APR Forecast - Jan 2024

Matan Hamburger
January 19, 2024
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Twinstake’s January 2024 APR forecast expects little change to the 4.31%staking APR on Ethereum, in contrast to reductions in the staking APRs on otherchains, ranging from 0-60 basis points.

The Ethereum staking market saw a steady increase in validator numbers in Q4 2023, though ata slower rate than in the previous quarter. Celsius's restructuring in early January 2024 resulted ina substantial unstaking event, leading to a temporary 1% increase in the staking reward rate. Weexpect that a further dip in the number of validators in the short term from 900,000 to890,000 validators is likely, followed by a recovery potentially reaching 930,000 validators bythe end of Q1. This would result in a slightly lower Consensus Layer (CL) APR of 3.03% from thecurrent 3.07%. Additionally, the adoption of MEV optimization strategies is growing, which mayimpact network dynamics and rewards. Twinstake predicts a staking APR of approximately4.34% by Q2 2024, driven by an increase in MEV partially offset by lowe CL rewards.

Of particular note, Twinstake expects the reward rate on Celestia to experience a significantreduction from 16.13% to 13.35% driven by a scheduled inflation reduction and an increasingstaking rate. The recent successful launch of Celestia has seen bullish price action alongside asurge in staking demand increasing the overall staking ratio. Although this increase is expected tocool, the inflationary transmission of Celestia will decrease over the period. The combination ofthese drivers would result in the anticipated decline in the overall reward rate.

Twinstake predicts a moderate increase of 16bps to 8.31% in Near’s reward rate. We expect thetotal stake on the network to remain at recent levels of 600M while inflation will drive the supplyto 1.18B. This dynamic could result in the suggested uplift in staking APR.

Solana's staking APR is predominantly influenced by its inflation rate, which is set to decreasefrom 5.57% to 5.37% due to a predefined reduction. Assuming the stability of slot times and stakingratios, Twinstake anticipates a potential drop of 39bps in the staking APR from 7.22%.

During Q4 2023 proposal 848 was implemented on Cosmos, altering Atom's economic structureby reducing the maximum inflation from 20% to 10%. This change aims to control inflation,improve Atom's value, and address overpayment for security in the network. In the weeks sincethe proposal, the staking ratio has dropped from 65.2% to 64.2% and resulted in the APRdecreasing from 23.02% to 16.63%. We anticipate an increase in the overall staking rate whichwould result in an APR of 16.21% at the end of Q1 2024.‍

A complete list of current and projected APRs for the end of 1Q 2024 is shown overleaf.

‍It is important to note that realised APR and volatility are calculated from 30 days of daily aggregated APR data and arecurrent as of the time of writing. The APRs shown are in native token value and do not account for network inflation.

In the second quarter of 2023, Polygon unveiled its strategic initiative to transition its MATIC token to POL, maintaining a 1:1 exchange ratio. This pivotal move is aimed at boosting theoperational efficiency and functionality of the platform. As part of this transition, the POLwhitepaper proposed a revamped tokenomics model. Staking rewards were initially to bedetermined by an annual inflation rate of 1% of the total supply, along with a portion oftransaction fees generated within the ecosystem. The long term plans for the ecosystem is tovastly increase the network utilisation through the use of sub-chains. The higher throughputwould generate larger transaction fees capable of sufficiently incentivising validators in theabsence of significant inflation. However, given the current transaction volume, as well as the35% of the total supply currently being staked, the expected APR would be approximately2.90%, a notable decrease from the current 5.27% APR.

Given this potential change in economics, PIP 26 has been formally introduced with the objectiveof aligning the initial POL validator rewards with the established MATIC validator rewardsschedule. PIP 26 is presently pending approval, and it has garnered extensive support within thecommunity, leading us to anticipate its approval. We commit to providing timely updates as theybecome available.

An additional point of interest is that Polygon has announced that MATIC holders will need totransfer their tokens to a designated smart contract to exchange them for POL tokens. Themechanism for exchanging staked tokens specifically remains to be clarified. Importantly, thereis no urgent requirement for this token exchange, as the smart contract is designed to facilitateswaps over an extended period, potentially indefinitely. It should be noted that the POL stakinglayer is not yet operational, and as such, POL tokens cannot currently be staked on the Polygonnetwork. Therefore, no action is required at this point for stakers to convert their MATIC to POL.

Governance Update - MATIC/ POLTo ensure transparency in our calculations, we define APR and volatility. APR is the annualized return of dailyrewards. The presented APRs are subject to the inherent stochasticity within each blockchain, such as theprobability of being selected to propose blocks or the rewards captured through MEV when proposing ablock. Consequently, we also provide a measure of the volatility, defined as the mean variance of the dailyAPRs over the period of data used. These metrics collectively enable the evaluation of annualised returnswithin the current state of the network and the associated volatility of these rewards.

In practice, the state of networks undergoes changes, making it insufficient to solely focus on realized APRwithout considering the likely network configurations in the future. Thus, we provide estimated projected APRs(Q2 2024) to offer insights into potential short-term future reward expectations. Expected APR is provided asan estimate of potential rewards. The expected APR and the information in this document is not intended as apromotion, offer, invitation or solicitation for the purchase or sale of any investment, nor is it intended to giverise to any other legal relations whatsoever and must not be relied upon for the purposes of any investmentdecision.

The projected APR estimates are the result of a combination of mathematical forecasting, expertise regardingupcoming network upgrades, and insights into the network's current state. While the detailed methods used toextrapolate these parameters are beyond the scope of this document, in the absence of any impendingprotocol updates, we typically employ simple regressive or ARIMA models to capture trends.For further information regarding how staking works, or for additional informationon the network’s supported by Twinstake, get in touch with us at [email protected]

Twinstake is a leading institutional staking provider which offers unrivalledknowledge and experience of the institutional market from our foundingheritage coupled with deep crypto expertise and technology from our team ofcore devs and industry veterans.Twinstake does not provide staking services to retail customers. If you do not have therelevant professional experience in matters relating to crypto asset investments, youshould not consider this document to be directed at you.

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