Editor's Note: This article comes fromUnitimes（ID：Uni-times）Editor's Note: This article comes from

, by Stefan Coolican, translated by David, published with permission.

Later this year, when Ethereum moves to staking, $26 billion worth of ETH will instantly turn into a yield earner.

When your ETH is pledged, these ETH will no longer be a virtual commodity (virtual commodity), but more like a financial instrument (financial asset) from which you can earn dividends or interest.

If Bitcoin is digital gold and ETH is digital oil, then the pledged ETH is a digital bond.

The staked ETH is unique. Unlike traditional bonds, pledged ETH does not have counterparty risk, but only protocol risk. The pledged ETH gives you income through the protocol layer (rather than the counterparty), so the pledged ETH is essentially a revenue tool.

For the first time ever, you can grow your ETH holdings organically without taking any counterparty risk.

In this article, the author will provide some thoughts on staking economics: Why does staking bring a unique income tool to the encryption field? What does staking mean for ETH earnings? Why will traditional finance inevitably need to pay attention to this?

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Staking –– what & why

We all know that blockchain needs honest validators (miners).

One of the incentives is PoW mining. In the current mining of mainstream blockchain platforms, the motivation of miners to keep honest comes from energy-intensive calculations (that is, they need to provide high-energy-consuming calculations for mining). This is the model of Bitcoin and the current model of Ethereum.

Compared with PoW hardware mining, the staking mechanism is not only more environmentally friendly, but also more efficient, safer and has better performance.

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Staking Creates an Intrinsic Yield Tool

Both PoW mining and staking are ways to secure the blockchain, but only staking creates an inherent yield tool. why? Because venture capital (i.e. staked ETH) and rewards are both inside the blockchain protocol.

We can think of staking as a security-as-a-service that is incentivized by providing rewards.

Let's explain this further.

• Participating in staking on Ethereum will be very simple. Proceed as follows:

• You hold ETH 💰;

• You deposit ETH into the staking deposit contract 👨💻;

• You run the staking software honestly ☑️;

You earn more ETH (yay!) 💵

The difference in PoW mining is that the mining reward is internal to the protocol, while the investment (that is, the cost of mining equipment and electricity invested) is external.

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Asset lending is not a built-in yield tool

Can't I use bitcoins to generate income?

sure. You can lend it to other people (or in the DeFi space, provide your crypto assets to some liquidity pool managed by smart contracts). But this leads to additional counterparty risk, effectively decoupling benefits from protocol risk.

Unlike ordinary asset lending, staking has no counterparty risk – the risk of staking is internal to the blockchain protocol itself.

[Remarks: In the DeFi lending agreement Compound, users can obtain cToken (such as cETH or cDAI) according to a certain proportion by depositing (mortgaging) assets (such as ETH or some ERC20 token) into the agreement. These cTokens can earn interest income. When you choose to redeem, each cToken can be exchanged for the corresponding underlying asset. ]

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Staking & Traditional Finance

Traditional finance has a clear understanding of income, is familiar with interest and dividends, and has a clear understanding of cash flow and compound growth.

But it doesn't know anything about staking!

why? Investment professionals, bankers, and economists are still getting used to the concept of Bitcoin. A few years ago, Bitcoin was often dismissed as a scam and believed to be used only by drug dealers and money launderers. Today, that tide of thinking has changed, and a popular financial narrative has emerged that sees it as a gold-like, higher risk/reward asset.

However, being digital gold is not enough.

Warren Buffet, one of the most famous investors of all time, once said he would prefer all the farmland in the US to all the gold in the world. why?

In short, farmland is an asset with the potential for compound growth. You can generate cash flow from your farm and reinvest the proceeds to grow your wealth. And gold is a commodity that you can only hold in the hope that the price will go up.

Staking transforms cryptocurrency from digital gold to an asset with compound growth potential. The staked ETH is more like farmland than gold.

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Staking – what will be the price and rewards?

Investors often ask me, what impact will staking have on the price of ETH? What will be the return on investment? These are difficult questions to answer.

First, ETH price: After staking is launched, ETH will be more scarce than gold and Bitcoin in terms of supply issuance.

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After ETH staking goes online, excluding the mining rewards of the Eth1 chain, the annual inflation rate of ETH in the Eth2.0 network will be below 1.4%, lower than Bitcoin (1.8%) and gold (1.6%). Source: Consensys' ETH2.0 Calculator

In Eth2.0, the inflation rate of ETH will depend on the total amount of ETH pledged, but the highest annual inflation rate is only 1.4%. In fact, we can expect inflation to be below 1.0%. Please note that this inflation rate excludes the additional ETH issued on the Eth1 chain as a reward for PoW mining, and eventually the PoW mining of Ethereum will be abolished in the staking mechanism.

Of course, prices are not determined solely by supply factors. Simply put, if ETH can sustain its demand side, then the scarcity of ETH's issuance will likely be very beneficial to its price.

In the early stage, we assumed that relatively less ETH was pledged (that is, with higher risk), and in the early stage, ETH could not be transferred on the Eth2.0 chain. We then assume that when Eth2.0 is fully operational in the next few years (a more mature stage), the total amount of ETH staked will be even higher.

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Getting involved in staking early on can be very profitable, but after a while it can be more akin to an inflation protection and a margin deposit (of course, still with higher yields than your negative interest rate bank account).

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The Future of ETH Digital Bonds

Ethereum’s digital bond (i.e., pledged ETH) promises to be a major milestone in the analogy of cryptocurrencies as an asset.

Think back to 2008 when the Bitcoin white paper came out.

Imagine back then (2008) predicting that Bitcoin would gain global acceptance just a few years after its launch, predicting it would become an important part of CNBC’s ticker tape, predicting someone with $40 billion in assets under management Fund managers touted the virtues of bitcoin in an update to investors. At the time, these predictions would have been considered outlandish, but now they are.

Likewise, I think staking returns will open the door to similar predictions.

Perhaps we’re not too far away from the Financial Times comparing staking returns to those of treasuries, bonds, and dividend stocks.

Perhaps we are not far away from using ETH staking yield as a reference indicator for financial products (like LIBOR).

[Remarks: LIBOR stands for London Interbank Offered Rate, which refers to the interest rate of short-term funds borrowed between the first-class banks in London, and is the base interest rate of most floating interest rates in the international financial market. ]

Perhaps we are not far away from the world's next-generation financial infrastructure driven by smart contracts secured by ETH such as Maker, Compound, Uniswap, and Augur.

Inevitably, even if only a fraction of these predictions come true, traditional finance will have to take cryptocurrencies more seriously.

Among them is having to deal with this novel idea of ​​staking returns with no counterparty risk.