Cryptocurrencies are often criticized for not providing any financial benefits to their holders in contrast to holding equities, where holders benefit from dividends and buybacks to reduce outstanding shares by effecting a buyback program.
Not only do the majority of cryptocurrencies not provide financial benefits to holders, but they also often dilute the very same holders, as they issue new coins to miners and stakers to incentivize them to verify transactions. A regular holder of Bitcoin as well as other proof-of-work cryptocurrencies will be diluted over time. In terms of Bitcoin, 1.7% of the supply is presently issued annually to miners. For proof-of-stake frameworks such as Ethereum, regular holders are also diluted by a similar mechanism – unless the holders decide to stake their coins.
Ethereum provides staking rewards but does not dilute stakers
In proof-of-stake, to compensate stakers with rewards without simultaneously diluting them, transaction fees are absolutely crucial. In the past 30 days, Ethereum has generated $69.71mn from transaction fees, which are particularly burnt and paid to stakers. Since adopting a proof-of-stake framework on September 15th this year known as the Ethereum merge, Ether holders have been able to earn an annual reward of up to 7% by staking their Ether. The reward is derived from newly issued Ether and the unburnt transaction fees.
Although the network issues new Ether to stakers, since it also burns the majority of transaction fees, the supply has largely been constant since the Ethereum merge. So, the rewards to stakers have not come at the expense of dilution but rather due to transaction fees. It is important to notice that stakers lock up Ether for the foreseeable future and risk being slashed, meaning the network can ultimately take all their Ether in case the staker acts dishonestly. The latter occurs relatively rarely. Likewise, stakers have ongoing expenses to verify transactions, but they are estimated to be below 10% of the rewards. At present, around 15.6mn Ether are presently staked out of a total supply of 120mn.
Again, if you do not stake Ether, you will not receive a direct reward. Yet, the supply may turn negative, if burnt fees exceeds newly-issued Ether. This occurs in times of high demand for Ethereum-based transactions. If the high demand for transactions in 2021 is to be repeated in the future, we are likely to see an annual negative supply growth of up to 1%. This would benefit all holders of Ether, not just those who are staking it.
ENS has $43mn on its book
It is not only native blockchains to possibly generate yield. Here, we also find tokens, in other words, protocols based on, for instance, Ethereum. We stay within the ecosystem of the latter, namely Ethereum Name Service or ENS in short. ENS is the decentralized protocol for registering domain names on Ethereum. Like ordinary domain names, there is a small recurring cost to keep ownership of an ENS domain. Last month, ENS generated a revenue of $1.7mn, while its all-time high was in May of this year at nearly $10 million. Although the revenue is almost as volatile as crypto prices, it implies that protocols can generate revenue too.