Ethereum’s Next Upgrade Could Open the Floodgates for Institutions Staking
Ahead of Ethereum’s Shapella upgrade poised to unlock ETH withdrawals, MetaMask is launching a marketplace for institutionalized staking. Through MetaMask’s Institutional version of the wallet, the new service is going live on March 27.
MetaMask Institutional Becomes More Attuned to Businesses
Few know that Web3’s most popular wallet, the gateway to DeFi dApps, has an alternate version. In April 2021, ConsenSys launched this version as MetaMask Institutional (MMI).
Geared towards institutional management, MMI reflects this by offering multi-user access, a higher compliance level composed of pre and post-trade know-your-transaction (KYT) risk assessment, and more advanced API for MMI’s portfolio performance analytics.
MMI took until January 2022 to support multi-chain custody, extending to all EVM-compatible layer 2 networks such as Arbitrum, Optimism, Polygon, and others. In January 2023, MMI extended support for liquid staking via Rocket Pool and Lido Finance platforms.
MMI crosses an equally important milestone by launching a staking marketplace on March 27. This makes it the first multi-custodial institutional staking bridge. Initially, the platform will facilitate institutional staking via four providers:
- ConsenSys Staking – $1 billion TVL at historic yield of 4.88%
- Blockdaemon – $431.9 million TVL at historic yield of 5.67%
- Allnodes – $145.1 million TVL at historic yield of 5.56%
- Kiln Finance – $547.7 million TVL at historic yield of 5.57%
The new MMI-facing marketplace will allow venture funds to have a simpler and clearer overview of staking benefits through one-click staking.
After all, Web3 is powered by networks that are nearly all proof-of-stake blockchains. To bolster the new feature, MMI will be overhauled with a more sophisticated portfolio dashboard, transaction tracking, and reporting, custodial compliance controls, and built-in PnL performance analytics.
Shapella’s Reshaping of the Staking Landscape
On April 12, Ethereum will finalize its transition from last September’s proof-of-work to proof-of-stake. This milestone is dubbed Shapella, as a combination of Shanghai and Capella upgrades, allowing validators to withdraw staked ETH alongside the accumulated yields.
Presently, Ethereum is secured by 17.7 million ETH, worth ~$32 billion. The staking reward ranges between 4% and 5.3%, depending on the inflation rate, the number of validators, and the total amount of tokens being staked.
Although each PoS network has its staking policy, it typically involves a lock-up period. Its purpose is to ensure validators have a long-term interest in the network’s health, as their stake is used to validate transactions and create new blocks.
Therefore, validators are incentivized to act in the network’s best interest as they tie up their cryptocurrency as collateral. In addition to the commitment mechanism, the lock-up period stabilizes the crypto market by removing some crypto from circulation.
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What Will Shanghai/Capella Do for Ethereum?
Paired together, as Shanghai + Capella, the Shapella upgrade will make ETH staking withdrawable from previously totally locked to be able to withdraw ETH periodically and predictably. In practice, solo stakers that fulfilled the required 32 ETH threshold will soon be able to withdraw their ETH, plus the rewards accrued.
This upgrade, also called a hard fork, will spawn a new Ethereum branch that will subsume the pre-upgraded one. The Shanghai upgrade includes four Ethereum Improvement Proposals (EIPs):
- EIP-3651 Warm COINBASE – reducing gas cost for COINBASE (unrelated to the eponymous exchange) payments, which are the rewards paid for adding new Ethereum blocks.
- EIP-3855 PUSH0 instruction – optimizing smart contracts by making them smaller and less vulnerable.
- EIP-3860 Limit and meter initcode – patches a potential DoS attack vector by limiting initcode size. (initcode is the executed code when a new smart contract is created, as the deployed backbone of dApps)
- EIP-4895 Beacon Chain withdrawals – enabling validators to withdraw ETH from Beacon Chain to EVM.
The tagalong Capella is the executor upgrade. Specifically, it enables ETH locked on Ethereum’s Execution Layer (EL) to be withdrawable by unlocking it from Ethereum’s Consensus Layer (CL). Then, the ETH can be credited to an Ethereum address on EL.
In more understandable terms, the Shapella upgrade will allow for a more flexible staking model, likely unleashing new staking products. That’s because users can stake, accrue, and re-stake ETH rewards unbound from the previous confines.
More Derivatives and Liquid Staking?
One example of such innovation would be staking derivatives. For instance, a token represents shares in staked assets. Likewise, dApps may issue speculative contracts on the future price of staked assets. In short, such derivatives could serve as both a hedge against risk and gain staking exposure without the actual staking.
Another benefit of Shapella is that liquid staking will likely become more popular. This may sound contradictory, as liquid staking was designed to circumvent ETH lock-up period. However, with Shapella completely unlocking staked ETH, redeeming wrapped ETH for the underlying staked ETH will likely push LS platforms to bring in more incentives as the LS competition heats up.
Let’s also not forget Shapella’s psychological impact. It has become common for Bitcoin maximalists to joke about this upgrade, given that Bitcoin is about asset sovereignty. After all, this is why Bitcoin outperformed Ethereum so swiftly amid the US banking crisis.
Accordingly, Shapella will eliminate that negative framework by giving investors peace of mind through directed and withdrawable staking. However, Gary Gensler, the SEC Chair, may intrude on that peace of mind. Over the years, he repeatedly claimed that any digital asset outside Bitcoin is a security.
This is why the outcome of the SEC vs. Ripple Labs legal battle is much anticipated. In the worst-case scenario, US-based exchanges might even de-list ETH from their portfolios, which would apply to US-based DeFi protocols until they gain securities broker-dealer licenses.
In the meantime, ConsenSys’ MetaMask Institutional is well-positioned as the ‘first mover’ to serve institutional stakers ahead of Ethereum’s Shapella milestone.
Do you think proof-of-stake will endanger Ethereum’s legal standing, chilling investor inflows? Let us know in the comments below.