmer of hope and bolster investors in their belief that good things will come to those who wait.