First Mover: Ethereum’s Transition to Staking Could Push More Traders to Use Derivatives

Ethereum’s biggest-ever upgrade is supposed to make the blockchain network faster and more efficient. But the new “staking” system could lock up so many of the network’s native ether tokens that investors who want to trade them may have to rely on derivatives markets.

The blockchain, the world’s second-biggest, currently uses a validating mechanism similar to larger Bitcoin’s known as “proof-of-work,” where new data blocks and transactions are confirmed via power-hungry computers solving complex cryptographic puzzles.

Under Ethereum’s multi-year upgrade now underway, the network would shift to a “proof-of-stake” model, where investors validate transactions by staking ether on the blockchain in exchange for token rewards. It’s a bit like depositing dollars into a bank account for interest, paid out in dollars.

A possible consequence, though, is the new staking system could soak up as much as 30% of the ether tokens in circulation, based on estimates from Adam Cochran, a partner at MetaCartel Ventures, a decentralized investment firm. An address needs to stake at least 32 ether tokens, worth about $12,400 at the current price, to become a validator in the proof-of-stake model.

“It’s possible to see a future scenario where the incentive to keep assets locked up on-chain is so great as to remove some liquidity from the market,” says Diogo Monica, co-founder and president of the digital-asset custodian Anchorage, told CoinDesk in an email.

Lost liquidity

In May, a survey by the Ethereum developer Consensys found that 65% of ether investors were planning to stake the cryptocurrency under the new system, known as Ethereum 2.0, and half of those wanted to run validator nodes.

Most staking mechanisms have a lock-up period. Rocket Pool Staking, an Ethereum 2.0 staking service, offers staking terms ranging from three months to a year.

Some ether tokens might get locked in staking as the network upgrade proceeds. Ethereum 2.0 is…

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