Ethereum's network recently underwent the Shapella hard fork, ending a three-year wait that now permits validators to withdraw their long-staked ETH from the Beacon Chain. Within the first week, over one million ETH was unstaked. But by the second week, many validators began re-staking their Ethereum.
Greater flexibility tends to drive greater demand. In the long run, we can expect more validators to join the Ethereum network than before. This idea aligns with the Liquidity Preference Theory (LPT), an economic principle suggesting that investors prefer short-term liquidity over long-term commitments. In other words, people demand a higher yield for locking up funds for longer periods.
LPT generally holds true under normal conditions. However, it can break down during periods of market stress or disruption—similar to what we sometimes see in traditional finance with inverted yield curves.
The yield curve reflects how LPT preferences accumulate, showing the relationship between how long investors lock their capital and the returns they expect.
If we think of Ethereum as an independent economy or sovereign state, staking can be likened to government debt, and staking yield resembles the sovereign yield or risk-free rate. Similarly, protocols can be compared to "companies" with additional credit risk relative to the sovereign entity. Although Ethereum isn’t a country, and staking serves a core validation function, we’ll use the terms "yield" and "interest rate" interchangeably in this article for simplicity.
A key challenge with staking yield is its inherent unpredictability and volatility. Internally, Ethereum must balance sufficient decentralization with the number of validators. Externally, market forces and competing investment options influence the supply and demand for ETH yield.
A common question is: how does staking yield compare to the yield available on Infinity? And how would this work in a system where ETH yield already exists? To answer, we must consider non-arbitrage principles and the mathematical rules that govern financial markets.
How Does Staking Yield Compare to Infinity’s Floating or Short-Term Rates?
Infinity is an over-collateralized borrowing and lending protocol that allows users to access a full yield curve—from floating rates to fixed rates—across various maturities. It uses conservative over-collateralization to minimize credit risk, ensuring sufficient collateral even during sharp market downturns.
Staking yield is a floating rate that changes per block. Unstaking requires an exit queue that can take ~1–36 days, meaning full liquidity isn’t immediate. For this reason, staking yield is best compared to Infinity’s floating or short-term rates.
When staking yield is higher than Infinity’s rate, we expect investors to either:
i) Directly stake or lend ETH; or
ii) Borrow on Infinity and use the funds to stake ETH (using staked ETH, such as Lido’s stETH or Rocketpool’s rETH, as collateral to borrow more ETH).
The first approach requires significant capital: every $100 moved from Infinity to staking reduces lending supply. The second method allows leverage—for example, using $100 of staked ETH as collateral to borrow up to $1000 in ETH on Infinity, which can then be staked. This would push Infinity’s ETH lending rate upward until it aligns with staking yield.
If Infinity’s rate is higher than staking yield, users may shift capital from staking to lending on Infinity. This would gradually lower Infinity’s rate due to increased lending supply. However, this adjustment may be slower because users can’t directly “borrow” from the base layer (i.e., become negative validators).
Yet, with liquid staking tokens like stETH and rETH, users can effectively short staking yield by borrowing these tokens, converting them to ETH, and lending on Infinity. This arbitrage helps align rates across platforms.
In summary, Infinity’s short-term rates should logically converge with base-layer staking yields due to non-arbitrage conditions. Any persistent differences would reflect factors like market timing, credit risk, staking costs, liquidity, or other unique risks.
The Future of the Ethereum Economy
What drives staking yield? Is it ETH’s price in USD or BTC? The total supply of stablecoins? The Federal Reserve? Weather? Post-ETH2 challenges or opportunities? The variables are endless. This leads to another question: how can we reduce this volatility and lock in a fixed staking yield?
Synthetic Fixed-Rate ETH Yield
Fixed-rate staking isn’t yet native to Ethereum, but the closest alternative is fixed-rate lending on Infinity.
Interest rates allow market participants to trade, hedge, and speculate on future yields. The diversity of participants helps produce a market-aggregated, risk-adjusted estimate of future returns.
Through a combination of floating and fixed rates, Infinity lets users choose between flexible loans/ deposits and locked-in rates. Crucially, Infinity enables using positions on one part of the yield curve as collateral for other positions, allowing efficient rate trading.
Today, yield curve trading or term structure arbitrage isn’t fully possible in crypto in a theoretically sound, non-arbitrage way. While ERC-20 tokens are composable, their risks aren’t easily hedged across protocols. For example, you can’t use Aave tokens as collateral on Compound, or floating-rate tokens from Aave in fixed-rate protocols like Element or Notional. These markets are siloed.
Infinity aims to be a complete market with a capital-efficient yield curve. Users can choose fixed rates if floating rates are too low or high, and vice versa. They can also borrow at floating rates and lend at fixed rates for relative value strategies.
This seamless interaction between maturities helps the Ethereum yield curve accurately reflect real-world conditions and expectations about Ethereum’s economic future.
If Infinity’s floating rates converge with base-layer staking yields, then—through the connected yield curve—Infinity’s fixed rates become the closest estimate of synthetic fixed-rate staking yield across various maturities. This provides a way to access fixed-rate ETH yield, albeit synthetically.
We can also use the Ethereum yield curve to mathematically derive forward rates, predicting future staking yields (ignoring basis or credit risk).
Whew—that was a lot.
We’ve now synthetically replicated fixed-rate ETH yield, logically tied to expected base-layer staking returns. But most of us live in a dollar-denominated world, with salaries and expenses in USD. We still face ETH market risk.
What Can Infinity Do for USD-Based Investors Who Preve Staked ETH?
Many investors make decisions in USD and need to convert returns back to dollars. If you’re a USD-based investor, you can hedge the price and yield volatility of ETH staking by predicting future interest earnings and selling each expected ETH cash flow forward into USD via futures markets.
If you’re a hedge fund, you could borrow USD, buy ETH spot, earn fixed ETH yield, and sell ETH forwards for interest and principal. This is a type of cross-currency swap. Theoretically feasible, it isn’t yet practical because spot/futures trading happens on one platform and rate hedging on another (Infinity). Although basis differences exist between futures markets and Infinity’s rates, we’re working to bridge this gap.
This mechanism is known as a cross-currency swap, where each component—spot, futures, and interest rates—is bound by non-arbitrage conditions, specifically interest rate parity. Your net return in USD should be the same as lending USD stablecoins at a fixed rate for the same period. Any difference represents arbitrage opportunity or basis risk that may persist under certain conditions.
Thus, USD investors can gain exposure to ETH staking while hedging both yield risk and price risk. This achieves a non-arbitrage condition linking USD stablecoin yields, Ethereum yields, and Ethereum futures prices.
What if you’re a Bitcoin miner? The same logic applies. Reach out to us if you’re interested in a pilot.
What Does All This Mean?
Crypto markets are not "complete." While loosely connected, they lack logical or mathematical cohesion. Interest rates and yield curves can help change that.
Now, when USD stablecoin rates change, Ethereum futures prices and Ethereum rates can adjust instantly, impacting trading volume across both markets. Similarly, news affecting Ethereum—like protocol upgrades or adoption trends—can immediately influence USD stablecoin rates.
In essence, new information in any of these markets—ETH spot, ETH futures, ETH rates, or USD stablecoin rates—can trigger adjustments across all connected products, leading to increased trading activity.
Logically speaking, the future of Ethereum is infinite.
Frequently Asked Questions
What is Ethereum staking yield?
Ethereum staking yield is the return validators earn for locking up ETH to secure the network. It's a floating rate that changes based on network activity, validator participation, and overall market demand.
How does Infinity’s yield compare to staking yield?
Infinity’s floating rates should converge with Ethereum staking yield due to arbitrage. If staking yield is higher, users may borrow on Infinity to stake, pushing Infinity’s rates up. If Infinity’s rates are higher, users may move funds from staking to lending, driving rates down.
Can I earn fixed returns on ETH staking?
While native fixed-rate staking isn't available, Infinity offers synthetic fixed-rate exposure through its yield curve. This lets you lock in a rate for a chosen period, effectively hedging against future yield fluctuations.
What is interest rate parity in crypto?
Interest rate parity is a financial principle that links interest rates, spot exchange rates, and forward rates across currencies. In crypto, it connects USD stablecoin yields, ETH yields, and ETH futures prices to eliminate arbitrage.
How can USD-based investors hedge ETH risk?
By using futures markets to sell expected ETH cash flows forward into USD, investors can mitigate both ETH price volatility and staking yield uncertainty. 👉 Explore more hedging strategies
Is leverage possible with staked ETH?
Yes, liquid staking tokens like stETH or rETH can be used as collateral to borrow additional funds on platforms like Infinity, enabling leveraged staking positions. 👉 Learn about advanced staking methods