Notes 4/13: Ethereum Unstaking, Ether Prices, and CZ Profile

After the successful completion of Ethereum’s Shapella upgrade, the percentage of total ether staked on its network has declined to 14.5% from 15.6% earlier. The number of active validators on Ethereum’s blockchain has fallen slightly, by 0.1%, to 562,168, as of this writing, from yesterday. This means that an insignificant percentage of validators have fully withdrawn their staked ether holdings and exited the blockchain’s network.  

Kraken Leads Withdrawals

Cryptocurrency exchange Kraken is leading the charge on validators moving out of Ethereum’s staking program. It accounted for sixty two percent of total ether withdrawn since the Shapella upgrade went live yesterday evening. The exchange reached a $30 million settlement with the Securities and Exchange Commission (SEC) earlier this year and agreed to discontinue its staking service after being charged for an unregistered securities offering.    

Kraken’s settlement has raised the specter of regulatory action against staking as a service. SEC chief Gary Gensler has previously compared staking to securities offerings earlier and fired an opening shot against it with his case against Kraken. The regulatory uncertainty associated with staking should make existing Ethereum participants jittery about their operations and result in more of them leaving its network.

But the blockchain’s develops have imposed conditions on the number of validators leaving its network in a single day. The number of validators in the withdrawal queue, including full and partial withdrawals of staked ether, right now is 308,740. About 291,000 are aiming to partially withdraw their rewards from staking. It will be interesting to see how that figure progresses in the coming days.     

Ethereum Staking Yields Confound

A reason for validators to not exit ether’s staking program are the juicy yields on offer. Ethereum’s website advertises an annual percentage reward (APR) of 4.2% for ether right now. But other staking services continue to magically multiply that figure using dubious tactics like rebasing and Miner Extractable Value (MEV).  

Lido, the crypto world’s biggest staking provider, promises yields of 4.7% on staked ether. The average APR, calculated from various staking services, on the Rated Network site is 4.92%. And the token.count app states that the staking APR currently is 5.06%.

In the mainstream fiat currency economy, often criticized by crypto enthusiasts, interest rates determined by the Federal Reserve are passed onto consumers and investors through banks. The latter offer products with rates that are equal to or below the Fed figure. But crypto’s unique algorithms have laid to waste to the simple rules of mathematics. Even more reason to begin regulating this Wild West.

Profiting from Ether Prices

A key concern about the Shapella upgrade is related to the prices of ether, Ethereum’s native token. Will prices crash after withdrawals are enabled?

The staggered staking withdrawal process, that enables only a fixed number of validators to exit the network or claim rewards, has ensured the opposite. Ether prices touched the $2,000 mark this morning, a figure they last reached back in the second week of May.

As of this writing, the token is changing hands for $1998.37, up 4% from a day earlier. Crypto analytics firm Glassnode has estimated that ether will face about $317 million worth of selling pressure in the next week after staking is enabled.

One could chalk up the bump in prices to investor enthusiasm for ether’s possible transformation into a yield-bearing asset. Or one could point to the release of staked tokens, albeit in a controlled manner, and the consequent price bump as a trigger for investors anxious to get out of the token. The native token for OKX – another cryptocurrency exchange that “released” a big bundle of tokens last June from staking – witnessed a similar price jump in the days after the release, enabling investors to get out of their investment.

LDO Prices Also Rise

The prices for Lido’s governance token, LDO, are also rising. As of this writing, they are changing hands at $2.42, up roughly 2% from the same time a day earlier.

Lido is the biggest staking service for ethereum, accounting for roughly 30 percent of all staked ether. But its future is uncertain because investors are rushing out its doors after booking handsome profits. It also has far too many regulatory red flags in its operations.

The concerted increase in prices for both Lido and Ether provides much-needed liquidity for crypto investors in an otherwise illiquid ecosystem. It is doubtful if the liquidity will sustain after traders have exhausted their selloff.

Changpeng Zhao’s Fortune Profile

As it turns out, Binance CEO Changpeng Zhao or CZ, as he is popularly known, is not a “walking time bomb”. According to a recent profile in Fortune magazine, he is an affable family man with two kids and a peripatetic existence that, among other cities, is split between Paris and Dubai. Thanks to Chinese roots and an upbringing in Canada, he is also able to traverse cultures and industries.

Two things jump out from the profile.

The first one is an account of his 1600-word Reddit tirade against his former employer OKCoin, now rechristened as OKX, in which he accused them of, among other things, using bots to boost trading volumes, faking their Proof of Reserves, and hiding their financials. *snigger*. *smirk*. These are all things that Binance has been accused of by crypto observers and regulators. Obviously, he learned his lessons well.

The second one is Binance’s use of Amazon Web Service (AWS) servers during its hasty move from China. From the article: Zhao oversaw a frantic but stealthy weeks-long effort to move data hosted on more than 200 Alibaba servers to those hosted by Amazon Web Services and others, outside the Great Firewall.

Even as regulators fret about the loss of so-called crypto innovation from America, this nugget proves that Binance, even crypto, depends on infrastructure located or owned by American companies to function. No wonder then, Binance has fallen in line, time and again, when it comes to toeing the line with sanctions from the Department of Treasury.

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