The Battle of Ethereum and Yield: What is the Future of ETH?

Author: Marie Poteriaieva, Source: Cointelegraph, Translated by: Shaw Golden Finance

Fixed income is no longer just the patent of traditional finance. On-chain yield has become a core pillar of cryptocurrency. As the largest PoS blockchain, Ethereum occupies a central position, with its economy relying on users locking their ETH to help secure the network and earn yields.

However, Ethereum is not the only option. Nowadays, cryptocurrency users have access to an increasing variety of yield-generating products, some of which directly compete with the staking yields of Ethereum, potentially undermining its blockchain. Yield-bearing stablecoins offer greater flexibility and are more easily accessible to traditional finance, with their yields linked to U.S. Treasury bonds and synthetic strategies.

At the same time, DeFi lending protocols have expanded the range of assets and risk profiles available to depositors. Both typically offer higher returns than Ethereum staking, which raises a critical question: Is Ethereum quietly losing this yield battle?

Ethereum Staking Rewards Decrease

Ethereum staking rewards are the earnings that validators receive for maintaining the security of the network. They come from two sources: consensus layer rewards and execution layer rewards.

The consensus rewards are distributed by the protocol and depend on the total amount of staked ETH. By design, the more Ether (ETH) staked in the network, the lower the rewards for each validator. This formula follows an inverse square root curve, ensuring that as more funds enter the system, the returns gradually decrease. The rewards of the execution layer include priority fees (the fees users pay to have their transactions included in a block) and maximum extractable value (MEV), which is the additional profit obtained by optimizing the order of transactions. These extra rewards fluctuate based on network usage and validator strategies.

Since the merger in September 2022, the staking yield of Ethereum has gradually declined. The total yield (including consensus rewards and tips) has dropped from a peak of about 5.3% to below 3%, reflecting the increase in the total amount of ETH staked and the maturing of the network. In fact, there are currently over 35 million ETH staked, accounting for 28% of its total supply.

However, only independent validators (those who run their own nodes and lock up 32 ETH) can receive the full staking rewards. While they can earn 100% of the rewards, they also bear the responsibility of staying online, maintaining hardware, and avoiding penalties. Most users opt for more convenient options, such as liquid staking protocols like Lido or custodial services offered by exchanges. These platforms simplify the access process but charge fees (usually between 10% and 25%), which further reduces the users' final earnings.

Although the annual staking yield of Ethereum seems low at below 3%, it still has advantages compared to its competitor Solana. The current average annual interest rate for Solana is about 2.5% (with a maximum annual interest rate of 7%). In terms of actual yield, Ethereum's yield is even higher: its net inflation rate is only 0.7%, while Solana's net inflation rate is 4.5%, which means that stakers on Ethereum experience lower dilution of their rights over time. However, Ethereum's main challenge does not come from other blockchains, but rather from the rise of alternative protocols that can offer yields.

Yield-bearing stablecoins gain market share

Yield-bearing stablecoins allow users to hold assets pegged to the US dollar while earning passive income, which typically comes from US Treasury bonds or synthetic strategies. Unlike traditional stablecoins such as USDC or USDT that do not pay returns to users, these new stablecoin protocols distribute a portion of the underlying yields to users.

The five major yield stablecoins—sUSDe, sUSDS, SyrupUSDC, USDY, and OUSG account for over 70% of the $11.4 billion market, utilizing different methods to generate yields.

sUSDe is issued by Ethena, a company invested in by BlackRock, and adopts a synthetic delta-neutral strategy involving ETH derivatives and staking rewards. Its yield ranks among the top in the cryptocurrency space, with historical annual rates between 10% and 25%. Although the current yield has dropped to around 6%, sUSDe still leads most competitors, but its complex, market-dependent strategy also entails higher risks.

sUSDS is developed by Reflexer and Sky (formerly MakerDAO), backed by sDAI and RWA. Its yield is relatively conservative, currently at 4.5%, focusing on decentralization and risk aversion.

SyrupUSDC is issued by Maple Finance, achieving returns through tokenized government bonds and MEV strategies. Its initial yield reached double digits, and the current yield is 6.5%, still higher than most centralized alternatives.

The USDY issued by Ondo Finance tokenizes short-term government bonds with a yield of 4.3%, targeting regulated and lower-risk institutions. Similarly, the OUSG from Ondo is backed by BlackRock's short-term government bond ETF, with a yield of approximately 4%, and complies with full KYC requirements, placing a strong emphasis on compliance.

The main differences between these products lie in their collateral, risk profiles, and accessibility. sUSDe, SyrupUSDC, and sUSDS are completely DeFi-native and permissionless, while USDY and OUSG require KYC and cater to institutional users.

Yield-bearing stablecoins are rapidly gaining favor as they perfectly combine the stability of the dollar with yield opportunities that were once exclusively for institutional investors. Over the past year, this sector has grown by 235%, and with the increasing demand for on-chain fixed income, there are no signs of a slowdown in its momentum.

DeFi lending is still centered around Ethereum

Decentralized lending platforms like Aave, Compound, and Morpho allow users to earn returns by providing crypto assets to lending pools. These protocols set interest rates algorithmically based on supply and demand. When borrowing demand rises, interest rates also increase, making DeFi lending yields more dynamic and often unrelated to traditional markets.

The Chainlink DeFi Yield Index shows that the borrowing rates for stablecoins are typically around 5% for USDC and about 3.8% for USDT. During bull markets or speculative frenzies (for example, from February to March 2024 and from November to December), borrowing demand surges, and yields tend to skyrocket. Unlike banks that adjust interest rates based on central bank policies and credit risk, DeFi lending is market-driven. This creates opportunities for higher returns but also exposes borrowers to unique risks such as smart contract vulnerabilities, oracle failures, price manipulation, and liquidity crunches.

However, paradoxically, many such products are built on top of Ethereum. Yield-generating stablecoins, tokenized government bonds, and DeFi lending protocols largely rely on Ethereum's infrastructure, and in some cases, even directly incorporate ETH into their yield strategies.

Ethereum remains the most trusted blockchain in traditional finance and the crypto-native finance sector, continuing to lead in the custody of DeFi and Real World Assets (RWA). As these areas gain popularity, they drive an increase in network usage, rising transaction fees, and indirectly enhance the long-term value of ETH. In this sense, Ethereum may not have lost this battle for yield—it has simply won in a different way.