How ETH2 staking pools work

ResearchJun 28, 2022
How ETH2 staking pools work

Migration to staking has been on Ethereum’s roadmap for years. This journey is bumpier than expected, but the network is poised to achieve its goal by 2023. The Ethereum 2.0 Beacon Chain is live, the ETH 2.0 deposit contract is public, and all eyes are on another key component – ETH 2.0 staking.

While stakers contribute to Ethereum’s future, the cost of solo entry is high — each set of validator keys requires at least 32 ETH. Those who cannot spend that much crypto turn to collaboration, a cheaper and more accessible option. Discover the principles of most staking pools and the benefits of staked ETH.

Description of ETH staking. Source: Ethereum.org
Description of ETH staking. Source: Ethereum.org

What is Ethereum staking?

PoW requires considerable computing power as it relies on mining. In PoS, transactions are validated by nodes based on another competitive method. Anyone owning a minimum amount of a specific currency can join in and earn rewards in return. On Ethereum, these rewards depend on the total amount of staked ETH.

The Beacon Chain, which introduced this more sustainable model, shipped in late 2020. Currently, every validator needs a 24/7 connection to the Beacon Chain & ETH1. A deposit of 32 ETH activates validator software, so a node can handle data storage, transaction processing, and the addition of new blocks.

When ETH2 finally goes live, it will improve security, efficiency, and scalability. According to Ethereum core developers, the block times will shrink to 12 seconds.

Solo vs. collaboration

Becoming a validator is not the only way to benefit from the network. Thanks to collaborative models, anyone can join by depositing very little ETH. This is what staking pools are all about.

To get started, all users send their Ether to the deposit contract — a bridge between PoW blockchain and PoS. All staked ETH is locked until the release of the new protocol.

Why stake your ETH?

ETH rewards are not the only motivation for staking Ethereum. The Merge will enhance the network in many ways, and staking is also multi-faceted:

  • Staking rewards. Validators get tangible benefits for facilitating consensus. Their software ensures that blocks are properly formed and checks that other node operators meet the requirements. Monetary issuance is based on a dynamic inflation curve, as shown below.
Staking rewards curve. Source: Stakingrewards.com
Staking rewards curve. Source: Stakingrewards.com
  • Better security. The more ETH is staked, the more of it is required to control the network. This improves its resistance to tampering. Taking over most of the validators and total ETH becomes increasingly more difficult.
  • Reduced carbon footprint. PoS is much lighter than PoW. Node operators only need a PC, laptop, or smartphone. The Merge will slash Ethereum’s energy consumption by around 99.95%.
Change in power consumption after the PoS switch. Source: Reddit
Change in power consumption after the PoS switch. Source: Reddit

Ethereum staking pool explained

Pool members, as the term suggests, join forces and resources. They can stake as much ETH as they like – virtually any amount will do. For example, the minimum deposit on Rocket Pool is 0.01 ETH.

Running one’s own node is also unnecessary. Pools are decentralized ETH staking services that allow passive participation. Stakers can sit back and watch their ETH profits roll in. After the Ethereum Consensus Layer (ETH2) goes live, their staked assets will be released in stages.

Anyone who stakes Ether in the ETH 2.0 deposit contract locks it until the ETH 2.0 rollout. With over 13 million ETH staked so far, the unlocking may start sometime in 2022. In the meantime, tokenized assets address the issue of illiquidity.

Ethereum has no native support for staking, so all pools are run by third parties. Some are powered by smart contracts, others rely on off-chain mediation. Either way, this model lets anyone:

  • Take part in staking at a lower cost. Pool participants can contribute a relatively modest amount of ETH.
  • Avoid dealing with hardware. All technical aspects are delegated to pool operators.
  • Yield returns more easily through delegation. Participants stake ETH and get a share of the rewards minus a fee for node operations.
  • Make use of staked ETH, despite its locking. This is possible thanks to liquidity tokens — a special type of ERC-20 assets. Each token represents a claim on the ETH staked and the associated rewards, so Ether works like crypto loan collateral.
  • Enter and exit at any time. In essence, staking ETH is as straightforward as a token swap.

Pools vs. other Ethereum staking solutions

Other options offer a trade-off between impact and trust, along with different approaches to private keys. While a pool lets you stake a modest amount, there are several ways to start staking with 32 ETH. Given the current ETH price, these modes of participation are costly (32 ETH is worth around $40,000 as of June 27, 2022).

Alternative 1. Solo staking

This format completely removes trust from the agenda. You get full participation rewards directly from the protocol, including unburnt fees after the transition. There is no need to search for a third party — you take care of your own ETH.

For the average retail staker, the entry threshold is prohibitively high. Aside from at least 32 ETH, they need a computer connected to the internet 24/7. Strong hardware is mandatory to keep the validator healthy at all times.

Alternative 2. Staking as a service (SaaS)

32 ETH unlocks another opportunity — delegating to a third-party node operator. SaaS takes care of the hardware, validates transactions on the staker’s behalf, and provides native block rewards.

Typically, a user creates validator credentials, uploads their signing keys, and makes a minimum deposit. Due to the counter-party risk, experts advise retaining custody of the keys used to withdraw ETH. Another drawback is the fee, which is usually monthly.

Alternative 3. Centralized exchanges

In this least impactful variation, users do not even hold ETH in their own wallets. They earn some yield with minimal effort by contributing to pools managed by CeFi platforms. By design, this scheme is potentially vulnerable to bugs and attacks.

Biggest decentralized staking pools

One of the most popular staking options is Rocket Pool. It is backed by Consensys, the company behind MetaMask and one of the leading blockchain software providers. As of now, this Ethereum pool offers three distinct benefits. Users can:

  • Stake 0.01 ETH or more to earn rETH, a tokenized version of the staked holdings
  • Run a validating node and deposit 16 ETH to boost ROI
  • Earn a competitive APY compared to other pools
Rocket pool stats as of June 27, 2022
Rocket pool stats as of June 27, 2022

Socialized risks

Dishonesty is a salient risk. What if some node operators act in bad faith and sign off on malicious transactions? Their stake will be slashed for good.

Rocket Pool addresses this challenge, as there is less responsibility for each participant. Any losses are soaked up across the pool. If you happen to stay with a deviant node, you won’t be alone to bear the brunt of it.

Smart contract functionality

Rocket Pool entirely relies on smart contracts. Once their funds are deposited to a contract, the contributors receive token rewards. Their assets are then managed and tracked in a trustless fashion. This system has three key features:

  • Every aspect is public (any smart contract is open-source).
  • Pool security is audited by outside parties.
  • The functionality is flexible and can be upgraded.

Tokenized staking

Those who deposit ETH to Rocket Pool contract receive rETH. These tokens represent their stake and yield simultaneously. By nature, the asset is similar to its ERC-20 counterparts. Holders have three options:

  • Keep the tokens in cold storage (hardware wallets)
  • Use rETH in DeFi
  • Sell its current and future value
Two ways to benefit from Rocket Pool. Source: Rocketpool.net
Two ways to benefit from Rocket Pool. Source: Rocketpool.net

Other staking pools

Rocket Pool is prominent, but it is not the only option. Crypto enthusiasts can turn to other community-based models.

Staked

This pool caters to high-net-worth individuals, and its returns are also higher than average. The infrastructure is comparable with high-profile investment funds, and the service also offers noncustodial staking. Professionals can rely on Staked nodes or access a user-friendly staking dashboard with web3 access.

Ankr

Unlike Staked, this noncustodial solution targets retail users as it facilitates staking through the Stkr app. Thanks to Micropools linked directly to Ethereum-based wallets, members can deposit just 0.5 ETH. Ankr has two major similarities to Rocket Pool:

  • It is designed to democratize staking.
  • It provides stakers with the aETH token.

Flexibility of staking

By joining staking pools, crypto enthusiasts support Ethereum without parting with much capital. While solo stakers need 32 ETH, pools accept deposits as low as 0.01 ETH. Tokenization means they do not sacrifice liquidity, and smart contracts let them earn staking rewards in a fully automatic fashion.

All stakers receive benefits, but they do not have to become validators. Collaboration democratizes the process by setting a significantly lower barrier. Staking pools run by third parties help Ethereum become more sustainable, scalable, and cost-effective. With a bit of due diligence, users can make the most of these accessible models.




Disclaimer:

The information provided by CoinLoan (“we,” “us,” or “our”) in this text is for general informational purposes only. All investment and financial opinions expressed by CoinLoan in this text are from the personal research and open information sources and are intended as educational material. All outlined information is provided in good faith. However, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information in this text.

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