This article starts with Ethereum staking and provides an in-depth introduction to what staking is, its origins, advantages and risks, and the flourishing development of liquidity staking. The purpose is to help readers fully understand this concept.
Table of Contents:
What is staking?
The origin of staking: PoS consensus mechanism
The development history of Ethereum staking
Advantages and disadvantages of staking
Methods of participating in Ethereum staking
What is liquidity staking?
Leaders in the Ethereum staking track
Lido (LDO)
Rocket Pool (RPL)
Pendle (PENDLE)
May 1, 2024
Pendle’s locked amount exceeds $4 billion, how to earn leverage income? Complete introduction and staking tutorial
April 5, 2024
JPMorgan: Decrease in Lido staking ratio “saves Ethereum”! Being recognized as a security by the SEC may decrease
April 3, 2024
Ethereum researcher: Electra upgrade should “reduce ETH issuance” to facilitate the survival of individual stakers
March 19, 2024
Fidelity applies to add “staking” service to Ethereum spot ETF to generate more income! Lido and Rocket Pool soar upon hearing the news
Since Ethereum transitioned from the PoW (Proof of Work) mechanism to the PoS (Proof of Stake) mechanism in 2022, staking ETH has become an important mechanism for protecting the network’s security. This application has evolved from independent staking to liquidity staking and further to re-staking during the current bull market, gradually developing into a multi-billion dollar market.
Starting from Ethereum staking, this article organizes information about staking, its origins, advantages and risks, liquidity staking, etc. to help readers fully understand the concept of staking.
What is staking?
Staking not only protects the network’s security but also allows users to earn additional rewards in cryptocurrencies. Taking ETH as an example, Ethereum staking involves locking ETH in the network to support its security and operation. Stakers can earn an annual reward of about 3-4% (varies based on the amount staked). Currently, the total amount of ETH staked in Ethereum is 32.1 million ETH, equivalent to a market value of $118 billion.
The origin of staking: PoS consensus mechanism
We know that the Bitcoin network relies on the PoW mechanism, where miners compete to solve mathematical problems to ensure the normal operation and security of the Bitcoin network and compete for block rewards. However, the PoW mechanism consumes excessive energy and computational power, making it unable to process a large number of transactions within the same timeframe. Therefore, blockchain networks like Ethereum introduced the PoS mechanism to solve these problems.
PoS, short for Proof of Stake, requires validator nodes to use their coins as stakes to become validators of the Ethereum mainnet. This significantly reduces the energy consumption of blockchain mining. Although PoW is still considered more secure in terms of security, PoS mechanisms can meet market demand when operating well.
The development history of Ethereum staking
Ethereum’s announcement of transitioning to PoS (Proof of Stake) went through multiple discussions and updates. Here are some key milestones:
July 30, 2015: Ethereum mainnet officially launched, based on the PoW (Proof of Work) consensus mechanism at that time.
2017: The Ethereum community actively discussed the transition to PoS and proposed the Casper protocol, which was the initial design for the PoS transition.
December 1, 2020: Ethereum Beacon Chain launched, marking the first stage of Ethereum’s transition to PoS. The Beacon Chain introduced the PoS consensus mechanism but operated separately from the Ethereum mainnet (which still used PoW).
September 15, 2022: Ethereum successfully completed The Merge, merging the Ethereum mainnet and the Beacon Chain, officially implementing PoS.
Advantages and disadvantages of staking
Advantages:
Passive income generation: The main advantage of staking for token holders is the ability to generate stable passive income.
Energy efficiency: More energy-efficient than PoW mining.
Participation in governance: In some blockchains, staking gives users the right to participate in network governance, including voting on network protocol or rule changes.
Lock-up period: Staked tokens are usually required to be locked up for a period of time, during which they cannot be traded, potentially reducing selling pressure on the market.
Disadvantages:
Hacker attacks: If the network or staking pool is attacked, stakers may lose their staked tokens.
Inflation: Staking increases the circulating supply of the currency, which may lead to inflation.
Penalties: In some staking systems, if a validation node goes offline or fails to validate correctly, a portion of the staked tokens may be reduced or confiscated.
Methods of participating in Ethereum staking
1. Solo Staking: Users run a full node to participate in the Ethereum network’s validation process independently. Users have full control over their nodes and staked ETH, enjoying all staking rewards. This method requires technical knowledge to maintain the node and requires a minimum of 32 ETH as staking, which has a high threshold.
2. Staking Service Platforms: Users can participate in staking by providing any amount of ETH, and the platform is responsible for technical operations and maintenance. Users do not need to worry about technical issues and node maintenance, making it suitable for users without technical backgrounds, but they need to pay service fees to the platform.
3. Staking Services Provided by Centralized Exchanges: Some centralized exchanges also offer staking services. It is easy to operate and suitable for ordinary users who do not need to deal with technical issues, but they may face platform risks and may be charged higher service fees.
4. Staking Pools: Multiple users pool their ETH together in a shared pool and act as validators. This lowers the threshold for participating in staking, and rewards are proportionally distributed among all participants.
What is liquidity staking?
Liquidity staking is a mechanism in decentralized finance (DeFi) that allows users to stake their assets to earn rewards while maintaining the liquidity of their assets. This is usually achieved through an innovative token called Liquid Staking Token (LST).
Here is how liquidity staking works:
1. Staking assets: Users stake their crypto assets (e.g., Ethereum) on a liquidity staking platform, and these assets participate in the consensus mechanism of the blockchain network and earn staking rewards.
2. Obtaining liquidity tokens: As a reward, users receive a liquidity staking token that represents their staked assets and their staking rewards.
3. Token liquidity: These liquidity staking tokens can be used on other DeFi platforms for activities such as lending, trading, or providing liquidity. Users can utilize their assets for other financial activities while earning staking rewards.
4. Redemption: When users decide to stop staking, they can redeem the liquidity staking tokens for their original assets and rewards, usually after a certain unlocking period.
The design of liquidity staking tokens, such as LST, has unlocked the liquidity of staked ETH, attracting a large number of users and assets, marking the beginning of the LSDfi era.
Leaders in the Ethereum staking track
Due to the lower required capital and lower participation threshold, liquidity staking quickly became a hot track. Currently, well-known projects in Ethereum liquidity staking include:
Lido (LDO): Lido is a leading liquidity staking protocol on Ethereum, allowing users to stake ETH and other crypto assets without locking their assets or maintaining infrastructure. The current token LDO is priced at $2.13, with a market capitalization of $1.88 billion.
Rocket Pool (RPL): Rocket Pool is a decentralized Ethereum 2.0 staking protocol where anyone can stake at least 0.01 ETH to a decentralized node operator network backed by RPL collateral. RPL is priced at $21.86, with a market capitalization of $440 million.
Pendle (PENDLE): Pendle Finance is a yield trading protocol that allows users to tokenize and trade future yields using top-tier yield-generating protocols like Aave and Compound. PENDLE is priced at $6.18, with a market capitalization of $940 million.
May 1, 2024
Pendle’s locked amount exceeds $4 billion, how to earn leverage income? Complete introduction and staking tutorial
According to Pendle’s own data, its Total Value Locked (TVL) has exceeded $4 billion, an increase of nearly 18 times from $230 million at the beginning of the year. At the same time, Pendle’s accumulated trading volume has surpassed $15.8 billion, leading to a significant increase in platform fee income.
Data from Token Terminal shows that Pendle’s fees reached over $596,000 from April 22 to April 28, making it the second-highest weekly revenue in history. On April 25 alone, the fees reached nearly $205,000. Compared to statistics from Crypto Fees, Pendle’s fee income ranks 7th, between MakerDAO and Kyberswap.
April 5, 2024
JPMorgan: Decrease in Lido staking ratio “saves Ethereum”! Being recognized as a security by the SEC may decrease
According to information from Dune Analytics created by @hildobby, the market share of Lido’s staked ETH has dropped below 30%, from 32% in December 2023 to the current 29.57%. This change alleviates concerns about the growing influence of Lido in the Ethereum ecosystem.
April 3, 2024
Ethereum researcher: Electra upgrade should “reduce ETH issuance” to facilitate the survival of individual stakers
Mike Neuder, a researcher at the Ethereum Foundation, proposed a governance solution in an article titled “Issuance Issues.” He advocated for Ethereum to reduce token issuance in the next Electra upgrade to address some of the current issues Ethereum faces, including maintaining the feasibility of independent staking compared to liquidity staking, in order to “preserve the survivability and proportion of independent stake holders.”
March 19, 2024
Fidelity applies to add “staking” service to Ethereum spot ETF to generate more income! Lido and Rocket Pool soar upon hearing the news
Fidelity, a giant asset management firm with assets under management of $4.5 trillion, has submitted a modified Ethereum spot ETH application to the U.S. Securities and Exchange Commission (SEC), adding a description of staking. It intends to allow its pending SEC-approved Ethereum spot ETF to stake a portion of its ETH assets, bringing additional income to the fund.
For more Ethereum staking-related news, click to read.
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