ETH liquid staking
Dec 12TH, 2021
Many decentralised applications run on Ethereum, a powerful open-source blockchain. There will be an enormous influx of applications that use Ethereum's immutable smart contracts to properly transfer, lend, borrow, or maintain users' funds as the decentralised finance (DeFi) sector explodes in the summer of 2020. As of the recent release of Ethereum 2.0's Phase 0 code, the network's transition to a proof-of-stake consensus mechanism had begun. The Beacon Chain is used to secure the blockchain by people (now referred to as validators) staking their ETH there, earning staking rewards proportional to the amount of tokens staked. Staking Ethereum or running one's own validator infrastructure to participate in the network consensus results in a passive income stream for users. Validators of the Ethereum 2 network are paid for attestations and block proposals. For now, there is no way to get ETH1 tokens back on the ETH1 chain, so you can't use them as you see fit. It will instead accumulate a larger and larger balance over time, but you will not be able to access it until you leave your validator.
Staking tokens through an exchange service is known as exchange staking. This allows users to stake and unstake at any time; they can withdraw their rewards, but exchanges will charge a percentage fee. But the inability of users to withdraw staked Ethereum during the early phases of Ethereum 2.0 complicates exchange staking for Ethereum. When users cannot cash out their staked coins, exchanges can only safely stake about 60% of their deposits in order to allow them to withdraw their staked coins. As a result, the reward rate from exchange staking for Ethereum 2.0 is expected to be significantly lower than that of self-staking or liquid staking.
The lack of transparency and centralization in the exchange staking process is another drawback. Exchange staking increases the risk of network centralization because users must have faith in the centralised exchange with which they are staking. It's likely that exchange staking will increase the size of the exchange's ETH holdings, which is bad news for the Ethereum ecosystem (in the eyes of some).
Staking liquid assets is a novel way to avoid the risks associated with liquidity, complexity and centralization in self-staking and exchange-staking.
It is possible to stake any amount of Ethereum and effectively unstake it without the need for transactions to be enabled. Liquid staking is an alternative to locking up a user's stake. As a tokenized derivative of the staked funds, this token can be transferred, stored and spent like a regular token. It can also be traded.
Ethereum would be deposited into a third-party application by the user. Using their own validators, this app would deposit this user's ETH into the Ethereum deposit contract and, in return, mint a representative ETH token (eg. stETH). While still earning Ethereum stake rewards with this token, users can transfer their Ethereum around as they see fit, while still maintaining their ETH liquidity.
If you're interested in staking Ethereum, Lido is a good example of a platform that allows you to do so while still earning daily staking rewards. Every day, the user's balance grows by one unit, so they can access the value of their staking rewards. This is done by staking their ETH. Through the use of stETH-ETH liquidity pools, Lido's approach also permits users to unstake at any time. It will be returned to the third party issuer once transactions are enabled in a future upgrade on Ethereum. The issuer will then return the user's original stake in ETH, as well as the rewards they earned for securing the network, to them. By trading their staked ETH tokens on the open market, users can unstake themselves from their staked tokens.
StakeWise is a staking service for Ethereum 2.0 that aims to provide users with the highest possible return. Because of our unique tokenomics and low fees, we're able to run a banking-grade infrastructure while also supporting yield farming and theoretically compound staking. Anyone with 0.001 ETH or more is welcome to join. With StakeWise, you can tokenize both your initial investment and any subsequent profits you make from staking. There are two types of sETH2 (staking Ethereum), which represent the user's deposits and rewards, and rETH2 (reward Ethereum), which represent the user's rewards. rETH2 will accumulate on your address as a reward from staking for as long as you hold sETH2 representing your deposit.
Rocket Pool is the first truly decentralised Ethereum staking pool. It was created in late 2016 using the Mauve Paper by Vitalik, which was released at the time. No matter who you are, your custom node software will allow you to run a node on our network, stake your ETH for free, and make a profit. For ETH stakers who deposit, any losses from bad nodes are shared across the network to minimise the impact on any individual user. The Rocket Pool network is built on the principles of network redundancy and decentralisation. Using this method, any potential problems and their effects are minimised.
