Ethereum Holders Not Staking ETH Altogether Is “Not Unreasonable” – ConsenSys DeFi Report
Ethereum 2.0 is likely to launch its genesis block in Q4 2020, says Ethereum developer ConsenSys in its latest DeFi report.
With the launch of the first phase, Phase 0 – Beacon Chain, the long-anticipated staking will come to ETH. The Proof of Stake consensus mechanism will allow the holders to earn rewards through staking Ether. For this, validators have to lock up their ETH. But this may become a problem as the report states,
“Some community members expressed concern that DeFi could be the number one threat to getting a significant amount of staking participation in Eth2.”
The Risk of Locking ETH
DeFi has been the star of Q3 2020 as it saw “the largest bull run since the ICO boom of late 2017 and early 2018.”
This DeFi bull run started with Compound's governance token (COMP) release, leading to a frenzy of activity and an exuberant amount of yield.
With various DeFi protocols offering higher returns than staking, ETH holders may elect to direct their tokens elsewhere that wouldn’t even require them to lock ETH up for an unspecified amount of time.
“It is not unreasonable to worry that ETH holders would (at best) wait to see how early staking returns compare to DeFi returns, or (at worst) decide altogether not to “risk” locking up ETH until Phase 1.5 (which is likely at least a year away) in case another similar bull run occurs in the meantime.”
But the team sees the emergence of derivative tokens representing the users’ pooled token. As we reported, recently launched project Lido has already announced the same intentions.
However, it remains to be seen how the holders will really react when the time comes with considerations like the amount of liquidity an ETH holder can access, the volatility of Eth1.x vs Eth2, and the evolving user experience of being an ETH holder to play into their decision making to lock funds.
Major Changes Expected
The report also covered how it was the rise of Automated Market Makers (AMM), governance tokens and yield farming, forks, derivatives, and network effects, and weird DeFi where it “began to incorporate memetic internet culture into the lexicon,” were the trends that defined Ethereum DeFi in Q3.
Although the excitement has come down extensively and the price of DeFi tokens are in capitulation mode, in the afterglow still, “smart financial and technical minds are increasingly attracted to the financial capabilities of Ethereum,” states the report.
These rapid innovation periods also saw an increase in ETH locked in DeFi protocols and a spike in the average gas price. But,
“As the Ethereum community prepares for an upgrade to the base protocol, and the Eth2 Deposit Contract goes live in Quarter 4 of 2020, this cycle could see major changes as DeFi continues to drive major activity on Ethereum.”