Ethereum Upgrade Roadmap

Started with Ethereum upgrade plan

Over the past 7 years and since its inception, Ethereum has grown stronger day by day. However, due to the increase in usage, the demand has skyrocketed, resulting in many problems. To solve this, the Ethereum core team promoted the upgrade roadmap and worked towards it.

The Merge Completed

The Merge is splitted into three main facets: enabling Beacon Chain, joining with Mainnet, and sharding to make Ethereum scalable. Currently, the Beacon Chain that uses PoS has successfully merged with the Ethereum Mainnet.

From PoW to PoS

In December 2020, Ethereum launched the Beacon Chain that uses PoS and enabled staking, as a preparation to merge the Beacon Chain with Mainnet. Ethereum is intended to replace the PoW mining that consumes extensive computing power with ETH staking. In this way, Ethereum hopes to solve the problems of low efficiency and high energy consumption and optimize the network. This move enables Ethereum to ensure sustainability while maintaining security, thus preparing for future scaling.

What is Staking?

Ethereum staking is based on the Proof-of-Stake (PoS). It refers to the act of locking a specific amount of ETH, say 32 or multiples of 32, in smart contracts to activate the validator software to participate in the network. A validator is responsible for storing data, processing transactions, and adding new blocks to the blockchain to maintain the security of the network. As a validator of ETH, you’ll first need to stake 32 or a multiple of 32 ETH. In return, you can get rewards for confirming the blocks.

After The Merge, Ethereum will be shifted to the PoS mechanism, which requires users to stake ETH in the protocol as deposits. If a node commits fraud or even intends to attack the network, the staked ETH will be destroyed. The attacker shall bear the risk of losing all staked ETH. As it costs so much to launch an attack, this mechanism helps improve security.

ETH staked on the Beacon Chain

According to the Beacon Chain website, there are a total of 13.49 million ETH staked on the Beacon Chain. If the price of ETH is $1,500 now, then the value of ETH that Beacon Chain holds is worth over $20 billion.

ETH staked on the Beacon Chain accounts for 10% of the total ETH market cap (which is $200 billion); the staked ETH on the Beacon Chain will be unlocked in stages within 6~12 months after The Merge is complete.

source：https://www.google.com/url?q=https://beaconcha.in/&sa=D&source=docs&ust=1668426444138307&usg=AOvVaw2JoqzeA4CulCgIwnkwy2rh

How to Stake?

To become a validator on Ethereum, it is required to stake at least 32 ETH on the Beacon Chain, which is estimated to exceed $70,000. This is quite a high barrier for average investors. At present, the most popular staking-as-a-service providers are Lido (LDO) and Rocket Pool (RPL).

There are three main staking options available:

1. Solo staking

Solo staking refers to staking 32 ETH to run an Ethereum node alone. An Ethereum node consists of an execution layer (EL) client and a consensus layer (CL) client. These clients are software that works together, along with a valid set of signing keys, to verify transactions and blocks, attest to the correct head of the chain, aggregate attestations, and propose blocks.

However, the high barrier makes staking inaccessible for most investors. The staked ETH cannot be withdrawn before the Shanghai upgrade is complete. That is to say that the liquidity is zero before the Shanghai upgrade ends. It should also be noted that solo stakers need to deal with the hardware required to run the client by themselves, so they need to use dedicated equipment to improve security. In this way, they can get rewards directly from the protocol.

The advantage of solo staking is that stakers can get all the rewards in a decentralized manner. The staker himself is the only person who got control of your funds, which could minimize the risks. However, the process before solo taking is cumbersome and complicated. Users will have to consider various issues before choosing to solo stake your ETH.

Running a node not only requires technical know-how, but is risky. If the network is interrupted or a node is stolen, the ETH staked as deposits may be confiscated.

2. Staking as a Service (SaaS)

Decentralized SaaS providers (or staking protocols) are superior to solo stakers in terms of convenience. Delegating node operations to a third party can avoid managing the complicated hardware. The barrier to stake ETH in this way is extremely low, and stakers can receive equivalent token credentials such as stETH and rETH.

Generally, solo stakers cannot withdraw their ETH before expiration. It is inconvenient especially when they are in urgent need of funds. However, the staking protocols solve the liquidity problem and improve funds utilization by issuing tokenized staking credentials. Users can participate in staking without considering when and how many to stake.

Therefore, the staking protocol is indeed a convenient staking method that ensures sound liquidity and has no minimum staking quantity requirement.

If adopting SaaS, you’ll need to create a set of validator credentials, upload the signing keys to the provider, and deposit ETH.

However, SaaS providers, among which Lido, the dominant one, host all staked assets in one pool. For this reason, many stakers think it is risky and hence turn to seek other staking protocols, such as Rocket Pool.

source：https://www.google.com/url?q=https://dune.com/LidoAnalytical/Lido-Finance-Extended&sa=D&source=docs&ust=1668426444138065&usg=AOvVaw3hFKyq2g565BV8MDT6Qd-V
(1) Lido

Lido protocol, launched only a few weeks after Beacon Chain enabled staking, aims to solve the problems of long-term lack of liquidity and high staking amount by providing non-custodial staking service.

Protocol Architecture

Lido protocol issues stETH (a tokenized form of staked ETH) at a 1:1 ratio, which maintains the liquidity of even the staked ETH and allows users to participate in staking with any amount of ETH. It not only relieves users’ concerns about indefinite staking, but also avoids zero capital liquidity and improves capital utilization. That is why the number of ETH staked on Lido has grown by 700x after only one year of launch.

For every single ETH staked with Lido, the protocol will issue the staker an stETH as a credential. stETH is an ERC-20 token generated through automated smart contract codes.

Redemption and price peg of tokenized staking credentials

When Ethereum completes the Shanghai upgrade, unlocks ETH staking, and enables trading, users can redeem the same amount of ETH using their stETH held by the Lido protocol. For every single ETH users redeem, the Lido protocol will destroy one stETH to ensure the 1:1 peg of the amount of staked ETH to that of ETH itself.

There are three ways and motivations to effectively peg the prices of the two:

1. There is an arbitrage opportunity when there is a price difference between stETH and ETH. Arbitrageurs may help maintain the peg;

2. Mining rewards are accessible in the stETH/ETH liquidity pool ;

3. stETH is the deposit and can be used to get loans from lending protocols such as MakerDAO and AAVE.

Price de-pegging risk and high selling pressure

Under the pegging mechanism in the crypto space, extensive selloff might occur if the price depegs. This is just like the UST depegging event in May 2022, which caused a series of panic selling of stablecoins. Even for stablecoins with excellent stabilities and reputations, such as USDC, USDT, and DAI, there were issues when their prices shortly depegged from the U.S. dollar.

Even though Lido has a mechanism that supports exchange between ETH and stETH, many applications in the crypto market are still in their infancy. Users should participate in any investment with caution, because even the largest protocol by market cap has potential risks of loss.

Centralized validators’ power leads to semi-centralization

The validators are selected by Lido DAO through governance voting, from which Lido DAO will get a portion of the income. This validation method enhances the scalability of the protocol. As the assets are dominantly controlled by holders of Lido DAO’s governance token (LDO) who can vote for proposals initiated by the Lido protocol, they enjoy great governance rights.

Endowing LDO holders with governance rights sounds reasonable, but it has been criticized for over-centralization. As the largest staking protocol for ETH currently, Lido is deeply concerned by the public as some of them are worrying that the decentralization of Ethereum may also be affected.

source：https://www.google.com/url?q=https://dune.com/queries/95814/191711&sa=D&source=docs&ust=1668426444138519&usg=AOvVaw0MwzcMJqs7P3n5gJNsgT77
(2) Rocket Pool

Protocol Architecture

Rocket Pool was launched in November 2021, 11 months after Lido. The workings of Rocket Pool are also to stake ETH and get the tokenized staking credential rETH, a derivative token based on ERC-20.

The mini pool is jointly established by validators and users

Unlike Lido, Rocket Pool has innovated the validation method to avoid that power is centralized in the hands of token holders. In other words, Rocket Pool is permissionless.

Rocket Pool is composed of three major elements, i.e. Smart Contracts, Smart Nodes, and Minipool Validators. The Minipool validators are a type of smart contract. When a node operator deposits 16 ETH on his node, the Minipool contract will retrieve 16 ETH from the user’s staking pool.

When there are 32 ETH, the minimum staking amount of ETH required by Beacon Chain, on this contract, the contract will execute the staking process on Beacon Chain and create a new validator on this node. The validating process will create rewards for node operators that are sourced from the staked deposits.

To provide the network and the users with additional security, node operators can choose to stake 1.6 ETH worth of RPL on their node contracts to protect users’ RPL from slashing. The slashing mechanism is used to govern and adjust the incentive mechanism of protocols to effectively reduce the risk of centralization in an automatic way. However, with Rocket Pool, users will need to stake a minimum of 16 ETH. This standard makes the protocol less flexible and hence depends much on attracting new node operators to stake more.

A rising star in ETH staking

source：https://www.google.com/url?q=https://dune.com/greywizard/Rocket-Pool-Overview&sa=D&source=docs&ust=1668426444138775&usg=AOvVaw3ybvgE_-MIvKajdhFeOPPm
Though less than one year since its inception, Rocket Pool has quickly accumulated over 173,000 ETH from about 2,300 individual stakers, accounting for more than 5% of the total market share. Though far behind the dominant pool Lido, it ranks 2nd among all powerful competitors.

Distinct from other staking protocols that support multi-chain staking, Rocket Pool focuses on ETH staking solely. Although this has, to some extent, limited the development of this platform, it is highly popular in the Ethereum community.

(3) Comparison between Lido and Rocket Pool

Lido achieves scalability and improves capital utilization but operates in a centralized way. By contrast, Rocket Pool is weaker in terms of scalability, capital utilization and degree of centralization.

LDO sees an unstable price trend with low market liquidity, resulting in less traders; while RPL is more favored by investors as it is required to stake RPL first before participating in the protocol.

3. Centralized exchanges (CEXs) staking

Among all staking options, the easiest way is to stake in centralized exchanges to eliminate the disadvantages of high entry barrier and low liquidity. Users just need to register an account in a CEX and purchase ETH with their spot accounts to stake. But it should be noted that staking in CEXs is different from the other staking methods in that users’ wallets are actually controlled by the CEXs instead of users themselves.

Therefore, it is very important to choose a trusted exchange. For most users who are not familiar with decentralized wallets (like Metamask and Ledger), staking in CEXs is the most convenient and user-friendly. Now, Gate.io is providing ETH staking service.

Here are the rules of staking ETH on Gate.io:

(1) Users will receive ETH2 token as their credential for participating in ETH2.0 staking. 1 ETH2 represents 1 ETH staked on ETH2.0 network;

(2) Users can buy ETH2 with ETH or USDT or resell the ETH2 they hold;

(3) After the ETH2.0 network is activated, staking rewards will be distributed to ETH2 holders according to the net staking revenues (staking income minus staking cost);

(4) Staking rewards are issued in ETH2 based on the 14-day average holdings of ETH2.

Comparisons of solo staking, centralized exchange staking, and SaaS:

ETH Staking Takeaways

Staked ETH on the Beacon Chain cannot be withdrawn at any time

When The Merge is completed, staked ETH cannot be withdrawn until the upcoming Shanghai upgrade, which is the next major upgrade following The Merge. This means that newly issued ETH will continue to be locked and stored on the Beacon Chain for at least 6~12 months after The Merge.

Stakers will not sell their ETH immediately after The Merge

As stakers cannot withdraw their staked ETH immediately after The Merge, there is no need to worry about the crisis of ETH price plummet caused by large selling. After The Merge, ETH withdrawals and deposits will be limited, and the rate to stake and unstake will be restricted, which helps maintain stability of the chain.

It is not required to stake 32 ETH to run a node

In fact, the more ETH it requires, the more messages are transmitted between nodes, and the less ETH, the more nodes will participate. As 32 is 2 to the 5th power, 32 ETH is considered as the optimal amount. Nodes transmit messages exponentially. If the required amount to run an ETH validator is reduced from 32 to 16, it would increase the messaging volume for all nodes by 4x. Given this, 32 ETH is considered the minimum staking amount.

Conclusion

In an era where Ethereum has transitioned from PoW to PoS and enabled staking that allow stakers to get rewards, Ethereum has entered an important stage of its major upgrade plan. For ETH holders, staking may be the best investment option at present.

The benefits that come with staking are: rewards available for maintaining network security; higher security as more ETH are required to deceive validators and less energy consumption (Ethereum’s energy consumption dropped by ~99.95% after replacing the traditional mining mechanism that consumes extensive computing power.)

It should be noted that the staked ETH cannot be withdrawn before the Shanghai upgrade is completed, which means stakers cannot sell their ETH even if the market fluctuates violently. In addition, during the 6~12 months after the Shanghai upgrade, the staked ETH can only be withdrawn in stages with a daily withdrawal limit. Therefore, it is unfounded to conclude that “unlocking will lead to huge selling pressure”.

Furthermore, as there are various staking options for users to choose from, it is necessary for you to take serious, thorough considerations about the security, governance and centralization risks before staking. As the dominant staking protocol, Lido faces concerns from the public about the risk of over-centralization; Rocket Pool, as an emerging decentralized staking protocol, is favored by more and more users for on-chain staking; and CEXs are undoubtedly the most convenient channels to participate in staking as users do not need to create another wallet to manage their deposits, but it is not favored by investors who prefer decentralized ways.

The current staking protocols all provide tokenized staking credentials. Stakers can get instant liquidity without locking their funds for 2 years, which makes it easier and more flexible to manage their funds. However, there are also risks of being attacked or depegging. Therefore, investors should consider comprehensive factors such as the verification mechanism, yield rate, and security before choosing an appropriate staking method.