35M Staked ETH: A Ticking Time Bomb or Stable Foundation?

35 million ETH staked. That’s a very bullish headline I would say for Ethereum! A hallmark of sustainability, a cornerstone of endurance. Maybe. Or perhaps, just perhaps, we’re looking at a very intentionally put together deck of cards. Let's be brutally honest: the narrative around staking has been overwhelmingly positive, bordering on euphoric. Euphoria is a dangerous drug in the crypto world.

Is All Staking Good Staking?

The headline is celebratory, investor sentiment is restored and the staked ETH continues to rise. Is it really just confidence? Or is it a more frenetic, gun-to-the-head march powered by yield farming incentives and the siren call of sweet, sweet passive income. Well, it’s easy to sound cocky when you’re guaranteed trillions of dollars in free money. Then what happens when the faucet runs dry? Picture this — what if the regulatory landscape all of a sudden changes, or if a supernova size exploit goes and shakes the staking ecosystem?

Think of it like this: in the 1920s, everyone was confident in the stock market. Until they weren't. The same human psychology that made the roaring twenties is in effect here. Our brains want us to jump off the cliff with everyone else.

Now, to be clear, I am not predicting a death knell for Ethereum. Together, let’s put the brakes on this runaway staking train. It’s a time to ask ourselves some very difficult questions. Specifically, is this boom even a good thing and who does it help anyway?

Centralization: The Elephant in the Room

Let's talk about the elephant in the room: centralization. Lido, Binance, Coinbase. These names dominate the staking landscape. More than a quarter of all staked ETH is sitting with Lido by itself. Coinbase, which has grown into the largest node operator on the network, has more than 11% of all validators under its control.

This is not decentralization, this is a centralized oligarchy pretending to be a decentralized revolution.

Now picture that same, historic financial system, where just three banks had about 40 percent of all consumer deposits. Would you feel secure? Would you trust the system? Probably not. So then, why are we so eager to accept this amount of concentration in the not-at-all-decentralized world of crypto?

The SEC recently released “guidance” indicating that at least some “Protocol Staking Activities” do not need to be registered securities offerings. While this provides some regulatory certainty, it creates space for a dangerous loophole. It pushes us toward even more centralization by providing these centrally controlled, large players with a large advantage. The holdup, in Bitwise’s case, signals a desire for regulatory caution. All of these conflicting signals add to the confusion—uncertainty is, after all, the antithesis of stability.

Reduced Liquidity: A Double-Edged Sword

It’s been about a month since the narrative shifted to claiming that decreased liquid supply of eth is bullish. It creates scarcity, driving up the price. Maybe. But what if their users wish to unstake. But when nearly all of them try to exit at the same time, the system is in danger of gridlock.

Think about it: if a significant portion of ETH is locked up in staking contracts, it reduces the available supply for trading. This creates a lot of additional price volatility and often makes it easier for whales to manipulate price. If stakers lose confidence in the protocol, they may all want to unstake at the same time. This would lead to a “bank run” situation, flooding the system and tanking the price.

Less liquidity is not necessarily better, it can be worse under the surface.

So, what do we do? We don’t throw the baby out with the bathwater. These risks can’t be left unattended if staking is to serve as a force for good.

Solutions: Diversify, Decentralize, Demand Clarity

It’s time to get past the hype and get serious about staking. Time for a clearer-eyed look at how the staking landscape is evolving. Just because there are 35 million ETH continually staked does not mean it’s a good or bad thing. It’s not an inherently bad tool. After all, it’s a tool, and like any tool, it can be used for good or for ill. We need to do more to make sure that the data is used responsibly and sustainably. This model needs to serve the whole Ethereum ecosystem and not just the chosen few. If it isn’t, this so-called stable bridge may very well collapse under our weight.

Here are a few actionable steps we can take:

1. Promote diversification: Support smaller, more decentralized staking providers. Don't put all your eggs in the Lido, Binance, or Coinbase basket.
2. Develop truly decentralized protocols: Invest in research and development of staking protocols that are resistant to centralization.
3. Demand regulatory clarity: Advocate for clear and consistent regulatory guidelines that protect investors without stifling innovation.

We need to move beyond the hype and embrace a more sober assessment of the staking landscape. The 35 million ETH staked is not inherently good or bad. It's a tool, and like any tool, it can be used for good or for ill. It's up to us to ensure that it's used responsibly, sustainably, and in a way that benefits the entire Ethereum ecosystem, not just a select few. If not, this supposed stable foundation might crumble beneath our feet.