In wake of last week’s major Ethereum blockchain upgrade enabling the unstaking of ETH tokens from the Beacon chain for the first time since staking was enabled in December 2020, the number of ETH tokens locked in the staking smart contract has continued to surge higher.
Total staked ETH tokens were at 18.62 million on Monday as per data presented by crypto analytics firm Glassnode.
That’s an increase of nearly 500,000 in one week, the fastest pace at which the total number of staked ETH tokens has risen since late February.
It also marks a new all-time high for the total number of staked ETH tokens.
The rapid rise in the number of staked ETH tokens in the last week shocked some traders an analysts who had been expecting the enabling of staking withdrawals to result in net outflows from the staking smart contract.
Some of these traders and analysts had expected ETH investors to withdraw their ETH tokens and accrued ETH yield on masse, potentially triggering a wave of selling and a drop in the ETH price.
Given the opposite happened (i.e. the number of staked ETH tokens rose, rather than falling), the ETH unsurprisingly saw a pop higher as bearish bets were unwound.
ETH/USD jumped from under $2,000 and in the last few days has been consolidating in the $2,100.
It seems that there were more ETH owners waiting on the sidelines for the successful implementation of staking withdrawals before depositing their ETH into the staking contract than there were staked ETH owners eager to withdraw their tokens from the staking contract and sell them down.
The newfound flexibility in ETH staking lowers the risk to investors of putting their tokens into the staking contract.
As a result, substantial inflows of ETH into the staking contract are expected in the years ahead.
What Rising Staking Participation Could Mean for the Ether (ETH) Price
Given last week’s market reaction, one might expect a continued rise in the total number of staked ETH tokens to provide an ongoing tailwind to the ETH price.
Assuming that when investors deposit their ETH into the staking contract that this is a long-term investment play, this should act as a deflationary tailwind for ETH.
That’s because as the number of staked ETH rises, the supply of readily available non-staked ETH will decline, increasing its scarcity and potentially boosting its price.
And the supply of unstaked ETH potentially has a long way to fall.
At present, as noted above, only about 18.6 million ETH tokens out of the total current circulating supply of just under 120 million tokens are currently in the staking contract.
That’s around 15.5%.
Comparable proof-of-stake layer-1 blockchain protocols like Cardano have staking participation rates of in the 60-70% range.
If Ethereum can reach a staking participation rate of 60-70%, that would imply a decrease in the number of unstaked ETH tokens of around 50-60 million.
That would have a huge impact on the market and could drastically reduce the availability of ETH tokens on major crypto exchanges and for other functions such as paying gas fees and for use within Decentralized Finance.
This could be a major ETH price tailwind in the years ahead.
Another major long-term tailwind will be the combined impact of the ETH token burn introduced by the London hardfork of August 2021 and the drop in the ETH issuance rate as a result of the “Merge” to proof-of-stake from proof-of-work last September.
Indeed, the ETH supply is currently falling at a rate of around 1.5% per year.
However, this deflation rate could accelerate in the months ahead if network congestion rises and pushes up network fees and the ETH burn rate, due to the fact that the ETH issuance rate has remained largely unchanged in recent months in the 0.5-0.6% per year range.
Indeed, the deflation rate momentarily hit 5.6% earlier this year amid a sudden spike in network activity that triggered a short-lived spike in network fees.
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