ETH 2 pledge mechanism
On December 1, 2020, Ethereum launched the beacon chain and began the transition from proof of work to proof of equity-Ethereum 2.0 (hereinafter referred to as ETH2) entered phase 0.
The Ethereum network will be protected by validators who pledge 32 or more ETH. The responsibilities of Ethereum 2.0 validators include processing transactions, recording transaction data, and adding blocks to the main network. Verifiers who actively and honestly perform their duties to the network will be rewarded with ETH; those who fail to perform their duties or have malicious actors will be punished And lose ETH.
One of the main purposes of ETH2 is to maintain a more decentralized network, which encourages the decentralization of power by setting a minimum pledge amount of 32 ETH per validator. With more active validators, the security of ETH2 has been enhanced. It will also make Ethereum more user-friendly, more scalable, echo the concept of a green earth, and promote carbon neutrality and environmental protection. In addition, most importantly, it allows ETH holders to receive more rewards as validators.
Features of ETH2 pledge:
- At least 32 or a multiple of 32 Ether is required
- You cannot delegate your pledge to other validators
- It cannot be extracted from the beacon chain yet
- The more Ether pledged into the network, the less rewards the pledger will receive
The beacon chain and the main network will be merged in early 2022, which will bring new changes to ETH2.
The current state of ETH2
As of the time of writing, there are more than 7.6 million ETH pledged on the beacon chain, equivalent to 28.5 billion U.S. dollars, and more than 235,000 active validators.
According to the statistics of Stingrewards, the average annual return rate of pledged 32 Ether is 5.34%, and the annual return is 1.7 ETH (about 5800 US dollars).
Distribution of ETH2 validators
From the data of Duneanalysics and Nansen, it is obvious that the validators of ETH2 are quite concentrated. The largest validator holds more than 210,000 ETH. Centralized exchanges are the main pledgers of ETH2 and have a large number of ETH2 nodes.
From the analysis results, the situation of most ETH2 participants is as follows:
Centralized exchanges represented by Kraken and Binance charge a commission of 15% or more for users who pledge ETH2.
Institutional custodians represented by Coinbase, Midas, SwissBorg and Bitcoin Suisse AG also charge more than 15% of commissions from users who pledge ETH2.
Among the staking service providers that have not yet issued tokens, Stakfish, P2P Validator, and Stakeholder charge about 10% of the commission.
For ETH2 pledge projects that have issued tokens, Lido charges a 10% commission, and Rocket Pool charges a dynamic commission. At the same time, these projects also issue ETH2 pledge derivatives to users to solve the problem of insufficient liquidity that locked ETH currently cannot be extracted from the beacon chain. And Blox is very unique, its commission rate is 0%.
User operation difficulty: Exchange> Institutional Custody> ETH2 Project> Pledge Service Provider> Independent Verifier
Asset security: Institutional custody, independent verifier>Exchange>Pledge service provider>ETH2 project
Commission rate: exchange, institutional custody> pledge service provider> ETH2 project> independent verifier
ETH2 pledge derivatives: ETH2 project>exchange
Pledge service provider=independent verifier=institution custody=0
There are many ways to pledge ETH2. “To become a verifier, you need to be able to run commands on a computer terminal. Generating a new ETH2 key pair and installing the verification software are all done on the terminal.”
Most users do not have enough ETH to meet the minimum deposit limit. If users now need to buy more ETH to pledge, there is also a risk that they will not be able to recover costs by obtaining pledge rewards. For compliance purposes, institutional custody usually requires higher pledge balance thresholds and more complicated KYC processes. Centralized exchanges are the most convenient for most users, but they charge higher commissions, and the liquidity of their ETH2 pledge derivatives is also worse than that of ETH2 pledge projects. The pledge service provided by the ETH2 pledge project is not that secure, but the ETH2 pledge derivatives they provide can also be used in other applications such as Defi, and may generate more revenue.
Each user should choose the pledge method according to his own situation and risk preference.
In my opinion, the security of assets is more important than pledge income. Failure to comply with the agreement or improper operation of the node will result in the loss of Ether. If there is a security issue with EHT2 pledge, it is possible to lose more Ether. Take SharedStake as an example, 16,000 Ether is pledged. However, due to an internal loophole, its tokens are now almost worthless.
Cream Finance has suffered multiple attacks, including flash loan attacks, re-entry attacks, DNS attacks, and suffered losses ranging from millions of dollars to tens of millions of dollars (rekt.news/cream-rekt). Therefore, ETH2 projects lacking development experience or immature technology are more risky for users. Especially the ETH2 pledge requires a longer holding time to realize the benefits. Users should be more careful and try to avoid less secure projects.
Liquidity of ETH2 pledge derivatives
ETH2 pledge derivatives are derivative tokens issued by exchanges or ETH2 projects to solve the problem of insufficient liquidity caused by ETH2 pledgers’ inability to withdraw Ether from the beacon chain.
ETH2 pledged derivatives trading volume:
Potential profit of Defi application:
Deviation from ETH anchor exchange rate:
Liquidity of ETH2 pledge derivatives:
In Curve’s LP liquidity pool, the value of ETH and stETH is approximately $4.1 billion. The average profit of liquidity providers is about 3% APY, which can get an additional 30% profit for ETH2 pledgers.
In Curve’s LP liquidity pool, the value of ETH and ankrETH is approximately $52 million. The average profit of liquidity providers is stable.
In Curve’s LP liquidity pool, the value of ETH and rETH is approximately $57 million. The trading volume is small and the average profit of the liquidity provider is very low.
In Curve’s LP liquidity pool, the value of ETH and sETH is approximately $600 million. The average profit of liquidity providers is small.
A good ETH2 pledged derivative token should be able to be used in other applications and protocols, and generate more revenue, have sufficient liquidity, and be stably linked to the ETH price. It can be seen from the above statistics that stETH of Lido and BETH of Binance meet these conditions.
ETH2 pledge project
Except for individual validators, all ETH2 pledge projects provide services for users who pledge less than 32 ETH, and some thresholds can be as low as 0.01 ETH. With 400,000 ETH inflation rewards (approximately $1.35 billion), the increase in the amount of ETH2 pledge deposit, and more pledge rewards from other PoS chains, the actual return of the ETH2 pledge project may be very surprising.
There is no doubt that ETH2 pledge can generate a lot of cash flow. The next step is to evaluate, filter and select investment targets for the ETH2 pledge project.
The ETH2 staking service provided by centralized trading and staking service providers is only part of their business, so I will not discuss these projects for the time being. If you are interested in this, you can also consider investing in some related service providers, because this is indeed a lucrative business.
Lido is by far the largest ETH2 pledge pool, accounting for 86% of the total ETH pledge of all ETH2 pledge projects. Lido also accounts for 16% of ETH2’s total pledge. 60 pledgers contributed 60% of Lido’s pledge, many of which are institutions, and they may also be Lido investors.
In a recent verification node event in Solana, the Lido team demonstrated excellent node operation skills and resource connection capabilities in the Crypto field. Assuming that Lido’s pledge amount remains the same, Lido can obtain a pledge reward of nearly 300 million US dollars, of which 5% (about 15 million US dollars) is collected by Lido, and the other 5% is given to Lido node operators. (Lido’s ETH2 pledge is not operated by Lido, but by a reputable pledge service provider.) Lido’s multi-chain pledge service is progressing smoothly, making the ETH2 pledge project more promising, and people can’t help but wonder what else they can achieve.
Lido’s fully diluted valuation is quite high, and the average cost for private investors is $0.73 per token. The team’s tokens will begin to be released in December 2021. The public sale price is between $1.4 and $1.6.
According to firstvip, the positions held by the fund are as follows:
Ankr StakeFi’s staking amount is more driven by related defi applications. Due to the launch of the defi application that can use ankrETH as the principal, the company’s pledge amount has tripled. So far, I haven’t found any documents about its commission rate and fees, but I think Ankr StakeFi mainly uses ankrETH in defi to attract pledgers and may charge higher commissions. But Ankr StakeFi is only a small part of its business, and it does not issue governance tokens. I currently have no plans to invest in Ankr StakeFi as an ETH2 pledge agreement.
Rocket Pool was originally created by David Rugendyke at the end of 2016. It allows users to earn rewards with pledges as low as 0.01 ETH and obtain pledged derivative tokens rETH.
In order to become a node operator in the agreement, at least 16 ETH must be pledged, and at least 10% of the value of the ETH must also be used as an insurance commitment in the agreement, as collateral in the RPL to prevent the node operator from being punished. Every year, 70% of Rocket Pool’s 5% inflation reward is given to node operators.
What’s interesting is that Rocket Pool’s node commission rate is not fixed. It is determined by the number of node operators and the amount of ETH available in the staking pool, which is in the range of 5-20%. The more ETH2 pledged, the higher the price of RPL. However, the insurance commitment mechanism may also restrict Rocket Pool. Currently only 10010 ETH is pledged on it.
Blox is an open source, non-custodial ETH pledge protocol created by Alon Muroch in 2018. Its predecessor was CoinDash, an encrypted asset tracking platform, a bit like Nansen and Zapper. But it was born too early to gain the favor of the market, and it has transitioned to the ETH2 pledge agreement. Blox has recently formally transformed into ssv.network, providing a way for more decentralized and trustless ETH investment. SSV uses a secure method to split the validator key among untrusted nodes or operators while maintaining node operations.
SSV is a complex multi-signature wallet with a consensus layer. It is an intermediate layer between the beacon node and the validator client. It has a “distributed key generation” process, the result is that each operator owns a single part of the private key, so no single operator can influence or control the entire private key or make unilateral decisions. Encryption methods and algorithms such as Shamir Secret Sharing, MPC and Istanbul Byzantine Fault Tolerant Consensus are used to enhance the design of SSV.
The goal of SSV is to allow untrusted individuals and groups to operate in a safer manner, optimize returns, significantly reduce risks and costs, and avoid the impact of a single point of failure of a single POS node operator on other users. The development of SSV technology not only benefits individual stakeholders and node operators, but also contributes to the large-scale decentralization of Ethereum itself.
“The core of SSV is to spread risks and reduce failures, so that a single SSV node becomes a powerful network that is superior to any single pledge service in terms of safety, robustness and uptime.” — Alon Muroch
At present, the centralized pledge of ETH2 will cause serious problems, and small incidents may cause mainnet downtime. Since more than 70% of validators use the Prysm client, client-side problems may cause lost blocks and more serious consequences. Consensys recently launched a complete ETH2 client called Teku. (For details, please refer to Eth2 Mainnet Event Review)
The use of SSV technology and ETH2 pledge decentralization is inevitable. Both Lido and Rocket Pool have chosen to be decentralized. Lido manages and controls Lido DAO, and recently announced a pledge to pledge $100,000 of LDO to Blox for research on ssv.
Rocket Pool manages the agreement through a smart contract, and the owner of the smart contract uses multiple signatures. Its roadmap also indicates that it will achieve full decentralization in the future.
Based on the above analysis, I think ssv.network will be the main component of the decentralized ETH2 pledge distribution, and it definitely deserves more attention and research.
Blox Staking ETH2 Data
Recent major events related to SSV include the upgrade of the token and the nomination of DAO multi-signature holders. The approved proposal will be implemented soon. Like Rocket Pool and Lido, SSV also cooperates with a number of well-known node operators. In a recent community conference call, the team also mentioned the sale of tokens. I think it is very likely that more and more smart institutions and strategic partners will join and enhance the brand.
SSV does not charge any commission for ETH pledge services. The pledger uses SSV to pay for the service provided by the node operator. A certain percentage of the fees collected by the operator will be allocated to the DAO library. Fundamentally speaking, the more ETH is pledged in the SSV network, the more fees will be paid to the operator and the DAO vault. The DAO will be able to use its funds to promote the growth and development of the network, thereby creating a virtuous circle of ETH inflow and SSV revenue.
Compared with competitors, the market value of SSV is surprisingly low. There are currently 1,748 active operating nodes holding 55,000 ETH, far exceeding Rocket Pool.
As can be seen from the above data:
The amount of pledged ETH/total market value:
CDT(40.34) > LDO (15.26) > RPL(0.0661)
Amount of ETH held / fully diluted market value:
CDT(21.1) > LDO(0.77) > RPL(0.0593)
LDO > CDT > RPL
According to Nansen’s statistics, 42% of CDTs are held by centralized exchanges, and there are not many whale transfers on the chain. There is no further analysis data on positions.
The ETH2 pledge project can increase the passive income of long-term ETH holders and create investment opportunities for pledged derivatives. But most importantly, the progress of ETH2 is a prerequisite for the further expansion and prosperity of the entire ETH ecosystem. We look forward to seeing a more decentralized, more environmentally friendly, and more scalable Ethereum.
It can be said that the staking limit of ETH2 is limited by the staking reward and the total supply of ETH. However, these projects can extend their scope to other non-eth chains, Defi applications, and even mev. Therefore, their value is not determined by the staking amount of ETH2, but will be adjusted to a higher level due to the huge prospects of Ethereum and the expected undiscovered application cases.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/ethereum-2-0-staking-discover-the-value-of-blox-staking/
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