ETH2 Staking | Discovering the Value of Bloxstaking(CDT)

ETH 2 Staking Mechanism

On December 1st, 2020, Ethereum began its transition to proof of stake (PoS) from PoW by launching the Beacon Chain. Phase 0 of ETH2 started. The Ethereum network will be secured by validators who stake 32 ETH. The responsibilities of ETH2 validators include processing transaction, recording transaction data, and adding blocks to the mainnet. Validators who actively and honestly perform their duties to the network will be rewarded with ETH, and validators who fail to perform their duties or act maliciously will be penalized and lose ETH.

One of the main purposes of ETH2 is to maintain a more decentralized network and it encourages decentralization of power by setting the initial deposit amount as 32 ETH for each validator. It enhances security of blocks by having more active validators. It also makes it more convenient for users to participate and makes Ethereum more scalable, as well as to echo the concept of green planet, promote carbon neutrality and environmental protection. Also, most importantly, it allows ETH holders to get more rewards as validators.

Features of ETH2 Staking:

① Need at least 32 ETH or multiples of 32 ETH

② Cannot delegate your stake to other validators

③ Cannot withdraw from the Beacon Chain yet

④ Lesser rewards will be earned with more ETH staked in the network

The Beacon Chain and the mainnet will merge in early 2022, which will bring new changes to ETH2.

Status Quo of ETH2

As of the date of writing this article, there are more than 7.6 million ETH staked on the Beacon Chain, equivalent to a stake of 28.5 billion U.S. dollars, and with over 235,000 active validators.

beaconcha.in
dune.xyz/hagaetc/eth2–0-deposits

According to the statistics on Stakingrewards, average annual reward rate of staking 32 ETH is 5.34%, with the annual earnings of 1.7ETH (about $5,800).

stakingrewards.com/earn/ethereum-2–0

Distribution of ETH2 Validators

It is obvious from the data on Duneanalysics and Nansen, ETH2 validators are rather centralized. The largest validator staked over 210,000 ETH. Centralized exchanges became major stakers of ETH2, owning large amounts of ETH2 nodes.

A glimpse of most participants of ETH2 staking from analysis:

Centralized exchanges, represented by Kraken and Binance, charge about 15% or more commissions from users for ETH2 staking.

Institutional custody, represented by Coinbase, Midas, SwissBorg, and Bitcoin Suisse AG, also charge more than 15% commission from users for ETH2 staking.

Among the staking service providers who have not yet issued tokens, Stakefish, P2P Validator, and Stakewise charge about 10% commission for their staking services.

For the ETH2 staking projects that have issued tokens — Lido charges a 10% commission, and Rocket Pool charges dynamic commissions. At the same time, these projects also issue ETH2 staking derivatives to users, so as to solve the illiquidity of the locked ETH as it cannot be withdrawn from the beacon chain yet. Blox is quite unique compared to the others, its commission rate is 0%.

User Operation Difficulty: Exchanges > Institutional Custody > ETH2 Projects > Staking Service Providers > Solo Validator

Asset Security: Institutional Custody, Solo Validator > Exchanges > Staking Service Providers > ETH2 Projects

Commission Rate: Exchanges, Institutional Custody> Staking Service Providers > ETH2 Projects > Solo Validator

ETH2 Staking Derivatives: ETH2 Projects > Exchanges

Staking Service Providers = Solo Validator = Institutional Custody = 0

There are multiple ways of ETH2 staking. “To become a validator, you will need to be able to run commands in the terminal on your computer. Generating your new Eth2 key pairs and installing the validator software are both done in the terminal.”

Most users no not have enough ETH for the initial deposit. There is also a risk of not being able to retrieve cost by getting staking rewards if a user needs to buy more ETH now just to stake.

Institutional custody often requires higher thresholds of deposit balance and more complicated KYC process for compliance purposes.

Centralized exchanges are most convenient for most users but charge higher commissions and their ETH2 staking derivatives have less liquidity than those of ETH2 staking projects.

The staking service provided by ETH2 staking projects are not as secured, but its ETH2 Staking derivatives may also be utilized in other applications such as Defi and potentially generate more yields.

Every user shall choose staking methods based on his/her own situation and risk preferences.

In my opinion, security of assets is the priority compared to staking yield. Unable to follow protocols and improper operation of nodes will result in slashing and loss of ETH. If a security problem occurs with EHT2 staking, there is a chance of losing way more ETH. Take SharedStake as an example. There are 16,000 ETH staked. However, due to an insider exploit, its token now is almost worthless. (Read more at Medium.com/immunefi/sharedstake-insider-exploit-postmortem-17fa93d5c90e)

Cream Finance has had multiple attacks, including flash-loan attacks, reentrancy attacks, DNS attacks, and has suffered losses ranging from million dollars to dozens of millions (Read more at rekt.news/cream-rekt). Therefore, ETH2 projects which have exploit experiences or are not as technologically sophisticated or are way riskier for users.

Particularly, as ETH2 staking requires longer holding period before realizing any gain, users should be more careful and try to avoid less safer projects.

Liquidity of ETH2 Staking Derivatives

ETH2 staking derivatives are derivative tokens issued by exchanges or ETH2 projects, in order to solve the illiquidity issue as ETH2 stakers are not able to withdraw from the beacon chain yet.

Trading Volume of ETH2 Staking derivatives: stETH>BETH>crETH2>ankrETH>gETH>STETH

Potential Profits from Defi applications: BETH>ankrETH>stETH>rETH>sETH>BETH

Deviation from Peg: crETH2>gETH>ankrETH>BETH>stETH

Liquidity of ETH2 Staking derivatives: BETH>stETH>crETH2>ankrETH>geth

Coingecko

There is about $4.1 billion worth of ETH and stETH in its LP liquidity pool on Curve. The average liquidity provider profit is about 3% APY, which can be an additional 30% profit for ETH2 stakers.

There is about $52 million worth of ETH and ankrETH in its LP liquidity pool on Curve. The average liquidity provider profit is stable.

There is about $57 million worth of ETH and rETH in its LP liquidity pool on Curve. The trading volume is very little, and the average liquidity provider profit is low.

There is about $600 million worth of ETH and sETH in its LP liquidity pool on Curve. The average liquidity provider profit is little.

A good ETH2 staking derivative token should be able to utilized in other applications and protocols and generate more yields, has sufficient liquidity and stably pegged to the price of ETH. From the statistics above, we can see that stETH of Lido and BETH of Binance meet checked these boxes.

ETH2 Staking Projects

Except for solo validators, all ETH2 staking projects provide services for users staking less than 32 ETH, some of the threshold can be as little as 0.01ETH. With 400,000 ETH inflation rewards (approximately $1.35 billion), increased amount of ETH2 staking, more staking rewards from other PoS chains, the actual return of ETH2 staking projects can be very surprising.

Undoubtedly, ETH2 staking is capable of generating large amount of cash flow. Next step is to evaluate, screen and pick investment target from the ETH2 staking projects.

ETH2 staking services provided by centralized exchanges and staking service providers are only part of their business so I will not talk about these projects for now. If you are interested in it, can also consider investing in some of the staking service providers as this is indeed a lucrative business.

Lido (LDO)

Lido is so far the biggest ETH2 staking pool, it takes up 86% of total ETH staked by all the ETH2 staking projects. Lido also constitutes 16% of total ETH2 staking. 60 stakers contribute 60% of Lido deposits, among which many are institutional stakers, who are probably investors of Lido too.

In a recent incident with Solana’s validating nodes, Lido team has showed excellent node operational skills and resourceful connections in crypto. Suppose its staking amounts stay the same, nearly $300 million staking rewards can be captured through Lido, of which 5% (approx. 15 million) is charged by Lido, another 5% is for Lido’s node operators. (Lido’s ETH2 staking is not operated by Lido, but operated by reputable staking service providers.) Lido’s multi-chain staking services have progressed smoothly, which makes ETH2 staking projects more promising and makes people wonder what more they can achieve.

Lido’s fully diluted valuation is quite high. Private investors’ average cost is $0.73 per token, with one-year linear vesting following one year cliff. Team’s tokens start to unlock in December 2021. Public sale prices are from $1.4-$1.6.

According to firstvip, funds’ holding positions are as follows:

Ankr StakeFi

Ankr StakeFi’s staking amounts are more driven by relevant defi applications. Its staking amount has surged twice due to launch of defi applications in which users can use ankrETH as principal. So far I have not yet found any document on its commission rate and fees, but I think Ankr StakeFi attracts stakers mainly by utilization of ankrETH in defi applications. It probably charges a higher commission. But Ankr StakeF is only a small part of Ankr’s business and there is no governance token issued. Currently I have no plan of investing in Ankr StakeFi as a ETH2 staking protocol.

Rocket Pool

Rocket Pool was originally started in late 2016 by David Rugendyke. It allows users to earn rewards on deposits as low as 0.01 ETH and receive a staking derivative token rETH. In order to become node operator in the protocol, a minimum of 16 ETH needs to be staked and a minimum of 10% of that ETH’s value must also be staked in RPL as an insurance promise to the protocol, as collateral in case the node operator is penalized or slashed. Each year, 70% of the 5% inflation rewards of Rocket Pool protocol is awarded to node operators.

Rocket Pool Dashboard

What’s interesting about Rocket Pool is that its node commission rate is not fixed. It is determined by the number of node operators and the amount of ETH available in the deposit pool. It can range from 5–20%. With more ETH2 staking amount, price of RPL will go higher. But the insurance promise mechanism might also set limits to Rocket Pool. Currently there is only 10,010 ETH staked on it.

desmos.com/calculator/mkbg05o7xz

Blox

Blox is an open-source, non-custodial ETH staking protocol created by Alon Muroch in 2018. Formerly known as CoinDash, a crypto asset tracking platform, a bit like Nansen and Zapper but was born too early to obtain favor from the market and has transitioned into an ETH2 staking protocol. Blox has recently officially transformed into ssv.network, which provides gateway to a more decentralized and trustless ETH staking. SSV uses a secure and robust way to split validator keys among non-trusting nodes, or operators, and at the same time maintain node operation.

SSV is a sophisticated multi-signature wallet with a consensus layer. It is a middle layer that comes between a beacon node and a validator client. It has a “Distributed Key Generation” process which results in each operator owns a single portion of the private key, so that no single operator can affect or have control over the entire private key or make unilateral decisions. Encryption methods and cryptography algorithms, namely Shamir Secret Sharing, Multi-Party Computation (MPC) and Istanbul Byzantine Fault Tolerance Consensus are also applied to robustify SSV design.

SSV aims to allow operation among non-trusting individuals and groups, in a more secured way, and to optimize rewards and significantly lower risks and costs, as well as to avoid the influence of a single failure of a single POS node operator on other users. Developing SSV technology is not only beneficial to individual stakers and node operators, but also contributes to large-scale decentralization of Ethereum itself.

SSV, at its heart, is a way to decentralize risk and reduce failures by making individual SSV nodes become a robust network that can outperform any individual staking service in security, robustness, and uptime.Alon Muroch

The current centralized staking of ETH2 will cause serious problems where small incidents could lead to mainnet downtime. With over 70% validators using Prysm client, issues with the client could lead to missing blocks and more serious consequence. Consensys has recently launched a full ETH2 client built called Teku.

Read more at Eth2 Mainnet Incident Retrospective:medium.com/prysmatic-labs/eth2-mainnet-incident-retrospective-f0338814340c

The adoption of SSV technology and decentralization of ETH2 staking is inevitable. Both Lido and Rocket Pool choose to move toward decentralization. Lido is managed and controlled Lido DAO, and has recently announced to commit $100K in LDO to Blox Staking for the research of SSVs.

snapshot.org/#/lido-snapshot.eth/proposal/QmTM4MUMyLLFpP1GWY92muTML6LcEwrnUA56uuVWzWjD4q

Rocket Pool manages the protocol by smart contracts, owners of which use multisig for signing. Its roadmap also indicates that it will achieve full decentralization in the future.

Based on the above analysis, I believe ssv.network will be a major component of decentralized ETH2 staking and definitely worth more attention and research.

Blox Staking ETH2 Data

Recent major events with SSV include the token upgrade and nominees for the DAO’s multisig holders. Approved proposals will be carried out soon. Just like Rocket Pool and Lido, SSV is also working with multiple reputable node operators. In a recent community call, team also mentioned there will be token sales. I think it’s very likely that more and more smart and resourceful institutions and strategic partners will be onboard and boost up the branding.

SSV does not charge any commission for the ETH staking service. Stakers use SSV to pay for the service provided by node operators. A percentage of fees collected by operators will be allocated to the DAO treasury. Fundamentally, the more ETH is staked in the SSV network, the more fees will be paid to operators and the DAO’s treasury. The DAO will be able to use its treasury for promoting the network’s growth and development efforts thus creating a positive cycle of ETH inflows and $SSV revenue.

The market cap of SSV is unexpectedly low, compared to its competitive. Currently there are 1,748 active operating nodes, with 55,000 ETH staked, which is an amount much more than that of Rocket Pool.

From the numbers above:

Staked ETH Amount/Market Cap: CDT(40.34) > LDO (15.26) > RPL(0.0661)

Staked ETH Amount/Fully Diluted Market Cap: CDT(21.1) > LDO(0.77) > RPL(0.0593)

Token Liquidity: LDO > CDT > RPL

According to statistics on Nansen, 42% of CDT are held in centralized exchanges, and no many on-chain whale transfers. There is no material for further analysis on holding positions.

nansen.ai

Conclusion

ETH2 staking projects can improve passive income of long-term ETH holders and create investment opportunities for staking derivatives. But most importantly, the progress of ETH2 is a prerequisite for the further expansion and flourish of the whole ETH ecosystem. We await to see a more decentralized, more environmental-friendly Ethereum with much higher scalability.

One could say that the ceiling of ETH2 staking is limited by staking rewards and the total supply of ETH. Nevertheless, these projects are able to extend their scope to other non-eth chains, Defi applications, and even MEVs. Hence, their value is not determined by the amount of ETH2 staking, but because of huge prospect of Ethereum and anticipated yet undiscovered use cases, to be adjusted to a much higher altitude.

NO INVESTMENT RECOMMENDED AND THIS ARTICLE DOES NOT OFFER ANY INVESTMENT ADVICE.

References:

Ethereum 2.0 Annotated Specification

https://benjaminion.xyz/eth2-annotated-spec/phase0/beacon-chain/#introduction

Eth2 Mainnet Incident Retrospective

https://medium.com/prysmatic-labs/eth2-mainnet-incident-retrospective-f0338814340c

Secret Shared Validators on Eth2

https://medium.com/coinmonks/eth2-secret-shared-validators-85824df8cbc0

Ethereum Proof-of-Stake Consensus Specifications

https://github.com/ethereum/consensus-specs

Ethereum Sharding Research Compendium

https://notes.ethereum.org/@serenity/H1PGqDhpm

https://launchpad.ethereum.org/en/faq

launchpad Validator FAQs

What’s New in Eth2

https://hackmd.io/@benjaminion/eth2_news

The Ethereum Consensus Layer (Eth2)

https://www.bloxstaking.com/documents/eth2/#validator-keys

Ethereum’s research

https://ethresear.ch/

https://www.chainnews.com/articles/782792661526.htm

Mint Ventures :Lido Finance:

https://www.chainnews.com/articles/900825198428.htm

MEV in eth2 — inequality & attack vectors analysis

https://github.com/flashbots/mev-research/blob/main/FRPs/FRP-15.md

https://docs.ssv.network/

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