Dialogue with the decentralized liquidity staking protocol Rocket Pool: How to promote the democratization of Ethereum Staking?

Before the Shanghai upgrade, ECN had the honor of inviting representatives from three important liquidity staking service providers , StakeWise, Rocket Pool and Lido, to be guests on the ECN Podcast to talk to them about the impact of the Ethereum Shanghai upgrade on Staking users and the entire industry landscape, as well as what kind of innovations and changes the upcoming large-scale upgrades of these three protocols will bring to Ethereum Staking that are worth looking forward to.

This is the second episode of the Shanghai Upgrade and Staking podcast series. We are pleased to invite Darren Langerly, General Manager of Rocket Pool. Rocket Pool is currently the only decentralized liquidity staking protocol. Darren introduced Rocket Pool's unique innovations in protocols, token models, and governance since its launch, shared his views on how to strike a balance between protocol development and Ethereum decentralization, the far-reaching impact of the Shanghai Upgrade on the Staking industry and the prediction of the direction of the Staking industry landscape, and how Rocket Pool's Atlas upgrade will greatly improve the scalability of the protocol and benefit individual node operators.

About Rocket Pool

Rocket Pool is a decentralized liquidity staking protocol. People can participate in Rocket Pool's staking in two ways. The simplest way now is to exchange ETH for rETH, which will accumulate rewards over time. When you want to exit staking, you only need to exchange rETH for ETH, and you will get more ETH than before. The other is node operation, that is, the ETH deposited by the liquidity staker needs to be matched with a node operator, and the node operator needs to pledge. When the mini pool has 32 ETH, the node operator will represent other liquidity stakers together with his own ETH to become a validator of the Ethereum network. Node operators will earn commissions on block rewards.

What’s special about Rocket Pool is that you can be a node operator in the protocol. In many other protocols, node operation is done by a group of selected node operators, but in Rocket Pool, becoming a node operator does not require permission.

Rocket Pool’s Redstone Upgrade Review

Redstone is a major upgrade for Rocket Pool that changes the way node operators get rewards. Previously, node operators could claim rewards once a month at a specific time, which was a bad experience for them. After the Redstone upgrade, node operators can claim at any time, so it becomes more flexible and simpler. A lot of its content is related to improving the quality of life of node operators.

Previously, rETH exchange also had this delay, that is, it could not be operated within 24 hours of exchanging to rETH, which actually affected the integration. In the Redstone upgrade, we removed this delay. Since then, the integration of reth has taken off.

Smoothing pool is also an important feature in the Redstone upgrade. Redstone is actually an upgraded version adapted to the Ethereum merge. After the merge, node operators actually start to receive transaction fees and MEV. Since the transaction fees and MEV vary greatly, it depends on the luck of the validator. Therefore, what the smoothing pool does is that if the node operator chooses to use the smoothing pool, all their blocks, especially the proposed blocks, will enter the smoothing pool, thereby removing this variability and everyone can get equal rewards. This feature is very popular among node operators, and 75% of the mini pools should have joined the smoothing pool.

Rocket Pool’s Liquidity Staking Token Model

Rocket Pool uses non-rebasing tokens. This requires starting with a rebasing token, which is a 1:1 anchor to ETH, and the number of tokens increases as the rewards you receive increase. So every day your balance or the number of tokens will increase. Rebasing tokens have disadvantages, which is why we use non-rebasing tokens. Non-rebasing tokens are tokens that increase in value over time relative to ETH, but the number of tokens does not change. The benefits of this model are that on the one hand, it is easier to integrate with DeFi compared to rebasing tokens because it is a standard ERC20 token; on the other hand, from a tax perspective, depending on your jurisdiction, since the number of tokens in the rebasing token increases every day, that means you have to pay taxes every day, which is not ideal. Non-rebasing tokens like reth mean that you only have to pay taxes twice, that is, converting ETH to rETH and converting rETH to ETH.

Rocket Pool Governance

How to understand Coinbase Venture joining oDAO?

First of all, we should separate Coinbase and Coinbase Venture, and it is Coinbase Venture that joined oDAO. For Coinbase, they hope that decentralized technology will become feasible, so they invest in decentralized technology, which has a great positive impact on attracting more people to the crypto world. From the perspective of venture capital, it is reasonable for them to hold a certain amount of our tokens, because investing in decentralized protocols is also investing in their brand.

What do pDAO and oDAO do respectively? Why do so many industry celebrities join oDAO?

Rocket Pool actually has two DAOs for governance, one is the Protocol DAO (pDAO) and the other is the Oracle DAO (oDAO). The members of the pDAO are our node operators. Node operators stake our protocol's native token, RPL, which they do on the one hand as collateral to protect rETH holders, and on the other hand they can also receive new RPL as a reward. But RPL itself is not a governance token, only when it is staked into the protocol. In other words, if you are a node operator, when you provide value to the protocol, you will also gain governance weight in the pDAO. The pDAO actually leads the development of Rocket Pool. Basically, everything we do, including parameter modifications and upgrades, must go through the pDAO.

Now pDAO is working well, but we don't think on-chain governance is strong enough to be a full-fledged governance, so there are several reasons for the existence of oDAO. First of all, we actually need information from the beacon chain, that is, information from the consensus layer to the execution layer, because Ethereum is actually running two chains now. So we need some trusted parties to provide this information. So oDAO is made up of these people and organizations that are very famous in Ethereum, such as etherscan, beaconcha.in, Lighthouse, Nimbus, Bankless, Anthony Sassono, and recently joined Coinbase and Gitcoin. Now oDAO has about 16 or 17 people. They provide us with information and apply for upgrades. After oDAO makes a decision, pDAO will vote whether to join the protocol.

If Rocket Pool imposes self-limits on network share, how should we evaluate the success of decentralized liquidity staking protocols and what metrics should we focus on?

TVL (Total Locked Value) is obviously the most important indicator for most DeFi projects, but it is not the most important for Rocket Pool. Of course, we also want to have a higher market share and TVL, because we don’t want centralized providers to have too high a share. We also really want to have a positive impact on Ethereum, so we value decentralized indicators such as the number of node runners and individual node runners on our protocol. We now have more than 2,000 node runners in different places around the world, and they are diverse.

The reason why we value the number of individual node operators is that Ethereum will eventually be decentralized. On the one hand, this is to improve Ethereum’s resilience, and on the other hand, it is to ensure its credible neutrality.

Therefore, institutions, organizations and even individuals on Ethereum should think about this issue. This is a risk management issue. When you look at the liquidity staking market now, the best case scenario is that multiple liquidity staking protocols have equal market share, but this is unlikely to happen. When one party has a high market share, it actually puts Ethereum at risk. This is the reason not to put all your eggs in one basket, and you also want to reduce the risk of centralization to Ethereum.

The impact of Shanghai upgrade on staking

The reason why Shanghai is important is that it fills the last piece of the puzzle for Ethereum proof of stake, because it allows node operators to withdraw their stake, which will give people who were previously hesitant to participate in staking because they didn't know when they could withdraw their stake or because of compliance issues. Another point is that before Shanghai, you couldn't take out your stake and choose another staking service provider. The reason why it's important for companies like Kraken to shut down staking is that once Shanghai is activated, you can choose the service provider you want, and now there are more options than before. So it will be interesting to see how it develops, that is, how people will reallocate their staked funds to do better risk management. So on the one hand, overall staking inflows will definitely increase, and on the other hand, the allocation of different protocols will definitely increase. In the short term, node operators may bring a little selling pressure because of taking out rewards, but from every survey we have seen, most node operators intend to continue staking. They only sell a small amount to pay taxes or some other purpose. But they will also put a large amount of rewards back into the liquidity staking protocol or stake it back to node operators.

The beacon chain has been online for more than a year. With the diversification of staking services, have users gradually matured and become more knowledgeable about choosing a staking service provider that suits them?

As I said before, the biggest change brought about by the Shanghai upgrade is actually in population distribution. People who were unable to stake before due to compliance reasons can now do so after the Shanghai upgrade. Another point is that the staking industry is maturing, but it is still in its very early stages. We expect that many new people from different regions will join the staking.

We are now just playing the role of a bridge between early adopters. As more new people come in, we will encounter new challenges and we still have a lot of educational work to do.

How do you view institutional pledge?

It depends on where institutions choose to put their ETH. If they adopt a risk management strategy and put ETH on many different protocols, it makes sense. If they prioritize decentralized protocols, then our market share will grow without the negative impact of centralized providers. Rocket Pool is currently the only liquidity staking service provider that can run nodes. If institutions choose Rocket Pool for staking, they can earn more because there are commissions in addition to staking rewards.

Will the Shanghai upgrade be a turning point for rETH to counterattack stETH?

The Shanghai upgrade was a catalyst, as was our Altas version upgrade. Right now, our node operators need 16 ETH per validator to start, plus 1.6 ETH worth of RPL. With the Altas upgrade, they actually only need 8 ETH and 2.4 ETH worth of RPL. We actually lowered the barrier to entry for node operators. We also allow mini pools that are currently 16 ETH to migrate to mini pools of 8 ETH, which will be a big boost in node operator supply. There's not a lot of comparison to Lido in this regard, because in terms of scalability, no matter how much ETH you send them, they can scale to accommodate it because they don't have to worry about decentralization or permissionless validator sets. Whereas our node operators need to have collateral when they start mini pools as protection for rETH holders, we believe you have to stake something to say it's proof of stake.

We feel that 8 ETH still provides ample protection for our rETH holders and will allow us to scale quickly. In fact, it would triple our current capacity.

rETH is in high demand and has long been trading at a premium, while other LSTs are trading at a discount. After Atlas goes live, this supply will grow rapidly. Of course, from our perspective, we don’t want to be as big as Lido is today, and we said we would limit ourselves. So far, we are happy with 2.4% market share, and we still have a lot of room for growth, which is also the direction we hope to work towards after the Shanghai upgrade.

How is the expected development of the staking industry? Is the winner-takes-all rule still valid?

I think institutions or other large ETH stakers in particular will determine the future distribution of the staking market. Staking is still very early, and players in this industry are just beginning to get their Lindy effect, that is, at least make people believe in them. More and more protocols are proving themselves, that is, they provide more alternatives, and I am willing to see the redistribution of the shares of various protocols.

Rocket Pool’s Atlas Upgrade

First, the Atlas upgrade supports withdrawals, so Rocket Pool node operators can exit and withdraw from staking.

Secondly, they can also migrate to a mini pool of 8 ETH, which is very exciting. And new node operators can also start a mini pool of 8 ETH.

Also, for individual stakers, you do not need to exit the beacon chain, you can migrate your 32 ETH validator to Rocket Pool and turn it into 4 mini pools of 8 ETH. In this way, you can also earn commissions on the Rocket Pool protocol.

Is it safe to stake 8 ETH in a mini pool? Why can I earn more commissions by staking less?

Security and earning more commissions are two issues.

First, going from 16 ETH to 8 ETH actually means collecting more commissions from more stakers. In the 16 ETH mini pool, you might have a 15% commission, which means you collect 15% commission from another 16 ETH staker. Now going from 16 ETH to 8 ETH, you actually collect 14% from another 24 ETH staker, which is a lower percentage, but it’s 14% of 24 ETH, which actually increases the commission a lot. rETH stakers pay the average commission of all node operators, and when node operators switch from the 16 ETH mini pool to the 8 ETH mini pool, the fees paid by rETH stakers will decrease. So on the one hand, node operators earn more, and rETH stakers pay less, which is actually a win-win situation.

Regarding the security of the 8 ETH mini pool, according to our analysis, 8 ETH is a very safe amount of collateral. In addition to 8 ETH, there is also RPL worth 2.4 ETH as collateral, so the node operator needs to pledge 10.4 ETH, which is enough to protect the funds of rETH stakers when Ethereum is in the most severe crisis. Even if there are black swan events such as quadratic leakage, one-third of node operators going offline, and Ethereum being unable to finalize, it will take many days to consume all the collateral of Rocket Pool due to Ethereum being unable to finalize.

That said, the 8 ETH mini pool model provides adequate protection when considering these unlikely black swan events.

Is the 4 ETH mini pool still far away?

The 4 ETH mini pool is indeed one of our goals, but we must have additional security protection when going from 8 ETH to 4 ETH. We need to discuss the priority of this goal with the community, and the research and development of the security protection required for 4 ETH is one of our future work.