How Ethereum can democratize Eth2 staking
How decentralized staking protocols will democratize access to Eth2 issuance
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Dear Bankless Nation,
Here’s a piece of Ethereum trivia: before it was 32 ETH to stake to Ethereum 2.0, it used to be 1,500. It certainly wasn’t ideal. But that was back in 2017, and things have changed since then. (Cryptography fixed this btw)
Even after lowering to 32 ETH, that’s still $40,000. Pretty steep.
Staking Pools have been a constant topic in the Ethereum ecosystem for a long time. There will always be smaller holders of ETH, and it is in Ethereum’s values to enable their enfranchisement with Ethereum.
I start this article off by talking about my thesis behind Decentralized Staking-as-a-Service (DSaaS) protocols; what they can do for us, why we need them, and how they should be built.
DSaaS protocols uphold and extends the values of Ethereum, and generally makes it a stronger system.
I then bring up Rocket Pool, an OG Ethereum project that has been following and working alongside Ethereum PoS development since 2017.
While I offer a model for understanding and appreciating the potential that DSaaS bring to Ethereum, Rocket Pool will either succeed or fail as a result of the choices of the RPL-owning community.
Like all token governance systems, there will be decisions that need to be made, and there are both good and bad moves. In order to evaluate RPL, it is not enough to just understand the protocol, but you must also understand the community behind the system.
Disclosure: RocketPool has a native token, RPL, which represents ~2.5% of David’s crypto portfolio.
Bankless Writer: David Hoffman, Bankless Founding Father
Decentralized Staking Protocols: Extending Ethereum’s Core Values
Ethereum was designed with a certain set of guiding principles that can be distilled down to a single objective:
Maximizing Ethereum’s inclusivity has been why Ethereum 2.0 has taken so long (six years!) to roll out. Cutting the corners on the path to producing a scalable, proof-of-stake blockchain would mean the disenfranchisement of many potential ecosystem participants.
When the design goals of Ethereum are to be able to host all of global economic activity, the six years of labor spent by the Ethereum 2.0 developers is a small sacrifice for increasing Ethereum’s inclusivity for generations to come.
We have already seen entire ecosystems come and go as a result of cutting-of-corners.
EOS created a high-throughput, low-cost, proof-of-stake blockchain. But it cut corners on scale by restricting blockchain consensus to 21 super-computers and using ‘Delegated Proof of Stake’, which created the ability to focus the direction of EOS token seigniorage, but not the ability to distribute EOS tokens to any and everyone, all at once.
A scaled, proof-of-stake blockchain, but only 21 entities can participate in consensus, and therefore only 21 entities can access EOS rewards. All other ecosystem participants are secondary citizens subject to EOS inflation because EOS cut-corners in its design.
The entire effort around Ethereum 2.0 was to create a financial system in which economic security can be assured at the protocol level, and the funding that pays for security is made accessible to anyone that wants to have access to it.
The Seignorage Problem
The Seignorage Problem: The entity with seignorage rights must secure itself from attackers, or else they may steal the seignorage rights for themselves.
The seignorage problem has plagued money ever since we invented it. Every money has a genesis story or event, and inside the genesis of money, there’s historically been an entity that has the power to make more of it.
Bitcoin solves the seigniorage problem by deleting it (🤞), making BTC the most scarce asset possible, and incentivizing people to mine for BTC as a result of that scarcity, and thereby making Bitcoin secure.
Ethereum solves the seigniorage problem by distributing new issuance to everyone. Because of this fairness and inclusivity of allowing anyone to access issuance, it becomes the Schelling point of currency legitimacy.
Ethereum 2.0 will offer the ability for the average individual to stake ETH on consumer level hardware, on laptops or Raspberry Pi’s, and participate in Ethereum security and receive ETH issuance. The BLS signature scheme that was incorporated into ETH 2 allows for unlimited numbers of participants from joining into the protocol and offering their security to the network.
So long as you have 32 ETH, you can participate in ETH staking.
Ah shit, wait….32 ETH is $45,000 as of January 26th, 2021.
Damn, that’s pretty expensive. Most people don’t have $45,000 in cash, and fewer are able to stomach trading $45,000 US dollars to 32 ETH where the future value is unknown.
The US dollar price of 32 ETH is already prohibitively expensive for 98% of the world’s population, and right now the price of ETH is going up and to the right pretty damn fast. As a result, it would be a shame if Ethereum consensus participation was only restricted to ETH whales and early adopters who made a high conviction bet on the future of crypto networks.
More importantly, it would go against the first point of this essay: Ethereum’s dictate is maximizing inclusivity.
If only we had a way to democratize access to Eth2 staking. Perhaps a way for users to pool their ETH together and give it to someone who’s capable of running the hardware. In turn, anyone with any ETH amount could participate in Ethereum consensus and access ETH issuance.
Then, Ethereum’s commitment to maximizing inclusivity would be upheld.
Well, it turns out Ethereum's application layer can offer solutions to its own problems.
Ethereum has an app for that.
The long-term bull case for Ethereum is that it can produce a decentralized alternative for virtually anything.
Decentralized Staking-as-a-Service (DSaaS) aims to decentralize any intermediates that may arise between ETH and Ethereum, and provide a more inclusive platform to democratize access to the Ethereum protocol.
As with many Ethereum applications, DSaaS has the opportunity to successfully offer a decentralized alternative to centralized staking-as-a-service providers, but it also comes with significant positive ‘n-order consequences’ (second-order effects)
Here’s the 6 things DSaaS Protocols can do:
1. Break up Ethereum 2.0 Staking into its component parts
What necessary components do you have to offer the protocol? ETH? A node? If you only have one of these things, you can combine your components with the components of others who have the things that you lack.
Have 32+ ETH, but no hardware?
Do you have the hardware, but no ETH?
Or maybe not enough ETH?
These components can all be mixed together into the same pool, and coordinated by DSaaS to produce a functioning decentralized Ethereum Proof of Stake network.
Additionally, the combination of people with nodes and people with ETH unlocks access to a third party of people: Staked ETH holders.
2. Provide Staked-ETH Tokens
Every Staking-as-a-Service protocol will issue Staked ETH derivative tokens. These will represent claims upon the ETH deposits, plus the interest earned by the system. These ‘S-ETH’ tokens will act as money in Ethereum. They offer the same attributes of T-bills based of the claims that the tokens offer on the underlying ETH.
These staked ETH tokens will be the buildable surface area that these providers will offer to Ethereum. Applications like MakerDAO, Uniswap, Compound, Aave will all likely accept these assets to be collateral.
3. Protect Deposits, Earn Interest
With a DSaaS protocol, user deposits must be protected above all else.
This is about putting strength into the S-ETH as a monetary asset. In the same way MakerDAO makes DAI a viable stablecoin by keeping it strongly backed and strongly pegged, a good DSaaS protocol will make its own S-ETH, which will be backed by ETH, uptime, and perhaps a native token as a collateral of last resort.
ETH staking—like everything in Ethereum—is a game. Validators are competing in uptime to receive more ETH than their counterparts. Validators that compound their ETH faster than their counterparts are able to compound their ETH faster, and ‘get ahead’. Thankfully, this is an extremely slow process. Yet the incentive to maintain uptime is met with ease in achieving uptime, thanks to the efforts behind Ethereum 2.0.
DSaaS can offer stronger incentives to maintain higher uptimes than the typical solo ETH Staker would be incented to achieve. As a result, S-ETH becomes a competitive monetary asset in the world of interest-bearing ETH notes.
4. Incentivize node operators to outperform
Ethereum offers a platform to tinker with incentives.
DSaaS protocols enable the incentive management of Ethereum node operators, with a goal to produce a system in which node operators are economically motivated to provide high quality node operating services to the protocol.
This is the economics part of crypto-economics.
5. Ensure staking infrastructure and components are as decentralized as possible, in keeping with Ethereum’s philosophy and security.
This is the ethos component. Some people, myself included, believe that there are strong philosophical and ethical arguments for why Ethereum is good, and that Ethereum is only good because of the good virtues that it upholds. Accessibility, permisionlessness, censorship resistance, credible neutrality—together they create an un-manipulatable landscape of money and finance.
These are the things that are at stake with Ethereum. DSaaS can help the world steward the values that Ethereum bring to the world.
6. Provide a scalable staking network capable of handling all demand for DSaaS service providers
This is the cool component.
A good DSaaS protocol must be able to absorb the potential maximum number of people who wish to use the platform to partake in Ethereum consensus.
Ethereum is a wholesaler. It operates in lot sizes of 32 ETH and bring-your-own-node. Rocket Pool is the distributor. It can operate in any size of ETH, and any size of node.
The ‘Last Mile’ describes the last leg of a journey comprising the movement of people and goods from a transportation hub to a final destination
"Last mile" was adopted from the telecommunications industry which faced difficulty connecting individual homes to the main telecommunications network. Similarly, in supply chain management last-mile describes the difficult last part in the transportation of people and packages from hubs to final destinations.
Last-mile delivery is an increasingly studied field as the number of business to consumer (b2c) deliveries grow especially from e-commerce companies in freight transportation, and ride-sharing companies in personal transportation. Some challenges of last-mile delivery include minimizing cost, ensuring transparency, increasing efficiency, and improving infrastructure.
A DSaaS protocol is trying to solve the Last Mile problem of distributing consensus participation. To whatever degree that Ethereum 2.0 can decentralize consensus, DSaaS can take it further.
For Ethereum to eat the digital world, it needs a system for coordinating mass amounts of node infrastructure and ETH to come together.
The scaling of Ethereum consensus revolves around the ability to maximize the pairing between ETH and Node.
✍️ Writer’s Note
Scalable is a word that is used different across many different ecosystems. Bitcoiners use ‘scalable’ to illustrate the ability to which society is able to use BTC as an anchor. Bitcoin is ‘socially scalable’ as public money infrastructure.
‘Scale’ is often used by ‘Ethereum killers’, in a skeuomorphic attempt to solve the congestion and data throughput problems that public blockchains offer.
Ryan illustrates scale as ‘trustless economic bandwidth’; the market-cap of ETH is bandwidth for trustless economic activity.
Rocket Pool is an attempt from Ethereum’s app layer to produce a DSaaS Provider that can operate at the bottom of the Protocol Sink.
Similar to the laborious effort behind Ethereum 2.0, Rocket Pool has been committed to maximizing and extending the values and ethos behind Ethereum’s consensus mechanism.
It’s extremely important that we have a DSaaS provider that resonates with Ethereum in design and ethos. If this option isn’t available to us, Ethereum consensus would be restricted to a smaller set of inidividuals, and those that are disenfranchized would be related to centralized SaaS providers.
If centralized SaaS come to dominate Ethereum consensus, that could spell trouble. It’s common belief that all SaaS (Centralized or Decentralized) will all issue a S-ETH derivative token, and they will all compete for liquidity in Ethereum.
This could be the 'DETH of Ethereum’. Liquidity begets liquidity, and when it comes to S-ETH (or DETH), that compounding effect means that a centralized entity comes to hold more and more ETH. If the S-ETH derivative token issued by a centralized SaaS provider comes to be the dominant form of yield-bearing ETH, this would mean that the centralized entity would slowly march its way into a dominate position in Ethereum consensus.
In the way that DAI offers us a trustless alternative to USDC and USDT, rETH (Rocket Pool’s S-ETH token) can offer us a similar safe-haven for trustless Staked ETH.
rETH is Money
When you come to Rocket Pool and stake your ETH, you will receive rETH in return. This is your ticket-stub. Your claim on the underlying. You can take that ticket and spend it like money, because if the commitments assured by Rocket Pool hold up, it’s as good as money.
U.S. treasuries are considered ‘cash-like’ instruments, and thus something like rETH would fit that same comparison as it relates to ETH.
It’s important that rETH becomes competitive as a money.
And I think it will, as rETH has certain features that gives it stronger assurances than any centralized S-ETH token could ever offer. I define ‘trustlessness’ as ‘the assurances that one has that their money will behave in ways they expect and intend’. If a protocol is trustless, it means that you have complete assurances that you are uncompromised in your control over money and assets.
Rocket Pool is a math-driven protocol, meant to serve any and all requests no matter way. Coinbase is a trust-driven company, which will never be able to offer stronger assurances than what is offered by decentralized applications on Ethereum like Uniswap or Rocket Pool.
Money itself is an asset with assurances. Good monies offer assurances to their salability and access, and rETH offers the strongest possible assurances with ETH redeemability. Therefore, rETH will be good money.
As these young DSaaS providers like Rocket Pool come into the market, we as users can protect Ethereum by adopting rETH or any other DSaaS S-ETH derivative token that arrives.
We’re watching this same battle play out between DAI and USDC/USDT.
DAI is Ethereum’s native, trustless, permissionless stablecoin. If Nation States turn authoritarian, USDC and USDT would fall, but DAI would remain. This is because MakerDAO maximizes the use of cryptography, and uses crypto-economics where it can’t. DAI is a crucial tool in the toolbelt to guarantee the trustlessness and permissionlessness of Ethereum, and it is created out of the maximizing what makes this industry so unique.
2017 was the beginning of Ethereum’s stablecoin wars, which has generally settled today into DAI, USDC, USDT, and an extremely nascent world of algorithmic stablecoins. This same story is about to play out again, but instead of crypto dollars its going to be staked-ETH derivatives.
Last week, Coinbase announced plans to acquire Staking-As-A-Service company Bison Trails. Coinbase already has stake in USDC as well, so this is completely within their core competency.
It’s important that Coinbase does not maintain outsized control over DeFi’s crypto-dollar market, and especially not its staked-ETH derivative asset, as that means that an outsized amount of ETH is under the control of Coinbase.
The Protocol Sink
The Protocol Sink protects this from happening.
Uniswap has quickly risen to become a viable competitor to Coinbase, after topping Coinbase in volumes multiple times in 2020. It is an example of what this space can achieve when it sticks to the values of Ethereum, and is deep in the protocol sink.
The landscape of Staking-as-a-Service Providers will feel the pull of the Protocol Sink just like everything else in this universe. We can expect there will be a decentralized version of this centralized service down in the Great Protocol Sink.
The most trustless and permissionless, strongest Staked-ETH derivative token will offer the most buildable and stable surface area for applications to integrate, and thus will have persistent demand as the growing DeFi ecosystem accepts the incentives that rETH offer over unproductive ETH.
rETH has an intrinsic advantage over Coinbase-ETH. As a protocol, rETH is blessed with tailwinds of credible neutrality. Protocols are more enticing to build upon than companies are. Even Coinbase itself could issue Coinbase-ETH by depositing their customer’s ETH into the Rocket Pool protocol, making ETH the M0, rETH the M1, and Coinbase ETH the M2.
According to the Protocol Sink Thesis, neutral protocol tends to attract a wider variety of users, from individuals to large scale companies. Deep protocols offer level playing-fields for everyone; this fairness and neutrality means that something like Rocket Pool can become a public good.
Resonance with Ethereum
Rocket Pool is a fantastic example of what is Ethereum’s primary competency: producing open-source coordination software that reduces dependency on trusted intermediaries. It’s also handy, because the success of Rocket Pool positively feeds back into Ethereum itself, and helps integrate it with the world around it.
My most recent piece, Ethereum the Tree of Trust, I discussed how applications that have resonance with the values of Ethereum receive favorable treatment from the Ethereum ecosystem. We see this in Uniswap, an Ethereum app that is a reflection of the values that Ethereum is built on. Trustlessness, permissionlessness, credibly-neutral.
I see Rocket Pool as an extension of what makes Ethereum, Ethereum. Rocket Pool has followed a committed path to not cutting corners, and I believe this is how you play long term games.
Rocket Pool elected to not launch during this initial phase, as they can’t adhere to the decentralized, trustless ethos they’ve committed too. Phase 0 doesn’t support withdrawals to smart contract addresses; meaning that in order to democratize staking in the current environment, ‘decentralized’ staking protocols must utilize a centralized custodian to control validator withdrawal keys.
The corners not cut by Rocket Pool will mean the long-term enfranchisement of many more ecosystem participants
Watching the creation of Ethereum is a once in a lifetime, decades-long opportunity, as we set Ethereum’s course for the countless generations ahead of us. Applications that understand this and take on that challenge I expect to be the protocols that last until the very end.
When Ethereum’s beacon chain went live, Bonding Together was released on Bankless. It discussed the relationship between the inclusiveness of Ethereum’s consensus algorithm and its ability to corral a sufficiently large army of people all coordinated with the same goals.
It was a call-to-arms to uphold the value we see in Ethereum together. To protect what we see as good for the world. It’s important to stake ETH to Ethereum, or else this would all be for naught.
It’s entirely possible that the future of Ethereum is consensus by large exchanges or ETH holding institutions. If centralized bodies are staking too much ETH, it could be the 'DETH of Ethereum’.
Rocket Pool is the decentralized, community-driven protocol that offers the counterweight to centralized staking-as-a-service providers. Rocket Pool makes it easy for retail to self-custody and stake without trust, and uphold the values that make Ethereum so great.
Gold is a permissionless, non-sovereign, trustless store-of-value asset, which shares many of the qualities that make BTC and ETH so great. Except gold is heavy and difficult to verify, and these frictions made it much more efficient to store gold in vaults than on one’s person. Eventually, over thousands of years, gold has centralized into central banks, and the people of the world have been left with paper instead.
I even fear that BTC might succumb to the same fate, because of a reliance on crypto-banks to process Bitcoin transactions, as Bitcoin isn’t sufficiently scalable. It doesn’t have the necessary infrastructure to be able to serve the globe without centralized providers.
Under a centralized staking-as-a-service regime, Ethereum could succumb to these same capturing forces! If it is difficult to take part in operations on Ethereum, centralized intermediaries will come to solve that problem. While centralized intermediaries aren’t inherently bad, intermediaries when it comes to network consensus is not where we want them to contribute value.
If Ethereum consenus gets captured by centralized intermediaries, then all Ethereum applications and transactions get filtered through these entities.
Thankfully, for every centralized intermediary, Ethereum has an app for that.
Rocket Pool is staking-as-a-service protocol by the people, for the people.
Its growth comes from adoption and stewarding by the masses, and ensures power stays in the hands of the many rather than the few.
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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.
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