Towards a Formal Framework of the Ethereum Staking Market

This paper examines how various categories of Ethereum stakers respond to changes in the consensus issuance schedule, and the potential impact of such changes on the composition of the staking market. To this end, we have develop and calibrate a game-theoretic model of the Ethereum staking market, incorporating strategic interactions between various staking agents. Our findings suggest that solo stakers may be more sensitive to variations in staking rewards than ETH holders using centralized exchanges or liquid staking providers. This increased sensitivity is driven not only by the cost structure of solo staking, but also by the competitive dynamics between different staking solutions in the market. When faced with a downward-sloping issuance schedule, staking agents compete for limited staking yields, and their choice of staking supply affects the revenues of other stakers. Therefore, the presence of other staking methods with access to MEV revenues and other DeFi yield sources when staking, as well as inattentive stakers, puts competitive pressure on solo stakers. Consequently, our model predicts that a reduction in issuance is likely to crowd out solo stakers. We present preliminary empirical evidence to support this result, using an instrumental variable estimation approach to estimate the yield elasticity of staking supply for different staking categories.