This article starts with an introduction to Ethereum staking, explaining its origin, advantages and risks, as well as the booming development of liquidity staking. The article aims to help readers gain a comprehensive understanding of 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
– Ways to participate in Ethereum staking
– What is liquidity staking?
– Leading projects in the Ethereum staking field: Lido (LDO), Rocket Pool (RPL), Pendle (PENDLE)
Since Ethereum transitioned from PoW (Proof of Work) to PoS (Proof of Stake) in 2022, staking ETH has become an important mechanism for securing the network. The application of staking has evolved from independent staking to liquidity staking and re-staking during the current bull market, gradually becoming a multi-billion dollar market.
This article starts with Ethereum staking, covering the concept, its origin, advantages and risks, as well as liquidity staking, to help readers fully understand the concept of staking.
What is staking?
Staking not only helps protect network security but also allows asset holders 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, and stakers earn approximately 3-4% annual rewards (depending on the staking amount). 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
Bitcoin relies on the PoW mechanism for network operation, where miners compete to solve mathematical problems to ensure the normal operation and security of the Bitcoin network, in turn, competing for block rewards. However, PoW consumes excessive energy and computing power, making it unable to handle a large number of transactions within a short period. Therefore, Ethereum introduced the PoS mechanism to address these issues.
PoS, short for Proof of Stake, requires validator nodes to use their coins as stakes to become validators of the Ethereum mainnet, significantly reducing the energy consumption of blockchain mining. Although PoW is currently recognized as more secure in terms of security, PoS operates well enough to meet market demands.
The development history of Ethereum staking
The transition of Ethereum to PoS has undergone multiple discussions and updates. Here are some key milestones:
– July 30, 2015: Ethereum mainnet officially launched, based on the PoW consensus mechanism.
– 2017: The Ethereum community actively discussed the transition to PoS and proposed the Casper protocol, which was the initial design for the transition to PoS.
– December 1, 2020: The Ethereum Beacon Chain was launched, marking the first phase of Ethereum’s transition to PoS. The Beacon Chain introduced the PoS consensus mechanism, but it operated separately from the Ethereum mainnet (which remained PoW).
– September 15, 2022: Ethereum successfully completed The Merge, merging the Ethereum mainnet and Beacon Chain, officially achieving PoS.
Advantages and disadvantages of staking
Advantages:
– Passive income: Staking provides token holders with a 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 protocols or rule changes.
– Lock-up period: Staked tokens are usually required to be locked for a certain period and cannot be traded during this period, which may not exert 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 coins, 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 as a penalty.
Ways to participate in Ethereum staking
1. Solo Staking: Users independently run a full node to participate in Ethereum network validation. Users have full control over their nodes and staked ETH, and they enjoy 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 in a shared pool and collectively act as validators, reducing the threshold for participating in staking, while rewards are proportionally shared 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’s 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 and earn staking rewards.
2. Obtaining liquidity tokens: As a reward, users receive a liquidity staking token representing their staked assets and the staking rewards.
3. Token liquidity: These liquidity staking tokens can be used on other DeFi platforms for 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 the liquidity staking token (LST) releases the liquidity of the staked ETH, quickly attracting a large number of users and assets, thus opening the curtains for Liquidity Staking DeFi.
Leading projects in the Ethereum staking field
Due to its lower capital requirements and lower entry barriers, liquidity staking has quickly become a hot field. Currently, well-known projects in Ethereum liquidity staking include:
1. Lido (LDO): Lido is a leading liquidity staking protocol on Ethereum that allows users to stake ETH and other crypto assets without locking their assets or maintaining infrastructure.
2. 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.
3. Pendle (PENDLE): Pendle Finance is a yield tokenization protocol that allows users to tokenize and trade future yields using top-tier yield-generating protocols like Aave and Compound.
Please note that the information provided in this article is accurate as of the given dates mentioned in the news headlines.
Sources:
– “Pendle鎖倉量突破40億美元,如何賺取槓桿收益?完整介紹與質押教學” (May 1, 2024)
– “摩根大通:Lido質押佔比下降「救了以太坊」!被SEC認定為證券可能降低” (April 5, 2024)
– “以太坊研究員:Electra升級應「減少ETH發行量」,以利單獨質押者生存” (April 3, 2024)
– “富達申請為以太坊現貨ETF增加「質押」服務,創造更多收入!Lido 、RocketPool 聞訊跳漲” (March 19, 2024)