Rocket Pool - for a Decentralized Ethereum
Rocket Pool, with a TVL of $500 million, ranks second in liquid staking protocols just behind Lido Finance. Rocket Pool accounts for only a fraction of the $ETH liquid staking market share. There are less than 220,000 $ETH deposited in Rocket Pool compared to over 4 million deposited in Lido Finance. However, Rocket Pool distributes these $ETH to over 1,400 node operators, while Lido Finance distributes over 4 million $ETH to just 24 node operators. Rocket Pool is a hidden hero that works hard toward a more decentralized Ethereum validation power.
Decentralization of Node Operators Is Important for Ethereum
The recent Tornado Cash sanction has spurred hot discussion about the risk of censorship on Ethereum. After Ethereum's transition to Proof-of-Stake blockchain, staking service providers such as Binance Stake and Coinbase Stake controls a large chunk of staked $ETH. These big validators are responsible for validating new transactions and producing new blocks for Ethereum, and they are prone to be pressured to censor certain transactions to comply with respective regulatory requirements. (Related Reading: From Tornado Cash Sanction to Ethereum - "SAY NO" to Censorship at the Blockchain Level)
On the other hand, over 30% of staked $ETH is channeled through Lido Finance, the largest liquid staking protocol. Users deposit $ETH into Lido's staking pool, and these deposited $ETH is then allocated to 24 whitelisted node operators. These node operators are selected by Lido and are all major players in the professional node industry such as P2P Validators, Stake.Fish, and Chorus One. Lido Finance accounts for over 90% of the liquid staking sectors and allocates all deposited $ETH to only a handful of professional node operators selected by the protocol DAO. This naturally raises the concern that Lido's unrivaled success brings centralization of validating power and even potential exerts influence on Ethereum. (Related Reading: $LDO's Governance Influence Over Ethereum)
The vision of Ethereum is to have a decentralized and diversified composition of validation nodes located around the world. However, the current situation is most of the staked $ETH is either staked through centralized exchanges or channeled through Lido to a handful of professional node operators.
Rocket Pool Is Helping More People Become Node Operators
Liquid Staking Service
Just like Lido Finance with its liquid staking token stETH, Rocket Pool provides liquid stakers with liquid staking token rETH. rETH does not accrue revenue through incremental issuance as stETH does. When Ethereum is successfully Merged and the staked $ETH is available for redemption, users can return rETH to the protocol, then redeem $ETH and the corresponding share of the $ETH reward. Thus the value of rETH increases over time. rETH is currently trading in the secondary market with the price of approximately 1.023 $ETH.
rETH has only a tiny market share in the liquid staking market of Ethereum, with only 106,000 in circulation. stETH has over 4 million in circulation. Due to the tiny size of its market share, rETH has limited liquidity on exchanges and very few DeFi use cases.
Serve Ethereum Solo Validator
The true merit of Rocket Pool lies in the service enabling solo validators. In contrast to Lido Finance allocating the 4 million $ETH to only 24 selected node operators, Rocket Pool allocates all of the deposited $ETH to solo validators around the world.
Running an Ethereum node requires 32 $ETH, which is equivalent to $48,000. It's not an insignificant financial requirement for most people. Rocket Pool lowers this barrier to 16 $ETH and allows "normal" participants to run a node which is the way Ethereum was intended to be used. Solo validators contribute 16 $ETH, this will be coupled with 16 $ETH from the staking pool(which stakers deposited into Rocket Pool in exchange for rETH) to meet the 32 $ETH requirement to become a validator node.
It is permissionless to become node operators for Rocket Pool, while Lido only allocates to professional node operators. Rocket Pool also develops smart node software to make setting up an Ethereum node simpler.
The native token of Rocket Pool is $RPL. The protocol has a nice tokenomic design to achieve two purposes:
- Ensure solo validators doing their duty properly and protect against slashing incidents;
- Incentive people to become solo validators for Rocket Pool
Bonding $RPL By Solo Validators As a Performance Guarantee
Lido Finance allocates staked $ETH to professional node operators. While this strategy creates the problem of validating power centralization, professional node operators have first-class hardware and technical expertise. There is no concern about their performance.
Solo validators, on the other hand, are beneficial to the decentralizing of validating power, but may not have the same quality of performance as professional node operators. If a validator is offline and misses an attestation or block proposal, it will be penalized by slashing the $ETH staked. (Ethereum is forgiveness, in most cases, the penalty is not very large unless there is serious malicious behavior such as network attacking)
To guarantee the performance of solo validators and protect $ETH stakers, solo validators are required to put at least 1.6 $ETH worth of the $RPL token as supplemental insurance against slashing incidents. Since $RPL is required to be locked as insurance, as more solo validators join the Rocket Pool, more $RPL is needed to act as insurance. This will reduce the circulating supply of $RPL. 34.55% of the $RPL supply is now being staked for this purpose.
It is important to note that since the $RPL that needs to be staked to be a solo validator is based on the value of $ETH (1.6 $ETH worth of $RPL), it means that if the price of $ETH rises and the price of $RPL does not change, then becoming a node operator will need more $RPL, the $RPL circulating on the market will decrease faster.
Incentivize Solo Validators With $RPL
The benefit of being a solo validator for Rocket Pool comes from two main sources, the network verification reward and the $RPL reward. A solo validator earns a 100% $ETH staking reward for their won half of the $ETH provided, a 15% commission on the other half of the $ETH provided by Rocket Pool, and a $RPL reward. 70% of the $RPL total supply will be allocated to reward solo validators. Estimated by the protocol, the staking reward + commission is estimated to be 4.81% APR, slightly higher than the Ethereum staking return of 4.2%. The APR of the $RPL reward is approximately 12.16%.
Two forces are affecting the circulating supply of $RPL:
$RPL incentive rewards emission >> Increase in circulating supply
More solo validators join the network or increase in $ETH price >> Decrease in circulating supply
The Scaling Issue
The problem with Rocket Pool is how to scale up. Since the solo validator needs to provide 16 $ETH and a certain amount of $RPL as insurance, this is still a significant financial requirement. In addition, being an Ethereum node requires a good-performance computer with good performance, such as a CPU>2.8 GHz, 16GB RAM, >100GB storage, and a stable, adequate speed internet connection. These are hard barriers that cannot be crossed, limiting the number of potential solo validators.
The supply of Rocket Pool's liquid staking token rETH is directly linked to the number of solo validators. Even if there is demand from the staking side, there may not be enough solo validators to absorb the rise in Rocket Pool's staking demand. This limit the potential for rETH, without a greater scale, it is hard for other DeFi protocol to accept rETH, limiting the application scenario for rETH in DeFi.
I like Rocket Pool, this is a protocol aiming to help Ethereum to achieve the vision of decentralization and permissionless. The protocol is doing something good for the Ethereum ecosystem. However, the scaling issue unavoidably limits the protocol's growth. The founding team acknowledges this limitation and is working on this. If the problem can be resolved, the potential for Rocket Pool is very bright.