Apr 1
CoinEx Institute | Liquid Staking: Unleash the Assets Value and Efficiency of Public Chain Nodes
According to incomplete statistics, the current market cap of Proof-of-Stake is $312.9 billion, and the global scale of crypto staking is worth $217.94 billion. In particular, the liquid staking market accounts for $17.23 billion, an increase of 70% compared with the figure recorded in October 2021 ($10.5 billion). The penetration rate (the number of tokens staked in liquid staking protocols divided by the total staking value) increased from 7% to 7.9%, which reflects enormous market potential.
According to growth estimations through the Messari model, the annual staking reward will reach $40 billion by 2025, and the average ROI of staking will reach 5% to 10%, which means that the total market cap of staked tokens will fall within $400 billion to $800 billion.
Decentralized liquid staking is an unexplored market with great prospects that will link markets including public chains, Ethereum 2.0 and DeFi and unleash the value of liquid capitals while making them more efficient. Today, we will review the history of PoS, analyze the new market trends, and discuss solutions to decentralized liquid staking that have risen to prominence on major public chains.
The History of Conventional Staking
Staking, one of the most popular trends in today’s crypto market, dates back a long time. As phenomenal PoS networks like EOS went live, the notion of PoS became widely known. In a PoS network, validators do not need to stock up on mining rigs to perform heavy hash operations as they used to under the PoW consensus mechanism. Instead, you only need to stake a certain number of token deposits and run project codes to become a node or validator of a PoS network, which allows you to contribute to the record-keeping process of the blockchain ledger or participate in block generation to earn block rewards and fees.
At the same time, the market has also fostered staking services for regular users who are not capable of running nodes. Such users may stake assets on a preferred validator through a centralized exchange or a decentralized wallet and share the block rewards and fees with the validator. Nodes, on the other hand, aim to improve its ranking and obtain the authority and block rewards reserved for validators by encouraging users to stake on it through their stability, the competition of delegation fees, and other services.
In a nutshell, staking happens when a user decides to lock or hold their funds in a crypto wallet to participate in maintaining the operations of a PoS-based blockchain system. Both Proof-of-Stake and Proof-of-Work share the same goal of reaching consensus while offering rewards to participants. In a PoS network, unfair competition or collusion is common between nodes and validators, covering vote-buying and rigged elections. Meanwhile, the security of a PoS network is also threatened by malicious behaviors such as the running of multiple validators by one individual.
For users, staking through a CEX is far less rewarding than decentralized staking. PoS tokens purchased on a CEX are often used by the nodes of the exchange in a PoS network. Relying on tokens from users, a CEX could become a validator and earn block rewards and fees, while other third-party validators can only purchase the tokens to be staked, which leads to cutthroat competition.
During the market downturn from 2018 to 2019, the coin-margined ROI of conventional staking ranges from 3.12% to 131.24%, which is far less than losses brought by the decline of fiat-margined markets. Essentially, such returns come from the annual inflation of PoS networks.
The Rise of New Staking Markets
However, from 2020 to now, crypto progress, such as the DeFi boom, the rise of major public chains and projects in their ecosystem, and the advancement of the Ethereum Beacon Chain, provided token holders with more ways to earn and stake tokens. According to statistics from Staking Rewards, as of March 15, the global scale of crypto staking has reached $199.891 billion; the number of stakers worldwide has exceeded 4.54 million; the annualized global rewards stand at $21.423 billion.
Should we keep the network secure through staking or engage in DeFi-Farming for high returns? This is a difficult trade-off. Even staking behaviors such as DeFi lending/borrowing, AMM liquidity, and mining rewards will deprive the original assets of their liquidity, and the loss of liquidity means the loss of value. This, coupled with the lock-up period and waiting period, takes away your control over the asset within a short period, which triggered the birth of liquid staking.
Liquid Staking
Liquid staking refers to the process through which users can gain liquidity on their staked assets. The process begins with an investor depositing tokens (i.e., ETH or other mainnet tokens) into a staking protocol that stakes the tokens on his/her behalf and then issues the investor a 1:1 tokenized version of the staked asset. The staking rewards accrue to the liquid staking token, similar to what happens with LP tokens on decentralized exchanges. Such tokens can be exchanged or used as collateral for borrowing assets. In fact, they can unlock revenue streams in addition to staking rewards. In liquid staking, tokens can be redeemed instantly, allowing investors to get back their original tokens without waiting for an unlock period. When staking tokens to mint liquid staking tokens, investors can choose a validator from those provided by the protocol they are using.
In this article, we will discuss the liquid staking solutions of the major public chains in two chapters.
1. ETH 2.0 Staking
ETH 2.0 is so technically complex that it goes beyond the reach of average users. At the same time, the minimum holding of 32 ETH is an increasingly unreachable requirement for retail investors. To shift to Ethereum 2.0 in a safe and controlled manner, staking on ETH 2.0 comes with a lock-up period of 18–24 months.
Such restrictions keep less sophisticated users out of the lucrative market of ETH 2.0 staking. Moreover, the actual yield prospects of ETH 2.0 staking are compelling. According to a model created by Ethereum researcher Justin Drake, the ETH staking APR could eventually reach 25% and maybe beyond.
1) Lido
Relying on its first-mover advantages, Lido, a leading solution to liquid staking, has built up a massive TVL and liquidity, which are both far higher than many of its peers. According to DefiLlama, Lido boasts over 33,700 stakers and a TVL of about $16.04 billion. On Lido, approximately $7.99 billion of ETH are staked (about 2.54 million ETH); roughly $7.48 billion of Terra are staked (about 84.68 million LUNA deposits); around $266.47 million of Solana are staked (about 2.89 million SOL deposits). Right now, chains and protocols including ETH, Solana, Terra, Polygon, Moonbeam, and Anchor are available on Lido.
Lido is a decentralized liquid staking solution built on Ethereum 2.0’s Beacon Chain and is governed by the Lido Decentralized Autonomous Organization (DAO). Lido aims to allow users to stake ETH without losing the ability to trade or otherwise use their tokens. Lido will be a decentralized infrastructure for issuing stETH, a liquid token, which is safer than exchange staking and has incredible flexibility compared to self-staking.
- Lido allows users to earn staking rewards without fully locking their ETH;
- Lido makes it possible to earn rewards on as small a deposit as users want without restriction on deposits different than 32 ETH;
- Lido reduce the risks of losing a staked deposit due to software failures or malicious third parties;
- Lido provides stETH as a building block for other applications and protocols (e.g., as collateral in lending or other DeFi solutions);
Realization
To bind ETH with Lido, when a user sends ETH into the smart contract of Lido, the user receives the corresponding amount of stETH tokens. stETH represents your tokenized staking deposit. These tokens could be held, traded, or sold. The total stETH balance is the sum of ETH deposited and the relevant rewards minus validator penalties.
All Lido deposits are divided by 32 ETH and then distributed to node operators that perform validation using the funds but do not have direct access to them.
Funds are deposited to the Lido protocol smart contract and then are locked into the Ethereum proof-of-stake deposit contract. The threshold signature account controlled by the Lido DAO is specified as a staking withdrawal address. On Lido, Ethereum staked can only be withdrawn when transactions and smart contracts are implemented in ETH 2.0 (scheduled at Phase 2).
Communication between the ETH 1.0 part of the system and the Beacon Chain is performed by the oracles assigned by the Lido DAO. They monitor node operators’ Beacon Chain accounts and submit the corresponding data to Lido’s ETH 1.0 smart contract.
Tokenomics
Lido makes the stETH token balance track the corresponding balance of Beacon Chain ETH. A user’s balance of stETH tokens corresponds 1 to 1 to an ETH amount a user could receive if withdrawals were enabled and instant. As the stETH balance on centralized and decentralized exchanges keeps growing, the demand for transactions has also been on the rise. Meanwhile, the token has recorded strong performance on many DeFi protocols.
For instance, the stETH balance has exceeded 650,000 on Curve.fi, a protocol that offers CRV Tokens to users who provide liquidity for its stETH-ETH pool and stake the LP Token crvSTETH they obtained. Apart from Curve, stETH has delivered high returns and features a wide range of application scenarios on protocols like the lending platform AAVE and Yearn, which is sufficient evidence of the token’s rapid growth in terms of DeFi applications.
LDO
LDO is a token granting governance rights in the Lido DAO, which manages a series of Lido protocols including ETH. The Lido DAO decides on the key parameters (e.g., fees) and executes protocol upgrades. Members of the Lido DAO manage Lido protocols to ensure efficiency and stability.
Node Capacity
Lido is a provider of liquid staking solutions for ETH/ETH2.0, as well as many other public chains. Therefore, the capacity of its nodes is key to the security and revenue of Lido and users, block generation and yields, as well as the avoidance of penalties. Lido is now working with over 22 validators, all of which are reputable node operators who have been dedicated to the industry for years, providing strong support for the normal operation of the protocol while ensuring stable returns.
Risks
With Lido approaching 20% of all validators on the Ethereum network, further capital inflows will begin to threaten the security of the Ethereum network. If the Lido protocol operates 50% of the Ethereum network validators (they may rise in the short term), the returns from stETH will not decline, but in this case, the value and security of the Ethereum network itself may suffer irreparable damage. As such, the only way forward is to channel money towards other liquid staking solutions at a lower scale.
2) Rocket Pool
As the first truly decentralized, permissionless underlying protocol for ETH 2.0 staking, Rocket Pool emphasizes the non-custodial and trustless nature of Ethereum and DeFi. According to DefiLlama and the official website of Rocket Pool, the current TVL of Rocket Pool stands at about $585 million (roughly 198,450 ETH).
Protocol and Staking as a Service
Unlike solo stakers, who are required to deposit 32 ETH to create a new validator, Rocket Pool nodes only need to deposit 16 ETH per validator. This will be coupled with 16 ETH from the staking pool (deposited by stakers in exchange for rETH) to create a new ETH2 validator called minipool. As such, as a node operator, you are staking your own 16 ETH and 16 ETH on behalf of the protocol. Of course, you can also stake 32 ETH if you’d like to. When depositing ETH, node operators must also deposit a minimum amount of RPL(Pocket Pool token) to act as collateral in case they incur any penalties.
Tokenomics
rETH is not simply 1:1 pegged to ETH. rETH represents the amount of ETH users deposited and when they were deposited. The value of rETH is determined by the following ratio:
rETH:ETH ratio = (total ETH staked + Beacon Chain rewards) / (total ETH staked)
This means that rETH’s value always effectively increases relative to ETH. The rETH/ETH exchange rate is updated approximately every 24 hours based on the Beacon Chain rewards earned by Rocket Pool node operators.
Suppose you started staking at the very beginning when 1 ETH = 1 rETH and deposited 10 ETH and received 10 rETH as a return. After a few years, the balances on the Beacon Chain grew due to validator rewards. If 128 ETH had been staked with Rocket Pool and the sum of all validator balances on ETH2 was 160 ETH, then 1 ETH would be worth (128/160) = 0.8 rETH; conversely, 1 rETH would be worth (160/128) = 1.25 ETH.
RPL token functions as the staking deposit of Rocket Pool node operators, and also the governance tokens and staking reward. Rocket Pool Protocol DAO is responsible for decision-making about parameters such as RPL inflation, RPL rewards, RPL auctions, RPL staking amount, node commissions, the min/max ETH deposit amount of rETH, etc.
Rocket Pool features two types of nodes: regular nodes and oracle nodes (nodes that form the Oracle DAO). An oracle node has to complete two oracle tasks — Validate the validator balance of the Minipool and the RPL:ETH ratio to make sure that node operators receive the right amount of RPL reward.
Oracle node operators working with Rocket Pool are primarily more decentralized node operators and DAOs.
3) Stakewise
StakeWise is also a decentralized protocol for ETH 2.0 staking. On StakeWise, the balance of ETH deposits and rewards is reflected in sETH2 (staking ETH) and rETH2 (reward ETH) minted to stakers at a 1:1 ratio.
Deposit queue: Deposited ETH first goes to the Pool contract, where it sits with other small deposits until it collects a total of 32 ETH required for a new validator. Once the Pool contract collects 32 ETH, it sends them to the Validator Registration Contract (VRC), which registers a new validator entity on the Beacon Chain.
After progressing through the activation stage in the Beacon Chain, the newly created validator starts earning rewards for stakers in the StakeWise Pool. For every ETH earned as a reward by the Pool, StakeWise mints an equal amount of rETH2, which accrues to the holders of sETH2 every 24 hours.
In conclusion, there are two types of decentralized solutions to ETH 2.0 staking: the custodial and non-custodial, and the development of both depend on the progress of ETH 2.0. After Ethereum completed its transition to ETH 2.0, the tokens and the project value migrated to the new network will all be affected. When rating an ETH 2.0 project, in addition to technical capacity and asset management skills, one should also account for its operating performance during the merge.
