Notes 5/26: Ether Supply Problems

While the crypto world’s attention is transfixed by the decline in bitcoin price, Ethereum’s native token, ether, is quietly undergoing its own price spiral.   

According to analytics firm Glassnode, ether balances at exchanges are at their lowest level since 2016. The firm says that only 14.85% of all ether was held in wallets at centralized exchanges, down from between 25% to 26% during the bull run of 2021. Less ether at exchanges indicates fewer trades involving the token.

A Concentrated Liquidity

For long time crypto investors, attuned to the whipsaw volatility of crypto markets, not many trades may be a time to wait out the bear market. However, another data point, this one from research firm Kaiko, illustrates the extent to which ether’s trading patterns are problematic.

In its latest analyst call, Kaiko pointed out that seventy percent of ether’s liquidity comes from just five exchanges. Three of those exchanges – Binance, Bitfinex, and BitForex – are unregulated. Two of them – Binance and Bitfinex – are the subject of regulatory action by U.S. authorities. BitForex demonstrates “suspicious trading activity,” say Kaiko analysts.

Meanwhile, Coinbase, another one of the five exchanges, is locked in a legal dispute with the Securities and Exchange Commission (SEC) over the status of tokens listed on its platform.       

What About Staking?

If almost 15% of ether resides at centralized exchanges, where is the rest of its supply? As it turns out, staking ether is a popular activity for investors. As of this writing, approximately 18.8 million ether is locked in staking smart contracts.

The attraction of staking for investors is the annual percentage rate (APR) for investors. Ethereum’s yield was supposed to decline after withdrawals for its native token were enabled. It has skyrocketed instead to compensate for the expected price bump in ether’s price that did not happen.

Winners Boost Ether Yields

The list of platforms that have witnessed a surge in ether deposits since the Shapella upgrade is proof that it is not enthusiasm for ether, a worthless token, but greed for rewards that is driving the current deposit mania. According to statistics from analytics platform Dune, staking platform Kiln has witnessed a massive 205% increase in deposits on its platform in the last month.

One need only look at its website to understand why. As of this writing, staking $100 million worth of ether with the platform will get you $8.79 million, translating to an APR of 8.79%. In February, the same investment would have garnered $5.34 million. Ethereum is advertising a yield of 5.5% on its native token, as of this writing.

The biggest staking platform, Lido, has also offered yields disconnected from the underlying platform, many times in the past. Compounding the problems with staking is its regulatory status. SEC chief Gary Gensler has repeatedly sounded out warnings against the practice and claimed that it is an unregistered security offering. That would make ether an unregistered security, something that NYDFS has already charged in a previous suit.

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