Ethereum to PoS imminently: In-depth analysis of the Staking track and representative projects
Research institute: Mint Ventures
Researcher: Flying Little Toe
Data update time: 2022–03–24
About #trackscan
This research report belongs to the #trackscan series of Mint Ventures. Compared with the #deep research report series which conduct comprehensive analysis of individual projects, the focus of the #trackscan series is to focus on the development trend of the track and to find representative projects for horizontal comparison, so as to grasp the dynamics and potential projects of each track in the crypto business.
This is also our new attempt. Welcome to leave your feedback in the message area.
This issue of #trackscan focuses on the staking track.
Before officially starting the content of this article, we first clarify several concepts mainly involved in this article:
· Node Operator: Specifically refers to the operator that runs nodes on the blockchain. They need to use devices to run the client side of the blockchain, stay online, and maintain the consensus of the blockchain.
· Liquid Staking Provider: A service provider who gives users a staking derivative after users stake so as to solve the liquidity problem of PoS staking. They may run nodes specifically (such as Kraken and Binance) or not (such as Lido, Rocket Pool, and Stader).
· STaaS Service Provider (Staking as a Service, in order to avoid confusion with SaaS, we use STaaS instead): refers to all service providers that provide users with staking services in a broad sense. We will hereinafter be referred to as STaaS service providers, and the services they provide to users will be referred to as STaaS for short.
Based on the above concepts, this article classifies the main entities as follows:
1. Track overview
The consensus layer of blockchains is clearly shifting from PoW (Proof of Work) to PoS (Proof of Stake) in recent years. As Ethereum shifts from PoW to PoS in the next six months (with a high probability), only BTC, DOGE, and LTC will still adopt PoW consensus among the top 15 public chains in market cap, while most of the rest public chains will adopt PoS consensus. At present, the top 10 PoS public chains in staking amount have staked more than US$180 billion in total, and they can obtain an average staking yield of more than 7%.
For the blockchain that adopt the PoS mechanism, maintaining a stable stake ratio is the healthiest for the protocol. Because when the stake ratio is too low, an attacker needs to pay a low cost to conduct a 51% attack, which will endanger the security of the protocol. However, if the stake ratio is too high, it will reduce the (actual) circulating rate of tokens, which is not conducive to the construction of the public chain ecosystem.
Therefore, each blockchain generally uses a set of dynamic adjustment algorithms to motivate token holders to adjust the stake proportion to a proportion that the public chain considers relatively appropriate. From the above figure, we can also see that the stake ratio of the top ten PoS chains ranges from 30% to 80% (BNB Chain is relatively special).
Regardless of which PoS public chain, it is complicated and not easy for ordinary investors to independently become a node to stake. Becoming a node usually requires relatively high equipment and network requirements, knowledge reserve requirements for the operating mechanism of the chain itself, requirements for the number of public chain tokens held (Terra only rewards the top 130 nodes, and BNB chain only rewards the top 21 nodes) as well as operation and maintenance capability requirements. All of these requirements make it difficult for ordinary users to directly participate in staking, which is not conducive to the overall security and decentralization of the chain.
In fact, since a relatively high asset stake rate is beneficial to the security of the chain itself, most PoS chains support the original delegate staking of the chain. That is, ordinary users are allowed to directly delegate their voting rights of their tokens to an address (validator), and this validator will maintain network consensus (and earns rewards) on their behalf.
Naturally, as some institutions with professional operation and maintenance equipment, knowledge, experience and sufficient funds, they began to provide the delegate staking service to ordinary users, i.e., STaaS services. They usually charge 5%-15% of user staking rewards as a reward for their services. The following are node operators with over US$1 billion in collateral:
It can be clearly seen that, except for Neutrino, Flow Team, which only serves the Waves chain, and Orion.money, which only serves the Terra chain, most node operators provide services to all PoS networks. This is because although each PoS network has high requirements for node operation, there is little difference between different chains. As a node operator with equipment, manpower and professional knowledge, its marginal cost of serving one more network is not high, but its marginal profit is high because it can meet the interest generation demand of diversified tokens in the hands of its users.
In addition, we can also see that node operators can be roughly divided into two categories: one is centralized exchanges represented by Kraken, Binance and Bitcoin Suisse AG. Because in the context of exchange business, it is reasonable for these centralized exchanges with a natural liquid PoS asset reserve to provide PoS staking services to users:
· From the demand side, there is a solid and stable demand: users’ idle assets in the exchange have a safe and stable place to earn interest. The inflation rewards that PoS chains offer to keep the network running can almost be seen as a risk-free interest rate in the crypto field. Compared with other investment types, its capital requirements are low, the risk is relatively small, and the annualized rate of return is usually between 5% and 15% (not particularly low).
· It is also easy to operate, because the exchange itself has relatively professional knowledge reserves and equipment resources with a good understanding of all public chains. The user assets are originally in custody and stored in the wallet of the exchange, and the user-end interaction is also very easy.
The second type is non-custodial node operators represented by Everstake, Allinnodes, and Infstones. Most of them have a large number of staking facilities, usually supporting multiple PoS chains, which have boomed in recent years.
Although the stake track is a blue ocean track, the price competition between different non-custodial STaaS service providers is fierce due to the almost completely homogeneous services provided by node operators. From the rate table below, we can see that non-custodial STaaS service providers charge much less than centralized exchanges.
In addition, node operators are also occupying the market through differentiated pricing methods. For example, Allinnodes, which currently ranks third in total staking amount, has won a lot of larege stakers by changing the charging method of some assets to monthly charging (when the market needs to occupy the market through differentiated pricing strategies, it may indicate that the market has become saturated).
The reason behind this is not difficult to understand. Due to the simple business model, the services provided by different STaaS service providers are standardized and homogeneous, and even the user operations are exactly the same (users manually fill in the address of the node operator as a delegate staking node). Users have no loyalty among node operators, and the convenience of delegate staking also makes the switching cost of users extremely low. The vast majority of users who are not sensitive to charges are split by centralized exchanges or later liquid staking service providers.
In addition, perhaps because the business and cash flow are too clear, or perhaps for legal reasons, node operators mostly raise capital in the form of equity (for example, as early as 2019, Staked received an investment of US$4.5 million, which was led by Pantera and followed by Coinbase Ventures, DCG and other co-investors. Finally, it was acquired by Kraken at the end of 2021.). This also makes it impossible for them to better incentivize the further development of their business in the form of tokens.
In this context, we believe that STaaS is likely to evolve into a refined competition for brand, user experience and cost control, similar to the consumer credit service of web 2. As a result, the rate that users need to pay will gradually decrease, and the proportion of yields that node operators can earn will gradually decrease too. At the same time, liquidity staking service providers will further erode the profit margins of node operators in the long run (we will analyze it in detail in the “Lido” section).
In addition, the PoS mechanism of Ethereum is far from other chains. Most of the objects we can invest in the staking track come from the segment track of ETH staking, so it is necessary for us to briefly introduce the PoS of Ethereum.
1.1 Introduction to staking on the consensus layer of Ethereum
On December 1, 2020, Ethereum officially started the transition from PoW to PoS by launching the Beacon Chain.
In the roadmap of Ethereum, we can see that the London upgrade and the Altair upgrade have been completed. The next “Merge” is the merger of the PoS chain and the PoW chain, which is expected to be completed (most likely) in 3–6 months. After the “Merge” is completed, Ethereum will be converted into PoS consensus. But the difference between Ethereum and other PoS public chains is that
1. It does not support in-protocol way to delegate stake.
2. The maximum staking size of a node is 32 ETH.
3. Since the PoS chain and the PoW chain have not yet merged, the current ETH can only be stored from the PoW chain to the PoS chain (Beacon Chain) in one direction and cannot be retrieved. This means that the users who deposited early will lose their liquidity (in fact, if users deposit ETH on the day the Beacon Chain opens on December 1, 2020, they have lost the liquidity of this part of ETH for 16 months).
The first two differences are mainly due to Ethereum’s insistence on decentralization. Ethereum does not want a situation where a large single entity controls the development of Ethereum by controlling a large node. The third point is an inevitable part of the historical process of PoW to PoS.
In this context, a series of liquid staking service providers represented by Lido Finance and Rocket Pool have emerged quickly. They issue ETH derivatives (such as Lido’s stETH, Rocket Pool’s rETH, Ankr’s ankrETH, etc.) to ETH deposited in their contracts, meet the liquidity needs of users after staking by encouraging the liquidity between ETH derivatives and ETH, and meet the interest generation needs of users for ETH derivatives thought the integration of ETH derivatives and other DeFi protocols. Some centralized exchanges like Kraken and Binance have also adopted a similar solution, and both have set up “ETH staking certificate”- trading pairs to meet the liquidity needs of users.
This liquidity staking solution does not lose liquidity or even opportunity costs (some ETH derivatives can also be borrowed, and interest can be generated). Compared with users’ self-staking or staking through node operators, it has obvious advantages. Therefore, the liquidity staking solution has quickly become the first choice for ordinary users to participate in ETH staking.
At present, Lido, Kraken, and Binance, which rank top three in ETH staking amount, all provide users with liquid staking services.
Another thing worth mentioning about Ethereum’s PoS is MEV (Miner Extractable Value).
After the launch of EIP-1559, the gas fee paid by users is divided into two parts: Base fee and Priority fee. The Base fee will be burned directly, and the Priority fee will be obtained by miners. After switching to PoS, the Priority fee paid by the user will be obtained by the stakers, that is, the ETH stakers will benefit from the user’s transaction.
At present, it is unclear how MEV is allocated among ETH staking users, node operators and even liquidity staking service providers. But in the long run, under the open competition, more and more MEV will flow to the users who stake ETH themselves.
Flashbots has established the “ETH2 Working Group”. According to their research article published eight months ago, when there are 8 million ETHs staked, MEV will increase the staking reward by 60% on the original basis (the current amount of ETH staked is 10.78 million, source: https://hackmd.io/@flashbots/mev-in-eth2)
In addition, there is also speculation that when 13 million ETH is staked, MEV will increase the staking yield of Ethereum from 4.6% to 9.6% (source: https://docs.google.com/spreadsheets/d/1vrK5sY5ooq-F8dcyRhmmAJ5YtgkvWKWP3OfGCZIYxSA/edit#gid=0)
In a word, the ETH staker after switching to PoS can not only continue to obtain the additional ETHs issued by the network, but also obtain part of the fees paid by users. This part of the yields will increase the current staking yield a lot.
2. Project Introduction
Below, we will analyze the staking track projects that have already issued tokens and are currently developing healthily one by one. Although centralized exchanges also provide staking services, their staking services are not linked to their tokens and are not their main business. So, we will not analyze them. Node operators usually do not issue tokens, which ordinary investors cannot participate. Liquid staking represents a new direction for the development of the staking track, and it also has investment value for ordinary investors, which we will focus on below.
The ranking of staking track projects according to TVL is as follows:
In this article, we will introduce 4 projects with relatively good business development status: Lido Finance — the king of liquidity staking pools, Rocket Pool — a ETH liquidity staking pool insisting decentralization, SSV Network that provides security redundancy for the Ethereum staking network, and a new Stader on the staking track.
2.1 Lido Finance
Regarding Lido Finance, Mint Ventures has a detailed research report in August 2021 https://mp.weixin.qq.com/s/DMKWVz4dqlBwpzB4ouxCGQ Interested readers can read it first.
2.1.1 Product introduction
Lido finance is a service provider of the liquid staking solution. It initially only provided staking services for ETH, and currently it supports users to stake five kinds of assets: ETH, LUNA, SOL, KSM, and MATIC. At present, Lido has a TVL of more than US$16.5 billion, ranking third among all DeFi protocols.
Now Lido is the largest staking service provider in the consensus layer of Ethereum. In fact, Lido does not directly operate any staking nodes, but provides a more user-friendly “liquidity staking” service by taking advantage of the particularity of ETH staking. Thus, it creates a new layer between users and node operators, thereby expanding into a multi-chain ecosystem.
We briefly illustrate Lido’s workflow with Lido’s staking process at the ETH consensus layer:
i. A user deposits any amount of ETH into the Lido contract, and Lido distributes the corresponding amount of stETH to the user.
ii. According to certain rules, Lido distributes one set of 32 ETHs to each node operator approved by lido DAO.
iii. The service provider deposits ETH into the Ethereum Beacon Chain, runs the node and obtains yields. The yields will be calculated every day, which is reflected in the growth of the user’s stETH balance.
We can see that Lido does not directly participate in the operation of nodes, but only needs to review, manage and allocate funds for nodes. So, Lido is not in direct competition with node operators. Of course, although the review and selection of nodes are governed by DAO, there must be some centralization, which is also the reason that many people think that Lido is not decentralized enough.
The business process of Lido is not complicated, similar to the business process of other liquidity taking service providers. The main reason why Lido can achieve such success is that Lido’s staking derivative — stETH, which has stable anchoring and powerful use cases. Regarding these two aspects, we have already introduced them in great detail at https://mp.weixin.qq.com/s/DMKWVz4dqlBwpzB4ouxCGQ. At that time when we completed this article, among the mainstream DeFi protocols, only three lending giants — Aave, Compound, and Maker, did not support stETH.
Up to now, Maker and Aave have started to support stETH as collateral. In the DeFi protocol, the risk control of the head lending protocols is the most prudent. The fact that stETH can gain their trust also shows the success of stETH.
On February 28 of this year, Aave supported stETH as the collateral of a protocol. Since holding stETH itself will obtain an annualized return of about 4% of the ETH standard, a leverage cycle of “deposit stETH — borrow ETH — ETH to exchange stETH” immediately appeared. This made Aave’s stETH deposit scale quickly reached US$1.3 billion in less than one month, becoming the fourth largest deposit source on the Ethereum main network, and successfully raising the ETH borrowing rate from about 0.2% to about 2.25%.
In terms of handling fees, Lido currently charges users 10%, of which 5% is allocated to node operators, and the other 5% is included in Lido’s insurance fund. Therefore, in a sense, Lido is nibbling away at the overall yields of node operators (10% of the fees can be obtained by directly providing staking services to users). However, the final result of Lido is that Lido has become the best choice for users to participate in ETH staking, or using the idea of web 2, “Lido is the traffic entrance for ETH staking”.
For a specific node operator, becoming a Lido-approved service provider means more business volume and more profits. Therefore, all node operator is actively striving to become a Lido service provider now. At present, there are more than 20 staking service providers in Lido’s list of qualified operators.
After the success of Ethereum, Lido also began to expand its business to other PoS chains. At present, Lido’s TVL on Terra has exceeded US$8 billion (accounting for 23% of LUNA’s market cap), and it has nearly US$ 300 million in TVL on Solana. In addition, Lido has also begun to provide services on Kusama and Polygon, while the staking services of Avalanche and Polkadot are also in preparation. On these chains, Lido also carries out the business of liquidity staking.
In general, in terms of ETH staking, Lido Finance will maintain its competitive advantages relatively easily with the current brand, resources, and strong stability and use cases of its staking derivative stETH. However, this advantage is obtained from subsidies to some extent. Although this advantage looks very stable at present, it is not unbreakable (especially when Ethereum turns to PoS and the cake becomes larger, which will attract more powerful opponents). In addition, when Ethereum is officially converted to PoS to allow users to retrieve the staked ETH from the Beacon Chain (consensus layer) (the specific time has not yet been determined, but it is not allowed to retrieve when transferring to PoS), the biggest advantage of Lido Finance — the anchoring stability of stETH will also reduce its significance to a certain extent. Whether Lido can continue to maintain its leading position in the liquidity staking track in the future depends on whether Lido can make good use of its first-mover advantage in time and resources.
2.1.2 Team and Partners
The founding team of Lido Finance is mainly from p2p.org, a STaaS service provider, including CEO Konstantin Lomashuk, CTO Vasiliy Shapovalov and Kasper Rasmussen.
In addition, Georgios Konstantopoulos, Hasu and Arjun Balaji from Paradigm conducted in-depth research on Lido Finance and contributed to Paradigm’s investment in Lido, and they also influenced and even guided the development route of Lido Finance on the key decentralization of Lido Finance.
In terms of investment, Lido Finance has officially announced three rounds of financing. In December 2020, Lido Finance completed a financing of US$2 million. The investors include companies such as Semantic Ventures, ParaFi Capital, Terra, KR1, Stakefish and Staking Facilities, as well as individuals such as MakerDAO’s Rune Christensen, Aave’s Stani Kulechov and Synthetix’s Kain Warwick.
In April 2021, Lido DAO passed a proposal of financing of LDO tokens reserved by the Ministry of Finance. In this round, a total of 100 million LDOs were sold, and a total of 21,600 ETHs were raised, equivalent to 0.000216ETH/LDO. The investment was officially reached on May 5, 2021. According to the ETH price on that day, it was about 0.75U/LDO, that is, US$75 million were raised. This part of the tokens will be released linearly in 12 months after a one-year lock-up period, but its governance right is given to these investors from the date of investment.
The investment lineup of this round is relatively luxurious, in which Paradigm obtained 70 million LDOs, and the remaining 26 million LDOs are obtained by Three Arrows Capital, DeFiance Capital, Jump Trading, Alameda Research, iFinex, Dragonfly Capital, Delphi Digital, Robot Ventures, Coinbase Ventures, Digital Currency Group, The LAO, and other institutions. An additional 4 million LDOs were allocated to a series of individuals (partially anonymous), including Sushiswap’s 0xmaki, Optimism’s Jinglan Wang, etc.
In March 2022, Andreessen Horowitz (a16z) announced that he had invested US$70 million in Lido Finance.
Overall, Lido Finance has a strong investment background.
2.1.3 Token model
The total number of LDO tokens is 1 billion, and the initial distribution is as follows:
· Seed round investors received 221.8 million (22.18%), which will be unlocked linearly in 12 months starting from December 2021
· Team members received a total of 350 million (35%)
o The initial Lido developers obtained 200 million (20%), which will be unlocked linearly in 12 months starting from December 2021
o Founders and future team members received 150 million (15%), which will be unlocked linearly in 12 months starting from December 2021
· Validation nodes and multi-signature members obtained 65 million (6.5%), which will be unlocked linearly in 12 months starting from December 2021
· The DAO Treasury controls 363.2 million tokens (36.32%), of which:
o With the consent of the DAO, 100 million (10%) were sold to investors such as Paradigm and Three Arrows Capital between April and May 2021. This part will be unlocked linearly in 12 months starting in May 2022.
o Daily and Curve’s ETH-stETH stability rewards, as well as other LDOs required for other DeFi expansion, are mostly from the part controlled by Treasury
In addition, the investment of a16z has not disclosed the number of LDO tokens obtained and the investment price. Unlike the Paradigm round, this financing has not been voted by DAO, indicating that it was not financed from DAO Treasury and may be obtained in the form of OTC.
The main use case of LDO token is to incentivize the better development and governance of the Lido ecosystem as a reward token.
In terms of system yields, Lido charges 10% of user staking rewards, and the DAO determines its specific distribution among node operators, insurance funds, and DAO treasury. Since the launch of Lido, its distribution has been: 5% for node operators and 5% for insurance funds. The purpose of insurance fund is mainly to compensate users when the ETH staking is reduced or fined. At present, there are 3,139 stETHs in Lido’s insurance fund. Although the absolute value is quite considerable, it is still only about 0.11% compared with the more than 2.7 million ETHs staked on Lido. Although Lido has also insured for a certain scale of ETH staking reduction through some insurance protocols (for example, 200,000 stETH are insured for staking reduction through UPslashed), it cannot completely cover the potential staking reduction risk of ETH staking (it may not be enough even with more than 20,000 ETHs financed by DAO). In this context, Lido has always adopted a cautious attitude towards income distribution, which is a responsible attitude in line with the long-term development of the project.
However, as mentioned above, after Ethereum turns to PoS, the MEV originally captured by PoW miners will be captured by PoS “miners”. As Ethereum’s largest provider of liquidity staking, whether Lido has a way to capture MEV? (Lido joined the MEV research group of Ethereum consensus layer created by Flashbot, source: https://snapshot.org/#/lido-snapshot.eth/proPoSal/0x12d75092ac4eb3037e321b00a4fa165726aad8d03540fa1cd1305a5eb70f79aa). This has also aroused many reveries among LDO holders.
2.2 Rocket Pool
2.2.1 Product description
Rocket Pool is the earliest Ethereum staking protocol. It was conceived at the end of 2016 and has undergone five successful tests. It was successfully launched pm the Ethereum mainnet in November 2021. At present it has staked more than 150,000 Ethereum (ETH) and has introduced 973 node operators.
Similar to Lido, Rocket Pool also provides liquidity staking service (users will get ETH derivatives rETH after staking). It also does not directly operate nodes, but instead incentives node operators to provide services to ordinary staking users through effective rewards.
Rocket Pool splits the maximum amount of 32 ETH staked by Ethereum into two parts: 16 are provided by ordinary staking users, and the other 16 are provided by users (enterprises) willing to run nodes. Ordinary users can simply stake and pay a part of their yields to the node operator at the same time. The node operator provides another 16 ETH and needs to carry out node operation.
With this design, Rocket Pool implements a micro-level asset management product: the senior tranche is the 16 ETHs provided by ordinary staking users, while the junior tranche is the responsibility of the manager — the node operator. If there is a situation in which the yield or principal is punished during the process of node staking, the junior tranche will bear the responsibility of the last out. Moreover, logically, the proportion of Ethereum paid by ordinary staking users and node operators can also be modified (equivalent to adjusting the proportion of the senior tranche and the junior tranche), so as to obtain higher capital efficiency or higher security. At the same time, compared with Lido’s supervision of nodes, Rocket Pool is more decentralized by requiring node operators to over-collateralize, but correspondingly, it also has higher requirements on the capital scale of node operators.
In terms of commission, Rocket Pool has designed a dynamic commission mechanism to balance the capital status of both ends due to the mismatch between supply and demand at both ends of ordinary users and node operators.
In terms of development path, Rocket Pool insists on decentralization. In addition to the above-mentioned choice of trustless node operators, it is also reflected in that Rocket Pool must be online only after the Ethereum consensus layer allows smart contracts to be used as the withdrawing keys (the actual launch time is July 2021, and we will introduce the withdrawing keys in detail below). This is because before the Ethereum consensus layer allows smart contracts to be used as withdrawing keys, the withdrawing keys can only be controlled by EOA (which can be understood as ordinary address), and EOA control will inevitably have a series of artificial risks such as private key leakage or malicious attacks by the holder. The actual mainnet launch time of Rocket Pool is November 7, 2021, when more than 1.4 million Ethereum has been staked in Lido.
In response to the above problems, Lido also gave a decentralized choice on the basis of business-first: before Ethereum allowed smart contracts as the withdrawing keys, they chose 11 people (including Rune Christensen from MakerDAO), Michael Egorov from Curve), Banteg from Yearn, Alex Svanevik from Nansen, Anton Bukov from 1inch, etc.) who were closely related to the interests of ETH and had a good reputation to control the withdrawing keys which is used to deposit all Ethereum of all Lido staking users. After Ethereum supported smart contracts as the withdrawing keys in July, it was updated immediately, and the ETH withdrawing keys subsequently deposited in Lido is controlled by the contract.
2.2.2 Team and Partners
The team members of Rokcet Pool include their founder and CTO David Rugendyke, general manager Darren Langley, Kane Wallmann, Nick Doherty and many other developers.
In addition, Rocket Pool has designed an oracle DAO, which is responsible for regularly calling the oracle to meet the needs of the normal operation of the protocol: such as reporting the validator balance from the Beacon Chain, and the RPL:ETH ratio.
The Oracle DAO members of Rocket Pool include many clients of Ethereum consensus layer, such as Prysm, Lighthouse, Nimbus, Consensys codefi, Etherscan, Beaconchain.in, Bankless, etc.
In terms of investors, the only investor available now is ConsenSys Ventures.
2.2.3 Token model
The native token of Rocket Pool is RPL, which was issued in 2017. Since then, the token economics has been adjusted many times with the evolution of its business form. After the official launch of Rocket Pool’s mainnet, its token economics have been basically determined. RPL plays multiple roles in the Rocket Pool ecosystem:
i. Final collateral: Node operators need to stake a certain amount of RPLs as the final collateral after their ETHs is all confiscated.
ii. Reward booster: Node operators can obtain more RPL rewards by staking a certain percentage of RPLs.
iii. Oracle DAO bond: Oracle DAO members can purchase RPL at a discount of a certain proportion and obtain RPL rewards from good behavior.
The total number of RPL tokens is 18 million. Now, there are nearly 16.2 million in circulation, and the uncirculated part is the team part. In the future, RPL will maintain an annual inflation rate of 5%, and the inflation part will be distributed according to the following proportions:
· 70% allocated to node operators
· 15% allocated to oracle DAO members
· 15% allocated to Dao Treasury
In general, as a very early ETH staking project, Rocket Pool still persists under the premise that the PoS of Ethereum keeps delaying. It has also designed a set of effective mechanisms to combine stakers, node operators and RPL token. At the same time, it has greatly maintained decentralization in the process, which is admirable.
2.3 SSV Network
2.3.1 Product introduction
The full name of SSV is Secret Shared Validators, which is literally translated as “Secret Shared Validators” in Chinese. It is essentially a network based on Distributed Validator Technology (DVT), and its value lies in the security redundancy it provides for its network. To understand the value of the SSV Network, we need to understand a little more background about ETH staking:
To stake on the Ethereum consensus layer, users need to master two private keys in total, one is the withdrawing keys and the other is the validator signing keys. The withdrawing keys can be stored offline, and users need to use the withdrawing keys when they need to withdraw yield or principal. The validator signing keys need to be continuously signed, and offline or malicious behavior will result in fines. Therefore, the validator signing keys need to be given to the operation and maintenance operator of the specific operating node, otherwise the validator will not work properly, i.e., not only will it not be able to earn yields, but will be fined. (For more details about these two private keys, interested readers can go to https://kb.beaconcha.in/ethereum-2-keys for reference). When users stake by themselves, the withdrawing keys are mastered by themselves, while the validator signing keys need to be imported into the node of the ETH consensus layer. When a user chooses to outsource the validation work, he needs to give the validator signing keys to the node operator, whether the outsourcer is Lido or Rocket Pool, or a service provider that directly runs the node such as Everstake/staked, or a centralized exchange such as Kraken exchange. In this way, whether staking users can normally obtain yields entirely depends on the working status of the validator stored in their ETH, thus there is a serious single point failure.
The core of SSV technology is to allow users to encrypt the validator key, divide it into multiple parts, and distribute them to different node operators. In addition, SSV technology can ensure that even if one or several operators (within a certain threshold) are offline or have malicious behavior, the verification results of the whole validator will not be affected (users can still effectively execute signature). For example, the validator signing keys are divided into four parts and given to different node operators. When one node operator is offline, the other three operators holding the validator signing keys can also carry out the verification work normally.
In the SSV network, the ETHs generated by all Beacon Chains are directly obtained by the demanders of the validator (individual or Lido, Rocket Pool, etc.) without passing through the node operator at all. They need to pay two parts of fees: the service fee for node operators, and the “network usage fee” for the SSV network. Currently, all network usage fees go into SSVDAO (similar to Lido’s insurance fund retention, this part may be allocated to token holders in the long run), therefore, for the SSV network, its yield depends on the prosperity of the entire network.
In the specific process, each node operator sets the service quotation in advance (annual payment model), and the validator demanders select the node operator according to their own needs. When the SSV balance in the account is sufficient, the validator can continue to work.
In addition, since SSV (like other ToB infrastructure projects such as LINK and GRT) tokens are used for the payment of fees, SSV has designed a set of rules to reduce the impact of SSV token price fluctuations on the validator demanders. Interested friends can go to check at https://SSV.network/tokenomics/.
At present, the SSV network is in beta. At the time of writing this paper, the test network has more than 15,000 validators and over 3,000 node operators working. It is worth mentioning that SSV Network is not the only protocol researching DVT at present. Another Obol network is also researching DVT, which has also obtained investments from ConsenSys, Coinbase Ventures, IOSG Ventures, Blockdaemon, Delphi Digital, Stakefish, Chorus One, Staking Facilities, The LAO and other institutions. However, Obol network has not released its testnet yet, and its progress lags behind SSV Network.
For the demanders of validators (such as individuals who need staking or liquidity staking service providers such as Lido), the benefits of SSV technology are obvious. SSV helps them eliminate the single point failure, because no single operator has control over their validator signing keys. They will not penalized for the mistakes caused by a single node operator, thus reducing the risk of their participation in staking. The only trade-off is the cost difference between staking ETH through other ways and through SSV.
For node operators, linking up to the SSV network will not cost more than running a Beacon Chain node alone. However, entering the SSV network may obtain more SSV token rewards. For example, the “ONEinfraTEST” operator in the test network currently works for 2,002 validators, which means that he can simultaneously charge the SSV fees paid by these 2,002 validators. Therefore, node operators also have sufficient motivation to link up to the SSV network.
Finally, for Ethereum, SSV technology is also of great significance. SSV technology is essentially a complement to Ethereum’s validator system (originally proposed by the Ethereum Foundation). Assuming that all node operators link up to the Beacon Chain through the SSV network, the entire Ethereum staking network will obtain better security and robustness without sacrificing decentralization, and it can withstand the machine failure/malicious behavior of the whole network under a certain threshold (e.g., 25%). For Ethereum, which has a market cap of more than US$340 billion and carries more than US$140 billion of TVL on its chain, any small vulnerability in the underlying mechanism of PoS may cause a major blow to the entire system, so any underlying security redundancy is precious.
In this case, the SSV Network hopes to become a new layer between node operators and the Beacon Chain (Ethereum consensus layer). By incorporating more node operators and staking demanders into the SSV Network, the node operators, staking demanders and Ethereum can benefit together. At the same time, the SSN Network can also capture more yields and become an important infrastructure of Ethereum. Therefore, SSV is not in competition with the above-mentioned Lido and Rocket Pool, however, it can be regarded as the most upstream and downstream of the ETH staking track: Lido and Rocket pool are oriented to users, and SSV is oriented to the Beacon Chain (Ethereum consensus layer). Lido has also donated money to SSV to support its technical work.
Regarding the scalability of SSV technology, logically SSV technology can be extended to all PoS public chains (such as Atom) with separate withdrawing keys and operation keys. However, it is unlikely that SSV technology (and SSV network project) can be extended to other public chains in the short term because other POS chains do not adhere to decentralization as Ethereum.
2.3.2 Team and partners
Formerly known as the asset management platform CoinDash, SSV conducted ICO in 2017 and later transformed into studying SSV technology in 2020. The core team is from Israel.
In addition to the investors of ICO, SSV has decided to conduct DAO partner financing of up to 3 million SSV tokens from October 2021. SSV tokens from DAO financing will be locked up for one year, then half will be released immediately and half will be released linearly in the next year. Institutions involving in financing so far include:
Digital Currency Group, Coinbase, Lukka, Stakewith.us, RockX 5, Stakin.com, Chainlayer.io, DSRV, Infstones, Skillz5, Shardlabs, Stakedus, Amber Group, XT, Lead Capital, Valid Blocks, AU 21, Gate ventures, OKEx Blockdream Ventures, NGC Ventures, Delta Blockchain Fund, etc. The total amount raised exceeds US$10 million.
Now financing is still ongoing.
In addition, SSV received US$188,000 in grants from the Ethereum Foundation. The Ethereum Foundation and Consensys have provide a lot of help in the development of SSV.
2.3.3 Token model
The native token of the SSV Network is SSV, and its main use cases are governance and payment as described above.
Since SSV is required for payment in business logic, institutions whose businesses include ETH staking may have demand for SSV. This may be the reason why SSV has obtained so many centralized exchange and large institutional investments in previous financing.
SSV tokens are exchanged from the original CDT tokens at a ratio of 100:1. The total amount of CDT is 1 billion, so the initial total amount of SSV is 10 million. In addition, DAO parter financing has given a total of more than 1 million SSV since October 2021, so the current total number of SSV tokens is more than 11 million.
2.4 Stader
2.4.1 Product introduction
Stader was established in May 2021, and the product was officially launched in December 2021. Currently, it supports common staking and liquidity staking services on Terra. Currently, its TVL exceeds US$800 million, of which the TVL of the liquidity staking service is US$160 million, and the rest is from common staking service. Common staking service users just regard Stader as an ordinary node. Compared with other node operators, the main advantage of Stader is that it can automatically compound interest and receive airdrops.
The team plans to expand the staking service to Solana, Fantom, Polygon and Hedera chains in April. In the long run, the team also plans to carry out staking services for Near, Cosmos and ETH chains.
On the Terra chain, if users want to release the staking after staking LUNA, users need a 21-day unlocking period. In this context, this is where the liquidity staking service can help. Similar to other liquidity staking service providers, Stader does not run nodes by itself, but rather matches the needs of node operators and staking users. Users can obtain LUNA derivatives LUNAX after staking LUNA on Stader. Holding LUNAX will continuously obtain the staking yields of LUNA. When users need liquidity, they can also directly exchange LUNAX for LUNA through DEX without waiting for a 21-day unlocking period. In addition, the liquidity staking service provided by Stader also retains the functions of automatic compound interest and airdrop collection to help users to maximize their profits from holding Luna.
At present, in less than three months after the launch of Stader business, it already has more than US$800 million of TVL, ranking fourth in TVL in the Terra ecosystem. Its development is really rapid. Of course, this is also related to its low fees, token subsidies and other strategies. It remains to be seen whether this growth trend can be maintained.
2.4.2 Team and partners
Stader’s core team is from India. The three co-founders Amitej, Sidhartha and Dheeraj have many years of strategic experience, crypto industry experience and technical experience respectively.
Stader has publicly disclosed two rounds of financing:
In October 2021, Stader completed a US$4 million seed round financing led by Pantera. Other investors include: Coinbase Ventures, True Ventures, Jump Capital, Proof Group, Hypersphere, Huobi Ventures, Solidity Ventures, Ledgerprime, Double Peak Group. In this round of financing, Stader also received support from Terraform Labs, Solana Foundation and Near Foundation, as well as the support of many angel investors from Coinbase, Polygon, Biconomy, and Staked.
In January 2021, Stader completed a US$12.5 million of strategic private placement round financing led by Three Arrows Capital. Other investment institutions include: Blockchain.com, Accomplice, DACM, GoldenTree, Accel, Amber, 4RC, Figment.
Stader’s financing is excellent. It not only includes well-known VCs and angel investors, but also introduces the public chain foundation, a related party crucial to the Staking project. This is of great help to its follow-up business development.
2.4.3 Token model
The native token of Stader is SD, and its use cases include the following aspects.
· As a reward for users to participate in the Stader ecosystem, such as incentivizing the LP pool of LUNA-LUNAX, etc.
· Staking for priority delegation: The percentage of staked funds that node operators can obtain is determined by their proportion in the SD staking pool.
· Final collateral: Node operators need to stake a portion of SD tokens to compensate staking users in case of staking loss due to improper operations.
· SD tokens can capture fees for users withdrawing from Stader.
· SD tokens can reduce the amount charged in the Stader ecosystem.
· Governance.
It can be seen that, as a relatively new DeFi protocol, SD’s token use cases are closely integrated with its business. To a certain extent, it is a collection of LDO and RPL use cases.
Stader’s token SD just completed TGE (Token Generation Event) on March 15th. The total amount of SD is 150 million, of which:
· 36% reserved for liquidity rewards.
· 17% is allocated to team members and advisors, and this part of tokens will be released linearly for 36 months after being locked for 6 months.
· 17% is allocated to two rounds of private equity investors, of which the private placement round will have 5% token release in TGE. There is no TGE in the seed round, and the rest will be released linearly in 36 months.
· 15% is allocated to the DAO fund, and its usage is determined by community governance.
· 11% is allocated to the Ecological Fund.
· 4% is publicly raised on CoinList, of which:
o 2% is priced at US$4.5, which will be released linearly in six months.
o 2% is priced at US $3.33, which will be released linearly in 12 months
3. Summary
In the staking track, traditional players are node operators. As the Ethereum consensus layer locks up the staking liquidity, the liquidity staking service providers suddenly emerge. Compared with traditional service providers that only provide node operations, liquidity staking service providers provide staking users with more liquid and composable choices than ordinary node operators. At the same time, for the public chain, the existence of staking derivatives enhances the security of the whole public chain network (see Paradigm’s argument https://research.paradigm.xyz/staking). Under the above factors, liquidity staking service providers have quickly become a new layer between users and node operators, while constantly encroaching on the profits of the node operator layer. From the past 15 months, Lido Finance has quickly become the first place in the staking track in terms of the staking amount. We can also support the above point of view.
From the previous competition of liquidity staking service providers, the points that have attracted everyone’s attention include brand, security, degree of decentralization, the liquidity/stability of the staking derivatives they provide and composability in DeFi. It is precisely because of the good combination of these aspects that Lido Finance has gained its current leading position.
In the follow-up, as the industry gradually matures, old players continue to develop and new players continue to enter the market. Brand, security and decentralization will become the threshold of the industry (but this does not mean that these points are easy). The focus of competition will be on the liquidity and composability of staking derivatives, both of which are essentially built through subsidies. For users, as long as they can earn yields stably and safely, and at the same time, the staking derivatives can have good liquidity and composability, they will not have too much loyalty to the liquidity staking platform itself. In this context, the liquidity staking track will likely fall into a subsidy war for users’ staking — just like the liquidity subsidy war between DEXs in the summer of DeFi (in this war, there was also a protocol that was invested by a16z and strongly supported by Paradigm. They took the lead early, but then fell into competition at least at the business data level.).
In addition, after Ethereum successfully turns to PoS and opens the ETH transfer function of the Beacon Chain, the most important advantage (the importance of ETH derivatives liquidity) that Lido can stand out will also be relatively weakened (although still important). Therefore, although Lido currently has a very obvious first-mover advantage in the staking track, it still faces considerable potential competitive pressure in the medium and long term.
In the future, as the bottom layer of the public chain network ecosystem, in addition to the current simple commission on yields from staking delegate and the general expectation for MEV, the staking track is likely to derive richer revenue sources with the development of the industry.
The staking track is still only a new track that has been emerging for only five years, and its rapid development stage is mainly concentrated in the past year. According to JP Morgan’s forecast, the staking of ETH alone will generate US$40 billion in network yield in 2025. As the second largest market cap in the crypto field, Ethereum will transform into PoS in the next 6 months. With this transformation, more players will still sprout and develop in the tide of PoS, thus bursting out more investment opportunities. Mint Ventures will also work with you to continue to follow the progress of the staking track.
Disclaimer: None of the above contents is intended as financial advice!
If you find errors in facts and data in the research report, please leave a message or send a private message to us, and we will modify it.
Reference
https://launchpad.ethereum.org/
Messari：https://messari.io/article/what-s-at-stake-in-staking-as-a-service
IOSG：https://mp.weixin.qq.com/s/YaD9D-pNNCtRKaaok1qIPQ
A brief analysis of the intrinsic value of SSV:
https://mirror.xyz/0x813D0dE870331Ac73646AC61E18606C1A3CD322e/mJFltcGlX2hI5nE6wf6K0ccq74MoXWVFie0eHxPZcrY
https://cointelegraph.com/news/jpmorgan-report-eth2-could-kick-start-40b-staking-industry-by-2025
Lido Finance, Rocket Pool, SSV Network, Stader official websites
