Ethereum’s 3% Yield Plunge – Is ETH Surrendering the On-Chain Returns War?

Ethereum's yield just cratered below 3%—a gut-check moment for DeFi's golden child. Suddenly, parking cash in traditional finance's dusty savings accounts doesn't sound so ridiculous.

The yield bloodbath

Network activity flatlining? Validators fleeing like rats from a sinking ship? ETH's once-mighty yield engine is sputtering while competitors rev their APY marketing machines.

DeFi's brutal truth

When the 'ultra-sound money' narrative collides with single-digit returns, even diamond hands check CoinMarketCap twice a day. Meanwhile, Wall Street quants smirk into their overpriced lattes—another crypto 'innovation' outperformed by T-bills.

Last stand or new paradigm?

Ethereum either reinvents on-chain value capture... or becomes the AOL of Web3. The chain that brought you 'programmable money' now struggles to outpace a basic CD. Game on.

Source: Glassnode

A significant portion of long-term investors, confident in the network’s fundamentals, have their ETH parked in staking.

At the time of writing, 34.9 million ETH, or 29% of the circulating supply, were participating in the Proof-of-Stake consensus.

Source: Beaconcha.in

Alongside the growing amount of ETH staked, the Ethereum staking reward has fallen since 2023. On the 17th of June, this rate was at 2.987% per annum.

This is for the consensus staking rewards, not the execution layer. By design, as more ETH is staked across the network, the reward per validator will diminish.

Source: Staking Rewards

Other chains seem to offer a higher reward rate, for example, Solana [SOL] at 7.54%, Polkadot [DOT] at 11.82%, and Cosmos Hub [ATOM] at 20.2%.

However, these networks have much higher inflation than ETH, with solana at 4.5%, and Polkadot at 7.78%. Compared to just 0.7% inflation for Ethereum, these alternative chains were not as big a challenge as other protocols.

Yield-bearing stablecoins, DeFi lending protocols earn more

Holding stablecoins such as UST or USDC does not earn the holders passive income. Yield-bearing stablecoins let users hold a dollar-pegged asset while earning passive income.

Ethena’s staked USDe [SUSDE], one of the leading yield-bearing stablecoins by market cap, has a current yield of 5.81%. Historically, it has delivered some of the highest returns, ranging from 10% to 25% APY.

Source: Stablewatch

Leading DeFi lending protocols such as Aave [AAVE], MakerDAO [MKR] (now rebranded to Sky), and Compound [COMP] earn by letting users (lenders) deposit their crypto into a “liquidity pools” on the platform.

Other users (borrowers) can take out loans from these pools by using crypto as collateral.

At the time of writing, AAVE staking has a reward rate of 4.63%, beating ETH’s 3%.

The higher return can attract users to DeFi lending platforms over directly staking ETH. Yet, that does not mean Ethereum is losing, as these DeFi products are built on the Ethereum network.

Their increased adoption and usage will drive Ethereum network adoption and boost transaction fees, bolstering ETH’s long-term value.

Source: DeFiLlama

This was seen in the whopping 55.8% share of the total value locked (TVL) in Ethereum. Compared to other chains, Ethereum was still a leader in the DeFi space, even if its direct staking rewards might be a little underwhelming.