High DeFi yields could threaten ETH 2.0 staking participation: ConsenSys

Published at: Oct. 28, 2020

The rise of DeFi and high yielding liquidity provision opportunities could act as a barrier to participation in staking when ETH 2.0 Phase 0 finally launches according to a new report.

The ConsenSys Q3 DeFi Report has taken a deep dive into emerging trends and warns that staking on Ethereum’s forthcoming Beacon Chain may be limited by better earning opportunities on decentralized finance protocols.

ConsenSys believes it’s likely that Phase 0 of the ETH 2.0 upgrade will launch before the end of the year. ConsenSys developer Ben Edgington said last week the launch of the ETH 2.0 deposit contract is imminent and the Beacon Chain genesis could occur within the next six weeks.

This will not offer any scaling improvements just yet, but will enable staking opportunities for those holding 32 ETH or more though the new proof-of-stake consensus mechanism.

However, there are some drawbacks: ETH holders will need to lock up their funds in a deposit contract for a variable return and, more disconcertingly, a currently unspecified amount of time.

Given an increasing number of DeFi protocols competing for liquidity with greater returns for Ethereum holders, the report warned it could leave, "ETH 2 without the threshold of staked ETH required to render it sufficiently secure and decentralized.”

"It is not unreasonable to worry that ETH holders would (at best) wait to see how early staking returns compare to DeFi returns, or (at worst) decide altogether not to 'risk' locking up ETH until Phase 1.5 (which is likely at least a year away) in case another similar bull run occurs in the meantime."

ConsenSys anticipates that DeFi providers and protocols could offer liquid tokens that represent the value of investor’s staked ETH.

This token would be easily redeemable or used as collateral for other protocols whereas ETH staked on Beacon Chain is effectively locked away for the period.

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