For savvy Cryptographic Currency investors like myself, there is nothing more satisfying than staking your tokens and earning that juicy, juicy yield. With Ethereum’s transition to a full Proof-of-Stake (PoS) consensus model, $ETH itself has become one of these aforementioned yield-bearing assets.

“Ultra sound money”, I hear you say.
“Yes indeedy”, says the CEO.

Unfortunately, native $ETH staking does have certain limitations which has paved the way for Liquid Staking Derivatives. This little article will cover $ETH staking and go over some of the alternatives on the market.

Read on, my dear students.

TL;DR

• Native staking on ETH currently earns ~4% APY via PoS rewards
• Native staking also requires at least 32 ETH and principal plus rewards cannot be withdrawn til Ethereum’s Shanghai Update scheduled for later this year
• Limitations to native staking have paved the way for Liquid Staking Derivative platforms such as Lido, Rocketpool and Coinbase Staking
• The above give you an ERC-20 token that represents your staked ETH and bypasses the capital requirements and non-tradability of native staked ETH
• These LSDs are excellent building blocks for DeFi protocols such as Dopex
• Note that use of third-party staking platforms carry additional risk compared to native staking so do your own so-called “research”

On ETH Staking

Ethereum’s transition to PoS means $ETH holders can now stake their tokens, validate transactions and earn $ETH rewards for doing so. The exact rewards stakers receive changes based on certain variables although it remains relatively constant around 4% APY.

“4% APY on ETH? Get me in Coach!” I hear you say.

Steady there, my dear reader.

Whilst highly attractive, native ETH staking does have certain caveats that make it unsuitable for all ETH holders.

Of note, stakers must stake at least 32 ETH to be a reward-earning validator. This is quite a sizeable sum and may preclude investors with sufficient capital from earning these juicy rewards.

Additionally, whilst staked ETH does accrue rewards, both principal and rewards are not withdrawable prior to the Shanghai Update (scheduled for later this year). For investors that want their assets liquid, the drawback of this lock on their capital may exceed the benefit of any rewards earned.

Fortunately for us, the power vested in DeFi through the good graces of composability have created some beautiful protocols that allow the masses to earn yield on ETH without the same limitations.

Introducing - ETH Liquid Staking Derivatives (LSDs)

On LSDs

Whilst a lot of LSDs exist, the logic behind each is very similar.

1. Deposit on LSD service and receive ETH LSD
2. Deposited ETH is staked natively and accrues rewards
3. Rewards are distributed to ETH LSD holders in the form of newly minted ETH LSD

By pooling depositor funds together and running their own validators, the 32 ETH minimum requirement for staking can be overruled from the user perspective. The staked ETH is represented by an ERC-20 ETH LSD - this allows holders to exit their positions on the open market whilst still earning rewards in the interim.

Ah yes, most intriguing. By harnessing the power of so-called composability, protocols have devised some clever little solutions on the main blockers for native staking.

But what are these protocols exactly?

Read on, my pretty pets.

On different LSD Solutions

Come one, come all - let us take a proverbial minute and look at a few of the leading LSD solutions on the market and how they differ.

Lido

Lido is the leading decentralized staking platform in terms of ETH staked and provides LSD services for several other tokens such as $SOL and $MATIC. Pooled ETH will go towards a whitelisted set of node operators that are responsible for validating transactions.

The Lido protocol consists of two LSDs which are essentially the same token but with different ways of accounting for rewards. Users can switch between the two (by wrapping/unwrapping) at any time they want.

stETH is backed 1:1 by ETH staked on Lido and uses a rebase mechanic to represent staking yield. For example, if you have 1 stETH initially, your balance may be 1.05 stETH at the end of the year to account for accrued rewards!

stETH can be wrapped as wstETH - rather than rebasing, wstETH employs an index to reflect accrued rewards. For example, if you have 1 wstETH worth 1 stETH initially, the value of your wstETH at the end of the year may be worth 1.05 stETH.

stETH and wstETH are functionally the same from a holder’s perspective but just uses different accounting methods to adjust for ETH staking rewards. The nuance lies in its implications for tax purposes and to accommodate for different DeFi use cases.

Incredible!

Lido’s native token, creatively tickered $LIDO, is used to vote on pool parameters and for incentives to integrate the use of stETH and wstETH across the DeFi landscape.

“Wen Lido-based SSOVs”, I hear you ask?
“Teehee”, says the CEO.

Rocketpool

Rocketpool works a little differently to Lido as it allows users to stake ETH and operate a node OR stake ETH only. Node operators must have at least 16 ETH and 10-150% of deposited ETH value in $RPL (the native token). This 16 ETH will be paired with another 16 ETH from only-stakers to form the 32 ETH required for a node.

Rocketpool’s LSD token is called rETH which is the equivalent of Lido’s wstETH. This means that the ratio of ETH per rETH increases overtime to reflect the yield earned on the ETH staked on the platform.

Intriguing indeed.

$RPL is used as collateral for node operators in the event the node operator is penalized for “failure to perform their duties” (some blockchain mumbo jumbo beyond the CEO’s abilities). The native token is primarily used as rewards for node operators, maintain appropriate oracles, and fund proposals.

Coinbase

Whilst Lido and Rocketpool are decentralized protocols, Coinbase also offers staking services ETH staking services.

Coinbase’s cbETH uses the same logic as wstETH and rETH, where the conversion rate of ETH per cbETH increases overtime to reflect staking yield.

Whilst this does represent easy access to ETH staking, please be mindful of custodial risk that reliance on centralized platforms carry.

“Not your keys, not your CEO”, or something like that.

Risks of LSD Solutions

Whilst LSDs eliminate the need for large sums of capital and loss of tradability for principal and rewards, there are risks associated with non-native staking.

Reliance on third party protocols may confer additional smart contract risk on your funds. Coding errors and exploits are definitely things to be considered if you want to use one of these services. In addition, since rewards and principal of the backing ETH are locked until Etheruem’s Shanghai update, there is a level of uncertainty regarding timeline for withdrawal.

Since LSDs are represented by ERC-20 tokens, depeg risk is another thing to give some thought to. Whilst LSDs are conceptually backed 1:1 by ETH (either represented 1:1 or via an index), they are priced by standard AMM logic. In the event of an unbalanced liquidity pool, LSDs may be traded for less than their backing value.

“Opportunity or cause for concern?”, CEO hears you ask.

Unfortunately, this is not his area of expertise nor does he want a long prison sentence for misinformation. Please do go ahead and do your own so-called research into each of these platforms (and the many others coming onto the market) before deciding if these are right for you!

Parting Poem

Wow. Incredible insight by another certified Australian legend may he rest in peace.

CEO hopes that this is an insightful little tour into the workings of ETH staking, some of the various staking options available, and also some risks. This does not meant to be a comprehensive explainer but just some little tid bits to help you along your way.

Do wait out for our dear Saitama's soon-to-come article tomorrow to see how this ties in to the Dopex Pty Ltd.'s lovely vision!

Until next time, my loyal students.

CEO (Chief Education Officer, not to be confused with Nutoro, our Chief Executive Officer)

Yeah look mate I'm already liquid you just gotta stake me.

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About Dopex

Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner.

Dopex uses option pools to allow anyone to earn a yield passively. Offering value to both option sellers and buyers by ensuring fair and optimized option prices across all strike prices and expiries. This is thanks to our own innovative and state-of-the-art option pricing model that replicates volatility smiles.

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