Introduction

Staking via exchanges and liquid staking are the two main methods for users to stake their assets, with the Liquid Staking Derivatives (LSD) sector gaining significant traction last year. Staking, based on Proof of Stake (PoS) and Delegated Proof of Stake (DPoS) mechanisms, requires users to prove ownership of a certain amount of digital currency. Users simply need to lock a certain amount of cryptocurrency in a crypto wallet or exchange, and they can earn rewards over time.

The Ethereum network has high demand and intense competition in the staking sector, driven by three major players: Lido, Rocket Pool, and Frax. Currently, approximately 13.19 million ETH are staked in the LSD sector, with a total market value of $44 billion. Lido is the undisputed leader in this sector, with over 9.5 million ETH staked, capturing a market share of 72.29%. Rocket Pool follows with 1.16 million ETH staked, with these two protocols holding over 80% of the market share, while other protocols hold relatively small portions.

Source: DefiLlama - LSD Sector

The LSD sector can generate long-term cash flow, with promising future development prospects due to the high demand on the Ethereum network. Benefiting from the ETH 2.0 upgrade, Rocket Pool’s staked ETH volume continues to rise, securing its position as the second largest player in the market. This article will detail its product logic and analyze its economic model and current development status.

What is Rocket Pool?

Rocket Pool is an LSD protocol on the Ethereum network, offering ETH staking pools and node operator staking pools through the rETH mechanism, providing additional rewards for ETH stakers. The product was officially launched on the mainnet in November 2021. The founding team, led by David Rugendyke, boasts extensive technical development experience, with most members having worked in traditional industries for many years, thus possessing considerable development capabilities. As early as October 2017, the project secured funding from ConsenSys Ventures, although the amount was not disclosed. In February 2023, it also received investment from Coinbase Ventures, with the funding amount again undisclosed.

Due to the rapid growth of the LSD sector post-ETH 2.0, the volume of staked ETH on Rocket Pool continues to increase, along with the number of node operators, establishing it as one of the leading projects in the sector.

Staking Token rETH

rETH is the liquidity token in the ETH staking pool. When users stake ETH into the pool, they receive rETH, which represents the staked ETH and the accumulated rewards over time. These rewards include beacon chain rewards, priority fee rewards, and MEV rewards. As these rewards accumulate over time, the exchange rate of rETH to ETH will exhibit long-term growth. Therefore, users can earn cumulative rewards by staking ETH through the protocol to obtain rETH or by purchasing rETH on the secondary market and holding it for a period.

Source: Rocket Pool Staking Protocol (Part 1)

Currently, Rocket Pool’s main products are the ETH staking pool for regular users (Liquid Staking) and the staking pool for node operators (Node Staking). Below is a detailed explanation of these two products.

Liquid Staking

As shown in the image, when a user deposits 1 ETH into the ETH staking pool, they receive 0.9 rETH in return. Additionally, a deposit fee is required to prevent attacks during rate updates. The exchange rate between ETH and rETH is displayed on the transaction page, and this rate increases over time. In other words, the longer the ETH is staked, the greater the returns.

Source: Rocket Pool Staking

Clicking “Unstake” cancels the staked ETH. Without considering transaction costs, users can receive more ETH than they initially deposited. Users also have the option to trade ETH and rETH on the secondary market. Currently, the staking yield for ETH is approximately 2.82%.

Node Staking

Users can become node operators through the Rocket Pool platform, with the option to operate nodes locally or in the cloud. By configuring the node’s operating system, selecting execution and consensus clients, and installing the Rocket Pool Smartnode stack, users can create new ETH 2.0 Validators using the Rocket Pool network. This process includes ongoing maintenance and updates of the nodes.

In this process, node operators need to provide either 8 ETH or 16 ETH to create a MiniPool, and stake RPL (Rocket Pool tokens) worth at least 10% of the ETH value as collateral, which allows them to create an ETH 2.0 Validator. Since a Validator node requires a total stake of 32 ETH, the remaining 24 ETH or 16 ETH will be supplemented from the staking pool. If a node operator goes offline or engages in behavior harmful to the network, their staked RPL and ETH will be confiscated to cover the staking pool’s losses. Additionally, if the value of the staked RPL tokens falls below the minimum collateral requirement due to price fluctuations, the node operator will not receive further RPL distribution rewards until they replenish the necessary RPL.

Rocket Pool node operators earn rewards primarily from two sources: the ETH rewards for being a Validator, which include beacon chain rewards, sync committee rewards, priority fees rewards, and MEV (Maximal Extractable Value) rewards; and RPL distribution rewards, which are linked to the proportion of RPL tokens staked by the node operator relative to the total RPL staked.

Currently, the annual percentage rate (APR) for ETH rewards for node operators is 6.44%, and the APR for RPL rewards is 8.06%.

Source: rocketpool.net

Oracle DAO

Oracle DAO is a group of special nodes within the protocol, primarily responsible for protocol management. Its functions include:

• Ensuring that Validator status and account balance information are transmitted from the beacon chain to the execution layer.
• Ensuring that Minipools are created using unused Validator public keys and providing appropriate withdrawal credentials for Minipools.
• Constructing a rewards Merkle tree at the end of each 28-day reward period and uploading it to IPFS for node operators to query.
• Monitoring proposals to ensure they meet Rocket Pool’s requirements.
• Proposing and voting on the Oracle DAO roster.

Source: rocketpool.net

After performing these functions, Oracle DAO members can receive 15% of the newly issued RPL tokens as incentives. Currently, the DAO includes 15 members from the community, ecosystem, team, and other areas.

Token Model

RPL is the native token of Rocket Pool, whose team is based in Australia. They conducted a token sale as early as 2017 and upgraded the token’s economic model in July 2021. As of June 18, 2024, the total supply of RPL tokens stands at 20,445,460. The team has not yet disclosed specific details regarding token distribution. Officially, RPL’s initial inflation rate is set at 5%, meaning the token supply will increase at this annual rate. The additional 5% of tokens will be distributed proportionally among participants in the protocol ecosystem.

The inflation rate of RPL will be governed and adjusted by the DAO.

Source: CoinGecko

According to official documents, 70% of the newly issued tokens will be allocated to node operators as subsidies for their operational costs. The amount of tokens each node operator receives is tied to the proportion of their staked tokens to the total staked amount. The Oracle DAO, responsible for node management tasks, will receive 15% of the newly issued tokens, and the remaining 15% will be allocated to Rocket DAO.

Source: Medium

Both Oracle DAO and Protocol DAO can participate in the allocation of newly issued RPL tokens. However, the Oracle DAO mainly consists of investors and partners with the primary function of managing nodes. The Protocol DAO is composed of community members whose main function is to vote on the development direction of the protocol, potentially gaining greater governance power in the future.

The demand for RPL primarily comes from the staking requirements of node operators. Node operators must stake at least 10% of the value of the ETH they provide in RPL. When market prices fluctuate or node operations face penalties, node operators must supplement additional RPL tokens to maintain the 10% ETH value requirement. Failure to meet this requirement will result in ineligibility for additional rewards. The RPL token exists in a cycle where it faces the risk of a death spiral: if the number of node operators decreases, the demand for RPL tokens will decline, causing the token price to drop. This drop further leads to operator losses and potential network exits, ultimately driving the token price down further.

Development Status

Benefiting from the growth of the LSD sector, Rocket Pool’s liquidity has been steadily increasing since its launch. Over the past year, it has seen significant growth, with the total value locked now surpassing $4.4 billion.

Source: Defi Llama

Currently, the Rocket Pool platform has over 760,000 ETH staked, and the number of node operators has reached 3,696.

Source: Rocket Pool

Conclusion

Launched in 2021, Rocket Pool is an LSD project that enhances staking yields for ETH stakers through the rETH token. It also offers a staking pool for node operators to increase their earnings. The entry threshold for node operators is relatively low, and the positive feedback loop of the RPL token provides additional incentives for them. Benefiting from the rapid development of the LSD sector post-Eth2.0 upgrade, the protocol has become one of the leading projects in the sector. However, if the RPL token experiences a significant decline, leading to losses for node operators, there could be a risk of a death spiral.