What is Ethereum Staking? Pros and Cons of PoS, How to Participate in Staking, and a Comprehensive Guide to LSDfi Popular Protocols

After Ethereum transitioned from the PoW (Proof of Work) mechanism to the PoS (Proof of Stake) mechanism in 2022, staking ETH became a critical mechanism for securing the network. This practice has evolved from independent staking to liquidity staking and re-staking, which emerged during the current bull market, growing into a market worth hundreds of billions of dollars.

What is Staking?

Staking not only secures the network but also provides additional rewards to users who stake their assets. For example, Ethereum staking involves locking up ETH to support network security and operations, and stakers receive an annual reward of approximately 3-4% (depending on the amount staked). Currently, the total staked ETH amounts to 32.1 million, equivalent to about $118 billion.

Origin of Staking: PoS Consensus Mechanism

Bitcoin's network relies on the PoW mechanism, where miners compete to solve mathematical problems, ensuring the network's security and normal operations, and earning Bitcoin block rewards. However, due to the excessive energy and computing power consumption of PoW, it cannot process a large number of transactions in the same time frame. Thus, blockchains like Ethereum introduced the PoS mechanism to address these issues.

PoS, short for Proof of Stake, was first proposed by a user named QuantumMechanic on a forum called Bitcointalk in 2011. Unlike PoW, PoS requires nodes to use their currency as a stake to become validators on the Ethereum mainnet, significantly reducing the energy consumption associated with blockchain mining.

In simple terms, you can think of PoS as a company where anyone can become a shareholder by providing funds (the tokens you stake), and each shareholder has the right to maintain the company's ledger (become a validator). To prevent validators from acting selfishly, a penalty mechanism is set up: if you make a mistake in ledger keeping, your funds (staked tokens) will be confiscated. Thus, each validator will find that honest ledger keeping is the safest mode, thereby protecting the blockchain network's security.

Although PoW is currently recognized as more secure, PoS can also meet market demands if it operates well.

Development History of Ethereum Staking

Ethereum's transition to PoS (Proof of Stake) was a process of multiple discussions and updates. Here are some key milestones:

• July 30, 2015: The Ethereum mainnet officially launched, based on the PoW (Proof of Work) consensus mechanism.
• 2017: The Ethereum community began actively discussing the transition to PoS and proposed the Casper protocol, the initial design for PoS conversion.
• December 1, 2020: The Ethereum Beacon Chain launched, the first phase of Ethereum's transition to PoS. The Beacon Chain introduced the PoS consensus mechanism but ran 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: For token holders, the primary advantage of staking is generating stable passive income.
• Energy Efficiency: More energy-efficient than PoW mining.
• Participation in Governance: In some blockchains, staking also grants users the right to participate in network governance, including voting on changes to network protocols or rules.
• Lock-in Period: Staked tokens are usually required to be locked for a period, during which they cannot be traded, potentially reducing market sell pressure.

Disadvantages:

• Hacker Attacks: If the network or staking pool is attacked, users' staked tokens may be lost.
• Inflation: Staking increases the circulating supply of the currency, which may lead to inflation.
• Penalties: In some staking systems, if validator nodes go offline or fail to validate correctly, a portion of the staked tokens will be slashed or confiscated as a penalty.

Ways to Participate in Ethereum Staking

1. Solo Staking: Users run a full node independently to participate in Ethereum network validation. Users have full control over their nodes and staked ETH, enjoying all staking rewards. This method requires technical knowledge for node maintenance and at least 32 ETH for staking, making the threshold relatively high.
2. Staking Service Platforms: Users can participate in staking by providing any amount of ETH, with the platform handling technical operations and maintenance. This method is suitable for users without a technical background but requires paying service fees to the platform.
3. Staking Services by Centralized Exchanges: Some centralized exchanges also offer staking services. This method is simple to operate, suitable for ordinary users, and eliminates the need to handle technical issues but may involve platform risks and higher service fees.
4. Staking Pools: Multiple users pool their ETH in a common pool to collectively act as a validator, lowering the threshold for participating in staking. Rewards are proportionally distributed among all participants.

What is Liquidity Staking?

Liquidity Staking is a mechanism in decentralized finance (DeFi) that allows users to stake and earn rewards while maintaining the liquidity of their assets. This is typically achieved through an innovation called Liquidity Staking Tokens (LST).

Here's how Liquidity Staking works:

• Staking Assets: Users stake their crypto assets (e.g., Ethereum) on a liquidity staking platform, and these assets participate in the blockchain network's consensus mechanism, earning staking rewards.
• Receiving Liquidity Tokens: In return, users receive liquidity staking tokens, representing their staked assets and rewards.
• Token Liquidity: These liquidity staking tokens can be used on other DeFi platforms for lending, trading, or providing liquidity. Thus, users can earn staking rewards while still utilizing their assets for other financial activities.
• Redemption: When users decide to stop staking, they can exchange their liquidity staking tokens back for the original assets and their rewards, usually after a certain unlocking period.

The design of liquidity staking tokens (LST) has released the liquidity of staked ETH, quickly attracting a large number of users and assets, thereby kicking off the era of LSDfi (Liquidity Staking Derivatives Finance).

Leading Ethereum Staking Projects

Due to the smaller capital requirements and lower participation thresholds, liquidity staking quickly became a hot sector. Currently, well-known Ethereum liquidity staking projects include:

• Lido (LDO): The leading liquidity staking project on Ethereum, allowing users to stake ETH and other crypto assets without locking up assets or maintaining infrastructure. Lido's token LDO is currently priced at $2.13, with a market cap of $1.88 billion.
• Rocket Pool (RPL): 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. RPL is priced at $21.86, with a market cap of $440 million.
• Pendle (PENDLE): A yield trading protocol that allows users to tokenize and trade future yields using top yield-generating protocols like Aave and Compound. PENDLE is priced at $6.18, with a market cap of $940 million.

Ethereum Staking News Summary

• May 1, 2024: Pendle's TVL surpasses $4 billion, how to earn leveraged income? Full introduction and staking tutorial. According to Pendle's platform data, its TVL has grown nearly 18 times from $230 million at the beginning of the year to over $4 billion. The cumulative trading volume on the Pendle platform has exceeded $15.8 billion, significantly boosting platform fee income.
• April 5, 2024: JPMorgan: Lido's staking share decline "saved Ethereum"! Recognized as a security by the SEC might lower its impact. According to Dune Analytics data by @hildobby, Lido's share of staked ETH has fallen below 30%, from 32% in December 2023 to 29.57% now, easing concerns about Lido's growing influence in the Ethereum ecosystem.
• April 3, 2024: Ethereum Researcher: Electra upgrade should "reduce ETH issuance" to support solo stakers. Ethereum Foundation researcher Mike Neuder proposed a governance plan in his recent article "Issuance Issues," advocating for reduced token issuance in the next Electra upgrade to address PoS staking centralization risks, including maintaining the viability and proportion of solo stakers.
• March 19, 2024: Fidelity applies to add "staking" services for Ethereum spot ETF, creating more revenue! Lido and Rocket Pool surge on the news. Asset management giant Fidelity, with $4.5 trillion under management, submitted an amended Ethereum spot ETF application to the SEC today, adding staking descriptions to allow the pending ETF to stake some ETH assets for additional income.