The popularity of Ethereum staking has kept yields low.

The Ethereum blockchain holds more than 14 million ether (ETH), worth more than $2 billion, according to data. But as the staked pool grows, the yield per token decreases.

Key points:

• The popularity of Ethereum staking is driving its yields down 
• The estimated yearly yield looks to be 4%-5%, despite the initial forecast of 9%-12%
• There is already 14 million ether staked in blockchain, worth over $2 billion. 
• Ethereum's yearly yield is almost the same as the U.S. government bonds, but stakers are still willing to accept a similar rate of return by placing money into the Ethereum blockchain

Ethereum staking appears to be the latest trend in crypto trading. This strategy is so popular, in fact, that it’s driving down yields as a result of a formula used to calculate the yields under Ethereum’s month-old proof-of-stake model. 

The staking yields are awarded in ether (ETH), the native cryptocurrency of the Ethereum blockchain. And because there is only a finite amount of ETH available for staking yields, sending more ETH for staking results in lower per-person yields. 

According to Coinbase Institutional, this formula estimates that staking yield post-Merge looks to be about 4%- 5%, well below their initial forecast of 9%-12%.

One problem for now, according to crypto analysts, is that investors can’t take their ether out of the Ethereum blockchain – so they’re stuck in the protocol even as the staking yields keep declining. The withdrawal option won’t really become available until Ethereum’s next significant upgrade, Shanghai (expected to occur in 2023).

Based on Dune Analytics data, 14 million ether (ETH), worth over $2 billion, are currently being staked on the Ethereum blockchain. This amount has increased by 7.5% over the past quarter, when the shift to the proof-of-stake model took effect, known as the Merge.

Data tracker shows a spike in ETH deposits to Beacon Chain and validators during the third quarter. (Dune Analytics)

In the Ethereum blockchain, validators provide security for transactions by staking their ether as a guarantee. To become a validator, one must lock up at least 32 ETH (about $50,600) worth of ether on the blockchain. However, as more people become validators and more ETH is deposited as part of this process, its yield gets spread out more thinly.

Staking yield for Ethereum is determined by four factors: the number of new ETH tokens issued, the amount of transaction fees generated per day by Ethereum, the rate at which these fees are burned and the amount of ETH being staked.

Growth of the dominator

The formula of annualized staking yield is: [annual gross ETH issuance + annual fees * (1-% of fees burned)]/average ETH staked over the year. 

In other words: The denominator [the amount of ether staked] affects how much interest you'll earn on your ether holdings. As more people stake their ether, each individual holder will earn less interest. 

At present, the annualized staking yield is roughly equivalent to that of a 10-year U.S. Treasury note, which topped 4.2% this year—the highest level since 2008.

Stakers are willing to accept a similar rate of return by placing money into the Ethereum blockchain as they would with triple-A-rated U.S. government bonds, which are considered some of the safest investments in the world.

The staking growth is “a sign that traders find it a reliable alternative to the traditional markets,” Alan Goldberg, market analyst at BestBrokers.

“Making a deposit for a year without access to your funds is a risky move, especially if the funds are in crypto," said Goldberg. “However, traders continue to stake... It just proves that many traders feel secure with Ethereum.”