Ethereum Staking Yields Are Dropping and Validators Are Leaving

When Ethereum switched to proof of stake in September 2022, staking yields were around 5-6%. Lock up 32 ETH, run a validator, earn a nice return. It was a compelling proposition, especially during a bear market when there weren't many other ways to earn yield in crypto.

Fast forward to today. Staking yields have dropped below 3% and are still falling. The validator queue that was once months long has reversed. More validators are leaving than joining.

And I think this is actually fine.

Why Yields Are Dropping

The math is simple. Ethereum's staking reward is split among all active validators. The more validators, the smaller each share. When the Beacon Chain launched with a few hundred thousand validators, yields were generous. Now there are over a million validators staking roughly 34 million ETH.

That's about 28% of all circulating ETH locked in staking. The denominator keeps growing while the numerator (total rewards) stays relatively fixed. More validators fighting over the same pie means smaller slices.

Tip income has also declined. During periods of high network activity, validators earn tips from users who pay for priority transactions. But with L2s absorbing most transaction activity, tip revenue on L1 has dropped significantly. Those occasional days with high gas prices from NFT mints or token launches are rarer now.

MEV (maximal extractable value) revenue has decreased too. Flashbots and other MEV protocols have made extraction more efficient and competitive, distributing profits across more participants.

The Exit Queue Is Real

For the first time since The Merge, the validator exit queue is consistently active. Validators are voluntarily leaving, withdrawing their 32 ETH and stepping away.

Why would someone unstake?

Better yields elsewhere. When ETH staking pays sub-3% and Treasury bills pay 4.5-5%, the risk-adjusted comparison is unflattering. A US government bond carries zero smart contract risk, zero slashing risk, and zero IL. ETH staking carries all of those risks for a lower yield.

Restaking opportunity cost. Some validators are unstaking to participate in restaking protocols like EigenLayer, which promise higher yields through securing additional networks. But restaking comes with additional risks (more on that in another piece).

Profit taking. Validators who staked early, when ETH was much cheaper, are sitting on massive gains. A sub-3% yield isn't compelling enough to keep capital locked when they could take profits and redeploy.

Is This a Security Problem?

The immediate concern: if validators leave, Ethereum becomes less secure. Fewer validators mean fewer attestations, which theoretically makes the network more vulnerable to attacks.

In practice, the security budget is still enormous. Even if 10% of validators exit, there's still over 30 million ETH staked, worth roughly $60 billion at current prices. Attacking Ethereum would require controlling a third of that stake, which is roughly $20 billion. Nobody's spending $20 billion to attack a blockchain.

The real risk isn't a sudden exodus. It's a slow drain that, combined with declining fee revenue, makes ETH's economic model look less attractive compared to competitors. If staking yield drops to 2% while Solana pays 7%, capital might shift even if the security implications are minimal.

Lido's Dominance Gets Scrutinized

Lido controls roughly 28-29% of all staked ETH. It's the single largest staking provider. When individual validators leave, Lido's market share can actually increase. Solo stakers are more likely to exit than Lido depositors, who hold liquid stETH and can sell on the open market without going through the exit queue.

This concentration has drawn criticism. If Lido controls more than 33% of stake, it theoretically has the power to disrupt consensus. The Lido DAO has committed to self-limiting, but there's no hard mechanism enforcing it.

The silver lining is that Lido's dominance has plateaued. New liquid staking protocols like Rocket Pool, Coinbase's cbETH, and several smaller players have been gaining share. The market seems to be self-correcting, slowly.

The Real Yield Comparison

Let's be honest about what ETH staking actually returns after accounting for everything:

• Consensus rewards: ~2.8% APR
• Tips and MEV: ~0.3-0.5% APR (highly variable)
• Total: ~3.0-3.3% APR

Now subtract:

• Liquid staking protocol fee (Lido takes 10%): -0.3%
• Smart contract risk premium (not zero): hard to quantify but real
• ETH price risk: you're exposed to ETH volatility

Net real yield after fees: roughly 2.7-3.0%.

Compare that to:

• US 10-year Treasury: ~4.5%
• Money market funds: ~5%
• Corporate bonds: ~5.5-6%
• DeFi lending (stablecoins): ~4-8%

The only reason to stake ETH at 3% is if you're bullish on ETH price appreciation. The yield alone doesn't justify the risk. You're staking because you believe ETH will be worth significantly more in the future, and the staking yield is a bonus on top of your directional bet.

What This Means for ETH's Price

This is where it gets uncomfortable for ETH bulls.

Staking was supposed to be a major demand driver for ETH. "Buy ETH, stake it, earn yield, supply gets locked up, price goes up." That narrative worked when yields were 5-6%. At sub-3%, with better yields available in traditional finance, the staking demand driver is weaker.

The supply lock-up argument is also less compelling than it seems. Liquid staking tokens like stETH trade freely. They can be used as collateral in DeFi. They can be sold on secondary markets. Staking doesn't actually remove ETH from circulation the way many people think.

Combined with the blob fee problem (near-zero revenue from L2s) and the general ETH/BTC underperformance, staking yields are just one more factor making it hard to be aggressively bullish on ETH in the short term.

The Equilibrium Argument

Here's the optimistic take. Falling yields and validator exits are the system working as designed.

Ethereum doesn't need a million validators. It needs enough to be secure. If yields drop and some validators leave, the remaining validators earn more per unit of stake. Eventually, an equilibrium forms where yields stabilize at a level that attracts exactly enough capital to maintain security.

That equilibrium might be 2.5%. It might be 2%. It might be lower. But it exists, and the market will find it.

The comparison to proof-of-work is instructive. Bitcoin mining profitability constantly fluctuates. Miners enter when it's profitable, exit when it's not. Difficulty adjusts. The network keeps working. Ethereum staking is doing the same thing, just through different mechanisms.

My Take

Falling staking yields are concerning for ETH's short-term price narrative but not for Ethereum's security or functionality. The network doesn't need 6% yields to work. It needs enough staked ETH to be secure, and $60 billion is more than enough.

What I'd watch is whether the validator exodus accelerates to a point where major liquid staking protocols start seeing significant outflows. If Lido's TVL drops 20%, that's a signal. If it drops 5%, that's just market equilibrium doing its thing.

For ETH holders, staking is still better than not staking. A 3% yield on an asset you already hold is free money. But don't stake ETH expecting the yield to carry the investment. You need to believe in the price appreciation story. The yield is just the cherry on top.