php editor Xinyi brings an introduction to Staking, Restaking and LRTfi. These concepts are a discussion of composable capital efficiency and neutrality and are of great significance to investors. In this area, understanding the meaning and application of these concepts will help improve the effectiveness and market neutrality of investment strategies. This article will delve into the connotations of these concepts to help readers better understand and apply them.
Translation: Vernacular Blockchain
Key points of this article:
In our research, the main layers of Ethereum, Solana, and Polygon are maturing, while the staking mechanisms of Bitcoin and Cosmos are also evolving. In Ethereum, there are two possibilities for the final outcome: if the value of Ethereum is maintained, then an oligopoly may be formed, with the top players’ share approaching 33%, but no more than that; The value is not maintained, which may lead to the establishment of LST (Layer 2 network). In Cosmos, ICS (Inter-Chain Standard) is in its early stages, and Solana’s pledge rate has reached 90%.
The secondary layer of re-staking has triggered a race for high returns, with capital flowing to projects with the highest returns, especially to LRT (Layer 2 Staking Token) pools. As the first Layer 2 networks to adopt staking, Blast and Manta made a splash around the world, instantly attracting over $1 billion in total locked value. However, the expected benefits from AVS (Automated Vault Strategies) and Restaking’s Layer 2 network, given ample supply and strong demand, are unclear. Additionally, the restaking mechanisms in Bitcoin, Cosmos, and Solana are all in their early stages.
On the third level, synthesizing stablecoins, optimizing returns and tokenizing assets are to promote the diversity of innovation. Capital efficiency and risk management are more important than composability in this regard. The key is to achieve maximum composability while minimizing risk.
Composability is the hallmark of Web3, characterized by frictionlessness, low minimum requirements, and self-hosting. In contrast, in traditional finance, return stacking faces high friction. For example, borrowing against Treasury securities creates multiple friction points, such as third-party custodians, case-by-case judgments of LTV ratios, and high minimum requirements to justify the labor costs involved, to name a few.
The emergence of Layer 2 stablecoins provides opportunities for the combination of consensus layer profits and execution layer DeFi activities. This combination is reflected in the DeFi boom in 2020. Now, three years later, this combination has become a habit, almost taken for granted. We’re used to frictionless ways to be more capital efficient. For example, we look forward to minting LPToken for staking or minting Layer 2 stablecoins to increase liquidity to provide positions for profit.
Self-hosting, low minimum requirements and frictionless – these features are unique to Web3 and highlight the potential for efficiency improvements in the broader financial markets. Imagine if you could tokenize your stock holdings and use it to participate in LP on a stock trading platform. Imagine if you could tokenize your real estate interests and easily use them for rehypothecation proceeds. With LSTfi, we get a glimpse of what composability means for traditional finance.
With LSTfi, we get a glimpse of what composability means for traditional finance.
Fundamentally, there are five types of revenue streams in crypto, and they are stackable, or in other words, combinable. The IOUToken of one revenue source can be used as the input Token of another revenue source.
Of course, risks and benefits go hand in hand. Among these five basic returns, Staking returns are the safest. Since staking began on Ethereum, only 226 node operators out of 959,000 have been punished. On the other hand, while sovereign bonds are often touted as the lowest-risk investments, Italy, Spain, Portugal, Ireland and Greece (not to mention serial defaulters Venezuela and Ecuador) have all recently experienced bond defaults. Even the gold-standard U.S. bonds "defaulted" when they left the gold standard in the 1930s to print unlimited money to repay debt. Treasury defaults are related to a country's ability to repay its debt. Its risk level is more similar to the risk of "borrowing income" rather than the risk of "Staking income". While sovereign bond returns are based on expectations of future debt repayments, Staking returns are related to current network usage levels.
Because of this, we consider Staking to be the benchmark interest rate in the crypto space.
On top of Staking, it is the capital efficiency engine that drives the revenue stacking rocket. We are already starting to see innovations like staking-guaranteed L2 networks similar to Blast and Manta, cross-domain restaking similar to Picasso and Babylon, and LST loops similar to Gravita.
LST’s composability features will drive further innovation in revenue stacking designs.
Staking is the security cornerstone of the POS chain and the risk-free benchmark interest rate in Web3.
Justin Drake attributes ETH to two purposes, economic security and economic bandwidth. In combination with various DeFi and Restaking activities, LST and LRT allow the same ETH to participate in both purposes simultaneously.
Where economic security is involved, PoS chains must protect decentralization and neutrality in order to mitigate potential collusion. Designing protocols in game theory to remain decentralized and neutral is a balancing act. We will return to this tension shortly.
First, let us use Ethereum as an example of a PoS chain to understand this stacking process. The main layer allows users to stake their ETH and earn LST like stETH, cbETH, wbETH, and rETH. In the secondary layer, LST or ETH can be restaking to provide security for other staking services and obtain LRT like eETH, uniETH, and pufETH. The third layer then combines LST and LRT with various DeFi activities for yield stacking.
To understand the incentives driving adoption, we answered three questions:
Thus, composability and capital efficiency are the main adoption drivers, while risk is the boundary condition that limits the range of options.
In the main layer, validators deposit native tokens such as ETH, ATOM and SOL to protect the PoS network , and receive transaction fees as a reward.
Since staking is the lowest risk form of revenue generation in the crypto space, over time we expect Ethereum (23% staked rate) to catch up with Solana (90% staked rate) and Atom (pledge rate 70%), which represents hundreds of billions or even trillions of market expansion.
Staking is divided into three categories: centralized, quasi-decentralized, and decentralized. Centralized and quasi-decentralized staking escrow transactions at the expense of convenience and composability. Decentralized staking, that is, independent staking, is the most secure for the protocol, but is difficult to maintain and lacks composability. In theory, self-hosted nodes could also issue LST, but no rational thinker would buy it due to the lack of composability.
In ordinary independent Staking, the verifier creates two pairs of keys, one as the verifier key and one as the withdrawal key, and then 32 ETH are sent to the Ethereum 1.0 deposit smart contract. The base fee is burned and transaction tips are sent to validators. Only 8 validators per epoch or 1800 validators per day can be activated.
Staking pools such as Rocket Pool, Diva, and Swell allow independent node operators to support staking pools composed of stakers’ deposits. From an operator's perspective, the lower the margin, the more capital efficient it is as they get a portion of the commission from the ETH they deposit. In essence, lowering margin requirements allows for greater leverage.
It is estimated that the node Operators can receive up to 6-7% ETH rewards and up to 7.39% staking pool Token rewards.
On Polygon, validators need permission. Validators must apply to join the certifier set and can only join when an approved certifier unbinds. On Solana, validators can join without permission, and the Solana Foundation provides clusters for validators to choose from. Solana also officially tracks the number of minority validators holding over 33% of staked SOL.
In the staking of centralized exchanges (CEX), the mechanism for issuing margins is not transparent. Retail stakers can post the entire deposit, and centralized node operators can pass all potential penalties onto the retail stakers. However, stakers also automatically benefit from the smoothing effect, often yielding higher returns than staking independently.
Every 2 to 3 days, the Ethereum beacon chain liquidates validators and distributes rewards. In addition to the consensus layer, validators can earn execution layer rewards through priority fees and MEV. Protocols such as Jito in Solana utilize MEV to increase their LST yields.
MEV increase redistributes MEV from block producers to validators, who can then distribute rewards to stakers. Eventually, a MEV burn may be implemented to return value to ETH holders. At its core, the redistribution of MEV is a philosophical issue surrounding fairness. But currently, MEV can be used to increase staking rewards.
Verifier rewards usually fluctuate widely. Due to the inherent randomness of validator selection, rewards may be uneven. In Ethereum, the next validator is selected using deterministic randomness involving the hash and seed of the previous block.
To this end, Rocket Pool provides a smoothing pool based on an opt-in approach. The smoothing pool will accumulate rewards for validators who choose to join. As a rule of thumb, if a validator has a smaller pool than the number of nodes in the smoothing pool, it is more likely to gain more from the smoothing pool. For projects like Lido, smoothing functionality is built into smart contracts.
In a centralized exchange (CEX), smoothing is automatic and stakers can expect stable returns over time.
Penalty is a very rare event. Since Ethereum staking began, only 226 node operators out of a total of 959,000 have been penalized.
When validators 1) fail to generate a block, or 2) fail to generate certifications within the expected time, they may be penalized. The penalty amount is smaller. Typically, validators can regain their earnings within the same number of hours they were offline. Penalties, on the other hand, are more severe.
Penalties will occur when one of the following three conditions is met. 1) Double signature: Sign two different beacon blocks for the same time slot. 2) Signature wrapping: A certifier signs a certification around another certification. 3) Double signing: signing two different certifications for the same target. A validator will include evidence of misconduct in a block, socialize with the set of validators, and penalties will begin after all validators sign off on that evidence.
In a penalty event, the following consequences may occur:
DVT (Decentralized Validation Technology) is designed to protect validators from failure to generate block or certification risk, reducing penalty risk and increasing the security of staking pools. DVT is implemented on a redundant set of validators using Distributed Key Generation (DKG), Multi-Party Computation (MPC), and Threshold Signature Scheme (TSS).
SSV (Social Security Verification), part of the DVT network, is a fully open, decentralized and open source public product currently being trialed for protocols such as Lido. Obol leverages Charon as an unmanaged middleware responsible for communication between validator clients and consensus clients. Diva uses its own DVT implementation to support its LST in a permissionless manner, allowing anyone to run a node. Puffer's Secure-Signer is a remote signing tool funded by the Ethereum Foundation designed to prevent punishable violations using Intel SGX. Puffer's Secure-Signer manages validator keys on behalf of the consensus client.
From a capital efficiency perspective, running multiple clients through DVT consumes computing resources. In actual implementations, the same hardware can participate in multiple sets of DVTs. Importantly, DVT enhances the security of the protocol so that even if a group of node operators goes offline or behaves erratically, the staking pool can still function correctly.
Cosmos Interchain Security has an interesting approach to penalties (Proposal #187). Since ICS is still in its early stages, governance votes need to address all possible punishable events. While this is intended to prevent any security contagion from the consumer chain to the central hub, governance currently leaves decision-making power to human arbitrators rather than code.
In Ethereum, 4 withdrawals are allowed per epoch. Due to mismatched entry and exit limits of 8 validators and 4 validators per epoch respectively, long exit queues may occur. Once a withdrawal is initiated, validators must wait for 256 epochs.
In Solana, delegation is established. Standard delegations to staking pools require a cooling-off period before withdrawals can be made. However, liquidity staking via staking pools does not require a withdrawal cooling-off period.
As the Ethereum pledge ratio increases and network usage remains unchanged, the basic rate of return should gradually approach 1.8%. This is the Ethereum Fund A minimum yield will be set, but the increase in gas fees and MEV may offset this trend to a certain extent.
Typically, opportunity cost will prompt stakers to stop staking when the income is lower than other available income sources. However, LST (Liquid Staking Tokens) can mitigate the opportunity cost because holders can participate in both economic security and economic bandwidth. Therefore, despite the low returns, stakers will likely continue to deposit and use their LST to participate in DeFi to gain additional yields.
Due to the decrease in Ethereum staking returns, another phenomenon is centralization. Independent stakers will find their returns continue to decrease, eventually exceeding the cost of the hardware.
The above is the detailed content of Staking, Restaking and LRTfi: Composable Capital Efficiency and Neutrality. For more information, please follow other related articles on the PHP Chinese website!