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An article to understand the ETH pledge pool and pledge derivatives stETH



Note: The original author is Georgios Konstantopoulos & Hasu The transition from Proof of Work (PoW) to Proof of Stake (PoS) is the most anticipated milestone of Ethereum since its inception. Unlike PoW, which uses high-cost energy to expand the blockchain, PoS allows users to pledge ETH and verify block production nodes. The first step for Ethereum to move towards the PoS mechanism is to launch an independent network that can reach consensus, that is, the beacon chain. In return for providing security to the system, stakers are rewarded with new ETH from inflation. In the future, the Beacon Chain will merge with Ethereum and allow stakers to earn transaction fees that currently go to PoW miners as well as Miner Extractable Value (MEV). For the sake of decentralization, Ethereum's PoS protocol does not provide stakers with some of the features expected in other PoS mechanisms such as Cosmos, Tezos, and Polkadot. But we believe that the market will always intervene to make staking more effective and convenient. Therefore, it is important to ensure that the solution will bring the most private benefits to the stakers, but also bring healthy systemic outcomes for the entire Ethereum ecosystem. In this article, we will explore the problems that ETH stakers currently face, and explain how staking pools and staking derivatives can solve these problems for stakers while increasing the effective security of the network. To pledge alone, the user must deposit 32 ETH to the ETH2 deposit contract, and specify two key parameters at the same time: 1. Validator public key: Before depositing, the user needs to generate a key pair for its validator. The private key is used to sign the block, while the public key serves as its unique identifier. Binance.US Launches Cardano (ADA) Staking Pledge Service: On September 1st, according to Binance.US official social media, the trading platform has supported the Cardano (ADA) staking function. Binance.US introduced support for high-yield staking in early June in an attempt to compete with Coinbase, and currently supports cryptocurrencies such as Avalanche (AVAX), Solana (SOL), Cosmos (ATOM), and more. Cardano is currently preparing for the upcoming Vasil hard fork and has released v.1.35.3. Once the relevant indicators meet the requirements, the upgrade operation will be launched. [2022/9/1 13:02:13] 2. Withdrawal certificate for depositing 32 ETH: Once the withdrawal is enabled, the principal (32 ETH) and pledge rewards can only be withdrawn to this address. Crucially, the public key and withdrawal credentials need not be controlled by the same entity. After that, users only need to operate an ETH2 validator node and sign blocks when it is their turn, otherwise they will be punished for violating the protocol. The efficiency and convenience of the pledge protocol can be decomposed into the following attributes. Correspondingly, what about Ethereum? These properties are significant obstacles for stakers. All else being equal, they would prefer to be able to stake any amount of ETH, delegate infrastructure operations, and be able to immediately withdraw the staked ETH. They also want to be able to use their staked ETH in other applications if possible, which is standard procedure in decentralized finance (DeFi). Nvidia CTO: Encrypted currency has four major characteristics: Jinse Finance reported that recently, Nvidia CTO Michael Kagan talked about hot topics such as the virtual world: metaverse, data center, and encrypted currency in an interview. According to Michael Kagan, cryptocurrency is a trading medium that uses the principles of cryptography to ensure transaction security and control the creation of transaction units, and is a type of digital currency (or virtual currency). It is based on a set of open source codes of computer calculations around the world, generated through computer graphics cards and CPUs, and a large number of calculations, and uses cryptography to ensure the security of all aspects of currency circulation. Cryptography-based design allows cryptocurrency to be transferred or paid only by real owners. There are four major characteristics of cryptocurrencies, one is international recognition, cryptocurrencies are not subject to interest rates, exchange rates, transaction fees or any other fees, so you can transfer money at an international level without encountering any problems. Second, transaction costs are low. Third, transaction confidentiality and finally, peer-to-peer transactions. This is one of the main assets of cryptocurrency payments, with no middlemen or third parties involved. Although Michael Kagan did not deny the important position of cryptocurrency in the virtual world, he believed that the current task of the virtual world is to do a good job in infrastructure construction. For the time being, the virtual world without cryptocurrency will make steady progress, but the current virtual world with cryptocurrency is also Not getting better. (ZDNet) [2022/5/18 3:23:42] Below we will discuss how the pledge pool solves the delegation and minimum pledge requirements; and how the pledge derivatives issued by the pledge pool solve the long-term lock-up problem and allow pledgers to release The liquidity of its pledged ETH. Fitness metaverse project OliveX will launch cycling fitness game Dustland Rider: News on April 27, the Move-to-Earn blockchain game Dustland Runner developed by fitness metaverse project OliveX is based on the early smartphone game Zombies, Run. It is reported that Zombies, Run has an average monthly active-zce user of 300,000, of which about 50,000 are paying users. The game was created by game developer Six to Start, which was acquired by OliveX in March 2021 for $9.5 million. OliveX, which previously acquired fitness game platform Sol Cycle, is using its designs to launch its next game, Dustland Rider. The blockchain game, which could launch as early as June, will feature cryptocurrencies and NFTs earned through cycling for fitness. After that, the company hopes to incorporate more sports, such as boxing and rowing, and start using motion detection technology in games. (Forbes) [2022/4/27 2:34:20] On the surface, the working principle of the pledge pool is similar to the mining pool in PoW, but due to the nature of PoS, it can provide users with additional benefits. 1. By pooling ETH together, stakers can bypass the 32 ETH minimum requirement, allowing smaller stakers to participate in PoS. 2. It is not necessary for each user to operate their own validator, the pledge pool will handle the corresponding operations. Additionally, some can provide users with insurance against protocol penalties such as slashing. Bank of America: Taking into account the growth of user adoption and developer activity, it will not enter the encryption bear market at present: March 1 news, Bank of America (Bank of America) in a report titled "Digital Assets: in the Flow" Analysis of the flow of cryptocurrencies between individual and exchange wallets revealed a “lack of directional conviction” in the market, the bank said. Fed tightening and macroeconomic headwinds could limit the cryptocurrency’s upside over the next six months. However, analysts led by Alkesh Shah wrote in a recent report that given the level of user adoption and growth in developer activity, it will not be a "crypto winter." The bank said that the outflow of bitcoin trading funds shows that there is little momentum for bitcoin bargain hunting, while the trading inflow of ethereum shows that its price may continue to face headwinds. Exchange inflows to the top three stablecoins slowed significantly for the second week in a row, the report said. Exchange inflows hit $517,000 last week, down 99% from the previous week, suggesting investors may be biding their time in the current macroeconomic environment, analysts at the bank said. The cryptocurrency market will struggle to break out of its recent trading range until fears of a potential recession are dispelled, the report said. (CoinDesk) [2022/3/1 13:29:29] 3. The pledge pool can maintain a reserve of liquid ETH to meet the demand for immediate withdrawal, similar to a bank. This eliminates the four-month withdrawal period, assuming not all customers want to withdraw at the same time. 4. Finally, the staking pool can provide tokens representing the staked ETH, which can be used in other applications. It will be explained in detail below. Netswap released the 2022 Q1 roadmap, opening liquidity mining on January 9: Official news, Netswap released the 2022 Q1 roadmap, opening liquidity mining on January 9; launching Launchpad and leveraged Swap from the end of January to February, And cooperate with BinaryDAO; launch the governance module in March, and reach cooperation with the stable currency project and the GameFi project. [2022/1/10 8:37:09] Staking pools can be centralized or decentralized, each with its own set of trade-offs. The creation of staking pools can be easily implemented by any large exchange. In fact, many exchanges already support (or will support) beacon chain staking. The exchange only needs to: 1. Allow users to opt-in to staking in exchange for staking rewards. 2. Run the validator with the user's ETH. Because it is pledged by the exchange, users do not need to run any infrastructure. In addition, providing instant liquidity is also very easy for exchanges since they already have large liquid ETH reserves. Given the value of customer acquisition and liquidity to an exchange's business, they can provide this service at no additional cost to users. Now, we have seen the difference between individual staking and staking pools, and how centralized staking pools work. Below, we will take Lido as an example to discuss the architecture of the decentralized pledge pool. From the user's point of view, the whole thing is pretty straightforward. They deposit ETH into an Ethereum smart contract and receive stETH as a receipt. The balance of stETH tokens is adjusted over time to reflect the due distribution of staking rewards in the contract. Additionally, 1 stETH will always represent a pledge of 1 ETH. From Lido’s perspective, every time 32 ETH is staked on an Ethereum smart contract, the DAO selects a new validator from a governance-controlled registry. Then call the deposit contract, assign 32 ETH to the validator's public key, and use LidoDAO's withdrawal certificate. Two issues that need attention: How are withdrawal vouchers managed? Withdrawal credentials are ETH2 BLS keys, which are split into 6-11 multi-signatures using a distributed key generation ceremony. While this is not optimal, it does not pose a risk when fetching from the beacon chain is not enabled. By the time stakers can withdraw, Lido will transition to the ETH1 smart contract and act as a withdrawal certificate instead of a multisig. After that, 1 stETH will be able to redeem 1 ETH trustlessly, assuming that the smart contract has no management function on funds. Who are validators and how do I get into the registry? Validators are professional staking businesses like, Chorus One, or stakefish, and they must be approved by governance. Each validator has a maximum stake limit, which is voted by the management. stETH is the ownership of the staked ETH and any rewards accumulated in the smart contract, also known as staked derivatives. Staking derivatives will have a major impact on the entire Ethereum ecosystem, including competition among ETH stakers, ordinary ETH holders, staking pools, and even Ethereum itself. Stakeholders: For stakers, the main benefit of staking derivatives is re-hypothecation. Stakers can use them for other purposes while staking. LP tokens similar to Uniswap can be used as collateral for DeFi. This can greatly reduce the opportunity cost of staking. Ordinary ETH holders: If stETH can be used as collateral to borrow ETH, then the need to borrow ETH can be released and used for leveraged pledge. This will drive up the interest rate on the supply of ETH1, ultimately benefiting all ETH holders with a higher interest rate. Competition among staking pools: The existence of stETH gives its staking pools a significant network effect. This network effect creates strong incentives for users to stake against leaders in this market, i.e. ETH staking derivatives may follow a power law or winner-takes-all distribution due to liquidity protection and associated network effects . Therefore, stETH has the potential to replace ETH in many use cases, and possibly even completely replace ETH. However, this argument must be weighed against interests. If staking derivatives reduce the cost of staking, they could result in more (or even all) ETH being staked. Note that this is a perfect example of a virtuous cycle: the more liquid stETH is, the lower the opportunity cost of staking, which leads to more ETH being staked, which in turn further deepens the liquidity of stETH. Without staking derivatives, we might expect 15-30% of ETH to be staked. However, with staking derivatives, this number can be as high as 80-100%, since there is no additional cost for staking compared to not staking. To illustrate why this leads to greater economic security, consider the following attack scenario: If 20% of all ETH is staked, and the attacker wants to obtain 66% of all stakes (the critical threshold for breaking the chain), they will Had to buy 40% of all ETH on the open market. If 60% of all ETH is staked, but stETH is liquid, the attacker would have to buy 66% of all stETH and eventually 40% of all ETH. Note that there are additional steps here, the attacker first redeems stETH to remove honest validators, and then re-stakes their ETH. If more than 60% of ETH is staked, the share of all ETH that an attacker has to buy will be higher than 40% and will only increase from there. If 100% of all ETH were staked, the attacker would need 66% of all stETH to reach the same threshold. The conclusion is that if staking derivatives can increase the amount of ETH staked above 60%, then they will strictly increase the economic security of Ethereum, not decrease it. Decentralization is often seen as an intangible benefit, but comes at a higher price, so users are often unwilling to pay for it. However, this line of thinking does not apply to decentralized staking pools, as they have three key advantages over centralized staking pools. Decentralized staking pools have stronger social scalability: For PoS security, an important indicator is how much staking is controlled by an entity.


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