This is a discussion on the economics of Ethereum staking pools. Staking pools involve the pooling of different users Eth to be staked as a whole, in order to achieve certain benefits. Custody providers like Coinbase may provide their own centralised staking service that involve pooling, for a fee. However, information on their potential service isn’t readily available.
In terms of pooling services in open development there seems to be only one. Currently the main player in this space is Rocket Pool. It has been actively publishing updates and its founders have displayed good integrity. Rocket Pool is well known with certain market participants and it seems like it will be a market leader in the space. As more pools emerge they will have different properties, and will have to be analysed separately. So the best current method for understanding the economics of Ethereum staking pools, is to analyse Rocket Pool.
There are two participants in the Rocket Pool network.
The staker who does not run a node
This user profile will include users that are: non technical, time short, have small amounts of Eth, not permanently in one location and in need the liquidity of deposit tokens.
● Setup and management (Few Clicks)
● API available on applications
● Smaller minimum Eth (1 Eth)
● Deposit Tokens (rEth) (Allows withdrawal during Phase 0 and 1 of ETH2)
● Ether refund mechanism (Node provider pays back any slashed Ether)
● RPL investment not required to participate
● Pay Fees (Unknown %)
● Trust in Node provider (Reduced by the spreading deposits over multiple nodes and the ether refund mechanism)
● Smart contract code risk (reduced by audits, etc.)
The staker who runs a node
This user profile will include users that are: technical, want an extra staking return, have free time, have amounts of Eth >16, usually permanently in one location and in need the liquidity of deposit tokens.
● Gets Fees (Unknown %)
● No fees have to be paid
● Smaller minimum Eth (16 Eth)
● Unlimited Eth on one node
● Deposit Tokens (rEth)(Allows withdrawal during Phase 0 and 1 of ETH2)
● Rocket Pools smart node software stack
● RPL investment required to participate
● Setup and Management
● Smart contract code risk (reduced by audits, etc.)
The purchase of RPL and Extra Return
In order for the staker who runs a node to access the Rocket Pool network and therefore access the benefits of it. The staker must purchase RPL. The investment cost of buying RPL and returns from doing so can be calculated. Allowing the user to see the fair value of RPL and the extra return achieved below.
● Ethereum POS rate = 5%
● Rocket Pool Fee = 10%
● An Optimum Network = To add capacity it cost 1 RPL for 1 ETH
Let’s say you have 100 Eth to stake. If we assume a Ethereum POS rate of 5%. You can stake it without Rocket Pool and earn 5%. So 5 Eth.
However, with Rocket Pool. You stake your 100 Eth and assigned 100 Eth from the pool. You earn your same 5% but also a percentage of the return of the assigned 100 Eth. So x% of 5%. x% is decided by a vote. If we assume a Rocket Pool Fee of x=10%. You will earn an additional 0.5 Eth from the assigned 100 Eth. Your return with Rocket Pool will be 5.5 Eth.
0.5 extra Eth for basically doing the same thing (Forgetting all the other benefits of using Rocket Pool). All you have to do is purchase RPL to access the network.
Now, at what price is economical to purchase RPL. Assume the Rocket Pool network is working at optimum conditions. To add capacity it cost 1 RPL for 1 ETH. A purchase 100 RPL is required.
At a market rate of ETH 1:0.1 RPL. It will cost you 10 ETH. This purchase will allow you to achieve the 0.5 extra return above.
Alternatively you can not purchase and stake the 10 ETH. The 10 ETH will give a return of 0.5 ETH.
At a market rate of ETH 1:0.1 RPL. The purchase of 100 RPL and 10 ETH have the same return. This is the fair value.
Under the assumptions, demand and supply don’t matter for fundamental valuation. All that matters is what price is it economical to join the network. Buying 1 RPL and pooling offers the same return as keeping 0.1 Eth and not pooling.
Simplifed. Rocket Pool allows you to earn an increased return, if you purchase RPL. If RPL is under a certain price, it is in your interest to purchase it.
At time of writing the 1 RPL costs 0.003 ETH. 100 RPL currently costs 0.3 ETH. Well bellow the fair value. If 0.3 Eth was staked it would produce a return of 0.015 Eth. A 5% return like our assumption shows. However, if it was used to purchase RPL it would produce a return of 0.5 Eth. A more than 100%+ return.
Can RPL be valued at higher than fair value?
Speculation can drive RPL to multiples of its fair value. All that will happen is the less people will buy RPL to join the network. The network would need more capacity as a result. The network rate (one of our assumptions) to add more capacity will drop. So instead of requiring 1 RPL to 1 ETH. The network may adjust to a rate similar to 0.65 RPL to 1 ETH, meaning less RPL has to be purchased at the higher speculation price. Making it still economical to buy and use Rocket Pool. (For further information on network dynamics please see the Rocket Pool white paper)
Hope you like my run down…
Links to further information bellow:
Rocket Pool Website https://www.rocketpool.net/
Rocket Pool Podcast Episode with founder David Rugendyke https://www.reddit.com/r/rocketpool/comments/bkacy2/token_talks_rocket_pool_interview/
Rocket Pool White Paper https://www.rocketpool.net/files/RocketPoolWhitePaper.pdf
Rocket Pool Reddit https://www.reddit.com/r/rocketpool/
Rocket Pool Discord https://discord.gg/NERuZUJ
*Rocket pool is still in development, figures and design subject to change.