Could ‘Underwater’ Ethereum (ETH) Stakers Threaten Crypto Market Dynamics?

As more Ethereum (ETH) gets staked, there are growing concerns In the community that in-loss stakers could induce price volatility for the second-largest crypto network.

The Ethereum Merge upgrade was one of the most significant events that have occurred in the crypto industry. The upgrade set out to address critical Ethereum network issues such as scalability, security, and high fees.

It also introduced several new features, such as staking and sharding, enabling the network to process more transactions per second.

Benefits of Ethereum Shift to Proof of Stake

The Ethereum Merge upgrade involved transitioning from a proof of work (PoW) consensus algorithm to a proof of stake (PoS). This transition was implemented in several phases, with the first phase, known as the Beacon Chain, launched in December 2020. The Beacon Chain was essentially a new blockchain that ran parallel to the primary Ethereum blockchain at the time and was responsible for managing the PoS consensus algorithm.

One of the main benefits of the PoS consensus algorithm is that it requires validators to stake a certain amount of ETH to participate in the consensus process. Validators are rewarded ETH for verifying transactions and can be penalized (referred to as slashing) for performing invalid or malicious functions.

Ethereum’s Shapella (Shanghai) upgrade was successfully implemented last month. Shapella enabled the withdrawal of staked ETH and effectively finalized the network’s years-long transition to proof of stake. There are numerous ways in which validators can unstake, though the two main types of unstaking include partial and complete withdrawals.

Zooming in On ETH Stakers

While the PoS consensus algorithm has several benefits, it poses some risks for stakers. One of the main risks is that the value of the staked ETH can decline, leaving stakers underwater in their position.

ETH has fallen significantly since reaching an all-time high of over $4,800 in November 2021. It’s now trading back around the $1,860 mark at the time of writing.

Ethereum (ETH) Price 1-month Chart | BeInCrypto Price

Regardless of the price decline, ETH holders continue to support the network. This is evident given the notable increase in ETH staked since the Shapella upgrade, also known as Shanghai. In the last 24 hours, net deposits reached 104,682 ETH staked on Ethereum’s Beacon Chain.

The ETH staked through principal deposits accounts for 93.82% of 18.93 million in locked ETH. Here, staking activity overpowered withdrawals by a significant margin. But, the decline in price action and increase in staking has raised some concerns among experts. Loss-making ETH stakers could even pose a threat, according to analysts at Delphi Digital, a famed crypto research platform.

Drowning Underwater

Looking at the specifics, the team shed some light on ‘underwater’ ETH stakers. Over 70% of stakers are down on their ETH positions in USD terms since staking. In fact, most ETH staking occurred between $1,600 and $3,500, while approximately 830,000 ETH was staked above $4,000.

In general, April witnessed the most significant amount of ETH staked in a single month.

Are Stakers in profit or loss since ETH was staked? Source: Delphi Digital

As a matter of fact, it won’t be the first time ETH staking was the center of discussion. In the past, privacy concerns and centralization were two key issues.

What Could Happen Now?

The researchers considered both sides of the coin in their analysis. Talking about a downturn, a gradual but constant flow of ETH out of the network from solo stakers would not be out of the question. Furthermore, if the ETH price drops further, ‘we would see more price-sensitive stakers withdraw their stake and sell their ETH.’

The Delphi report noted,

“One would expect a sharp price drop in ETH to cause a decent chunk of ETH to unstake. It’s human nature to panic at moments like that.”

On the other hand, some could note the ‘limits on network staking withdrawals and used that as fuel for a mid-term bullish thesis.’ Overall, this price decline has had a significant impact on stakers. For many stakers, this means they are now underwater in their position and may have to wait several months or even years for the market to recover.

Some validators may have withdrawn their staked ETH to cut their losses, while others may not participate in the network. This decline in participation could weaken the network’s security as a result of a reduced validator count.

Optimism in The End

Despite these challenges, there are still reasons for optimism about the Ethereum Merge upgrade. It has addressed some of the significant issues that have plagued the Ethereum network, such as scalability, security, and high fees. The introduction of sharding may enable the network to process a much larger number of transactions per second. This could potentially help alleviate the issue of high fees.

Moreover, the Ethereum community is known for its resilience and creativity. Many community members are working on new projects and applications that could help drive the adoption of the network and increase the value of ETH. For example, several projects are exploring the use of Ethereum for decentralized finance (DeFi) applications, which could help to drive demand for ETH.

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