Joel Frank
Ether (ETH)’s good week continued on Friday. The cryptocurrency, which is the world’s second-largest by market capitalization and powers the smart-contract-enabled Ethereum blockchain, was last up around 3.5% in Friday and changing hands near $1,700, with its weekly gains standing around 12%. ETH’s latest bounce means that it is back above its 21-Day Moving Average and back within a short-term bullish uptrend.
Some analysts are surprised at how resistant the cryptocurrency has been to concerns about a crackdown on crypto staking service providers in the US.
US Regulators Crack Down on Centralized Staking Services
US regulators are cracking down on US-based centralized crypto staking services. Earlier this month, Kraken came to a surprise settlement with the US Securities and Exchange Commission regarding the staking service it was offering to US customers via its exchange and agreed to shut the service down. The SEC is also going after Coinbase for its staking service, though Coinbase has vowed to fight back.
Staking services offered by the likes of Coinbase and, formerly, Kraken allow users to get involved in Ethereum staking without needing to put up a massive up-front investment, or without needing much technical know-how. If an ETH investor wants to stake by themselves, they would need to set up a node by themselves (a difficult technical feat) and commit 32 ETH (which most people don’t have).
Some crypto commentators have expressed concern about the SEC’s latest crackdown. In the Kraken settlement, the crypto exchanges staking service was labeled as a security offering. This has contributed to fears that the Ethereum cryptocurrency might soon be labeled by US regulators as an unregistered security, which could have big implications for how US investors can invest in or use Ethereum and its ecosystem.
Others have said that the SEC’s move might set staking back years by deterring US-based investors from getting involved. But others disagree. On the contrary, many commentators think that a crackdown on centralized staking service providers might actually be beneficial for Ethereum staking and the broader network. Here’s why.
Ethereum Has Nothing to Fear From US Staking Regulation – Here’s Why
Firstly, the SEC’s crackdown should accelerate the pace at which lawmakers bring in new regulations on staking. Regulation that outlines more clearly the rules that centralized US staking service providers must follow in order to take investment, and clearer rules on the risk disclosures that must be made to investors prior to accepting their funds would help protect investors from a repeat of the FTX debacle seen last year – FTX appears to have abused user funds in a way that it did not disclose.
Secondly, if centralized staking providers start losing power to their decentralized peers, like Lido and Rocket Pool – both of which are Decentralized Applications governed by Decentralized Autonomous Organisations (DAOs) – that could help increase the decentralization and security of the Ethereum network. There is a risk that if centralized staking service providers were to have obtained a dominant market share of all staked ETH, they could have abused this position to manipulate the blockchain, perhaps for financial gain or, even more nefariously, in pursuit of political motives.
The utility and governance tokens of both the Lido and Rocket Pool both surged in wake of the SEC’s recent crackdown on centralized staking providers, likely on the assumption that their market share of staked ETH is likely to grow. Coinbase and Kraken currently hold around 18% of all staked ETH.
Price Prediction – Can ETH Rally to $5,000?
Let’s assume that US staking regulations do have a net positive effect by 1) boosting investor confidence in staking and 2) by boosting the decentralization of the Ethereum network, this could be a long-term bullish driver for Ethereum. According to Glassnode, around 16.68 million ETH were staked as of Thursday. That is less than 14% of the total ETH supply of around 120.5 million.
Other comparable layer-1 blockchains that also use a proof-of-stake consensus mechanism, like Cardano, have a staking participation rate of more like 70%. So there is a lot of room for more ETH investors to start staking their tokens. Up until now, the fact that investors can’t withdraw their staked ETH has acted as a deterrent. But the upcoming Shanghai Hardfork upgrade is going to change that.
Pretty much everyone expects the number of staked ETH tokens to rise over the coming years by a significant amount. And, assuming that stakers intend on locking up their tokens for some time, this will result in reducing the supply of circulating ETH, in essence increasing its scarcity for buyers.
Couple that with the fact that ETH is now an outright deflationary asset (ETH burns as a result of EIP-1559) and its not out of the question to think that the cryptocurrency can stage a recovery beyond its 2021 all-time highs in the $4,800s and beyond $5,000 in the coming years. That would mark 3x gains from current levels.
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This article was written for Business 2 Community by Joel Frank.
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