After years of development and waiting, Ethereum’s transition from proof-of-work (PoW) to proof-of-stake (PoS) is nearly complete and is expected to finally arrive in late Q2 or Q3 2022.
The merger will have many broad implications.
First, it promises to reduce Ethereum’s energy consumption by orders of magnitude, as the Ethereum network will no longer need intensive, energy-inefficient mining to protect itself.
The move to PoS has also reduced ETH issuance by over 90% while paving the way for future scalability upgrades such as sharding.
The impact of the merger will also be felt at the application layer , as it will facilitate the growth of Ethereum’s liquid staking services . These staking protocols remove the opportunity cost of user participation in staking, as they enable holders to earn staking benefits while still enabling users to gain access across DeFi and more broadly by issuing derivative tokens to users deploy their assets in the Ethereum economy.
Above: The ETH balance staked in the current major ETH liquidity staking protocols. Source: Dune Analytics
Liquid staking seems likely to be the winner, capturing the majority of the market, due to barriers to entry (such as collateral requirements and technical requirements, etc.), and the network effects created by the liquidity and integration of these liquid staking protocols.
Considering that $10.89 billion worth of ETH was already staked prior to the merger while depositors were (temporarily) unable to withdraw their assets, the industry (i.e. liquid staking) seems poised to grow to tens of billions in the next few years (if not hundreds of billions of words). Not to mention the emerging staking economy on other fast-growing PoS networks like Terra, Solana, and Avalanche.
While it’s still early days, the two biggest players in this rapidly growing industry right now are Lido and Rocket Pool . While this protocol offers similar products to its end users, they differ significantly in architecture, adoption, growth strategies, and the design of the native token .
Which begs the question: who will win? Which is a better investment option, LDO or RPL? (Editor’s note: LDO and RPL are the governance tokens of the Lido protocol and Rocket Pool protocol, respectively.)
Let’s try to find out.
Let’s take a look at the architectures of Lido and Rocket Pool to see the differences and trade-offs in their protocol design.
Lido is a relatively simple protocol for end users. ETH (or other PoS chain assets) holders can deposit their tokens into Lido’s smart contracts to receive stETH at a 1:1 ratio . stETH is a derivative that represents your claim to your staked ETH, which is distributed to validator nodes. stETH is an ERC-20 token that accumulates inflation (staking) rewards and transaction fees , and can be used and traded like any other ERC-20 token.
This provides users with greater capital efficiency and utility as it allows holders to earn staking yields while also being able to use the ETH they use on DeFi. When the withdrawal function of the beacon chain is enabled after the merger, stETH will be available to redeem its underlying ETH.
Although Lido is non-custodial, Lido is not a permissionless protocol . Instead, the underlying validators are selected by Lido DAO through governance , and these validators draw a portion of the revenue earned from staking. While this model increases the scalability of the protocol and minimizes complexity, and while the Lido DAO has every incentive not to act maliciously, by concentrating power in the hands of LDO token holders, it does constitute a potential centering vector.
From the user’s point of view, Rocket Pool is like Lido: holders can deposit their ETH to get rETH , which is also a derivative token based on the ERC-20 standard and represents a claim on the staked ETH .
What differentiates Rocket Pool from Lido is its process of selecting validators . The Rocket Pool protocol is permissionless , rather than leaving the decision to its token holders. Anyone can become a node operator in the network by creating a “minipool” : for this, the node operator needs to deposit 16 ETH (i.e. half of the 32 ETH requirement specified by the Ethereum protocol) , and the rest 16 ETH from user deposits . In addition, “mini-pool” operators will also need to stake at least 1.6 ETH worth of RPL tokens (10% of their staked 16 ETH) , which is used as a part of the protocol in the event of a large slashing incident on the validator node . Safe and secure .
Editor’s Note: RPL is the governance token of the Rocket Pool protocol, and can also be used to pledge into Rocket Pool nodes as a form of insurance. Specifically, these RPL tokens pledged by the “mini-pool” operator will be used as collateral. When the node operator is severely punished or slashed by the Ethereum protocol in the process of performing verification duties, it will lead to the node’s pledged deposit. With less than 16 ETH, these RPL collateral will be sold through an auction for ETH, helping to compensate the Rocket Pool protocol for these lost ETH. In return for providing this security, the protocol will reward node operators with RPL tokens through token inflation (additions) built into the protocol. The more RPL tokens staked by node operators in Rocket Pool (the upper limit is 150% of the value of their staked ETH), the more RPL token rewards they can get.
Rocket Pool’s model aligns the interests of the protocol and node operators by requiring node operators to stake RPL tokens, and minimizes trust assumptions by automating the process of joining the network.
However, this comes at the cost of reduced scalability . Unlike Lido, which can continuously distribute an unlimited amount of ETH to validators at any time , Rocket Pool growth is limited by the 16 ETH required to join the network and relies on the need to constantly have new node operators come online .
While Lido and Rocket Pool may be the same to end users , the two are fundamentally different when it comes to adding new validators to the network .
While Lido comes at the expense of an increased trust assumption relative to Rocket Pool, Lido’s model is inherently more scalable and capital efficient as validators do not need to stake users’ deposits with the validator’s own ETH collateral match.
Growth Strategy & Market Adoption
Now that we understand how these two protocols work under the hood, let’s take a look at the strategies, growth, and competitive positions of the two protocols.
Lido has experienced tremendous growth since its launch in December 2020. The protocol has amassed over 3.05 million ETH from over 33,600 unique depositors , worth about $ 10.3 billion at current prices , or about 28% of all ETH staked on the Beacon Chain . And if you look at it from the perspective of the liquid staking service market, this ratio accounts for 88.1% of all ETH pledged through the liquid staking protocol , which clearly solidifies Lido’s dominance in the field .
Above: Growth in the total amount of ETH deposited in the Lido protocol. Source: Nansen Lido Dashboard
Part of the reason for Lido’s success is its pursuit of a multi-chain expansion strategy . In addition to ETH, the protocol offers liquid staking of LUNA, SOL, KSM, and MATIC, the native tokens of Terra, Solana, Kusama, and Polygon, respectively: this diversification has allowed the Lido protocol to accumulate $ 9.66 billion worth of deposits , Among them, stLUNA/bLUNA is the largest liquid staking scheme on Terra, and stSOL is the second largest liquid staking scheme on Solana.
Above: Lido Protocol’s Total Value Locked (TVL) growth trend, in billions of dollars. Source: DeFi Llama
Thanks to LDO token incentives for liquidity providers and “bribes” to CVX holders of millions every two weeks, Lido has also managed to build a surprisingly deep liquidity for stETH on the Curve platform, at the time of writing Over $5.1 billion worth of stETH is locked in Curve’s stETH-ETH pool . This not only increases the ease with which stETH holders can redeem back to “pure” ETH, but also enhances the peg of stETH tokens to ETH and the network effects of the protocol, making stETH the largest liquid collateral derivative .
As a result, Lido has successfully integrated a lot in the DeFi space, where stETH can be used as collateral for money markets (such as Aave and Fuse) , and can also be used to mint stablecoins (such as DAI).
Rocket Pool launched in November 2021, 11 months after Lido . At the time of writing Rocket Pool has accumulated over 173,000 ETH from more than 2,300 unique depositors , or about $ 571 million at current prices . At around 5% of all ETH staked on the Beacon Chain , it lags well behind Lido but more than twice as much as its next closest competitor, StakeHound.
Above: The growth of the total amount of ETH deposited in the Rocket Pool protocol. Source: Dune Analytics
Unlike Lido, Rocket Pool chose not to pursue a multi-chain strategy — instead, the protocol chose to focus on Ethereum . While this specialization may have helped the project establish itself in this niche and make itself beloved by the Ethereum community, it ultimately limits Rocket Pool’s addressable market relative to its main competitors.
Above: As of April 6, in the ETH liquid pledge market, the proportion of ETH deposits in each liquid pledge agreement. Source: Dune Analytics
Although Rocket Pool has been live for less than 6 months, the protocol has only recently started adding rETH integrations. For example, the recently launched Curve liquidity pool rETH-wstETH has attracted over $126 million in TVL, even though the pool does not currently have any secondary incentives . If Rocket Pool can learn from Lido and provide secondary RPL token incentives and/or “bribes”, this liquidity pool will provide rETH with an opportunity to grow and deepen liquidity.
Although Rocket Pool has experienced strong growth in the months following its launch, Lido remains the clear market leader for liquid staking services on Ethereum. Furthermore, given its multi-chain focus strategy, Lido has a larger addressable market than its competitors.
Now that we understand the differences between Lido and Rocket Pool in terms of protocol design and market adoption, let’s take a look at the token design and economics of these two protocols.
Lido is governed by LDO tokens. As mentioned above, currently LDO tokens are only used for governance, and LDO token holders can decide the node operator in Lido, and can also decide how the fee income of the protocol is distributed between the Lido DAO treasury and the node operator distribute. Although the protocol has generated $ 21.2 million in revenue over the past year , none of this revenue is currently distributed to LDO token holders, as the 10% of the staking reward revenue Lido protocol charges users is paid to node operators and the agreement’s slashing insurance fund (slashing insurance ) . (Editor’s note: The Lido protocol’s slashing insurance fund is controlled by Lido DAO, and is mainly used to supplement the user’s income and even the principal when the Ethereum verifier is punished. )
While Lido has an excellent foundation, the LDO token currently faces a lot of resistance in its pursuit of sustainable value capture. For example, due to the lack of utility of the LDO token in the protocol , there is no natural demand for the token . Additionally, because the LDO token is used to incentivize liquidity and pay “bribes,” the token naturally faces selling pressure from yield farmers and token holders seeking to lock LDO to capture yield .
This lack of demand to offset LDO token inflation (additional issuance) suggests that when the token does not have narrative tailwinds (such as the current narrative about the upcoming Ethereum merger) , its value may be difficult to maintain . We may have seen the first signs of this trend. While the LDO token has outperformed RPL in Q1 2022 (up 88% for the former and 40% for the latter), LDO is still 48% below its all-time high at the time of writing, while its competitor Rocket Pool ’s native token RPL was 41% lower.
Like the LDO token, the RPL token is used for governance. However, as mentioned earlier, RPL tokens are used as slash insurance , i.e. node operators need to stake 1.6 ETH worth of RPL tokens to participate in the network.
This provides utility to the RPL token and ties the demand for the token to the growth of the Rocket Pool protocol. As more and more users deposit ETH into Rocket Pool and more node operators go online, there will be a correspondingly large amount of RPL tokens that need to be pledged. This use case positions the RPL token as a commodity token with utility (and governance) rather than a pure crypto-native stake like the LDO token. This utility helps alleviate inflationary pressures on RPL (inflation of RPL tokens is paid as a reward to node operators who stake RPL tokens) , making staking on the network more attractive.
While Lido has incredibly strong fundamentals and seems likely to ride on the narrative tailwind of an Ethereum merger, LDO in its current form may struggle for an extended period of time due to the LDO token’s lack of utility and buying pressure keep value.
Additionally, Rocket Pool has a more valuable token design, and RPL benefits from demand and organic buying pressure commensurate with its network growth.
write at the end
Both Lido and Rocket Pool will be the main beneficiaries of the liquid staking boom.
While Rocket Pool’s design is optimized to minimize trust assumptions, and the protocol’s focus solely on Ethereum may solidify its position as the top player in the space, Lido has great potential in terms of scalability, growth strategy, and competitive positioning. obvious advantage.
Still, Rocket Pool has a more valuable token design that benefits from organic demand for the token as usage of the protocol grows, while LDO tokens may struggle with inflation without natural buying pressure to offset inflation.
This leaves us with an interesting conclusion – while Lido may be a more successful product, it may not be a better investment option than RPL.
Experienced crypto investors have learned time and time again that protocol tokens are two different things from the protocol itself.
Will this continue?
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/comparison-of-lido-and-rocket-pool-how-to-choose/
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