In part one, Pete and I explained Proof of Stake and where the rewards come from when you’re staking your ETH – but I also mentioned that most ETH staked is not staked directly. 70% of the ETH staked is done through a liquid staking provider who does the staking for you (in exchange for a fee).
Liquid Staking Tokens
Take Coinbase for example, which is a centralized liquid staking provider. If you go on Coinbase and buy some ETH, a dialogue box will pop up and ask if you want to stake it. Although this is as simple as clicking a button, the problem is that you are giving Coinbase custody of the ETH you just bought. It is now Coinbase’s ETH they’re going to stake, and they’re going to get some staking rewards. In return, you will receive a liquid staking token – (in Coinbase’s case, this is called called cbETH).
As far as cbETH goes, you can really think of it as a future deliverable of the staked ETH plus the reward that that staked ETH is going to earn over time. So if you have a cbETH, a year into the future when withdrawals are enabled you can take your cbETH and withdraw one of Coinbase’s ETH that they have staked. But in the meantime, you can take your cbETH and exchange it (there’s always some market price).
The important thing to remember is that even if you sell your cbETH, the underlying ETH stays staked and stays owned by Coinbase. But you have the option to go to Coinbase and ask for the ETH plus the reward.
In general, we can classify liquid staking into three categories: centralized, permissioned, and permissionless.
There are several liquid staking providers, let’s go over the biggest ones from each category.
Lido offers stETH, which stands for staked eth. stETH (currently) represents a whopping 75% of liquid staked ETH. Lido is what we call permissioned, meaning they don’t control all the validators themselves. But they vet the validator partners to ensure that they know what they’re doing.
Lido’s website currently claims a 4.6% APR, after the 10% fee that they charge on all rewards earned.
The way rewards accrue with stETH is tricky. Every day at 12:00 PM UTC, Lido does what’s called a rebasing. They take inventory of all the rewards earned in the last 24 hours, and how much new ETH has been staked with them. As a result, the amount of stETH in your wallet appears to “automagically” increase – as in the number just goes up without receiving a fresh transaction.
It’s important to know that stETH currently trades at a slight discount. Instead of staking your ETH directly with Lido, we recommend swapping ETH for stETH on Curve, where one ETH currently gets you around 1.01 ETH (or a 1% discount).
Coinbase ETH (cbETH)
As mentioned, Coinbase ETH (cbETH) is fully centralized, meaning Coinbase runs all the validators themselves. cbETH currently represents 15% of the liquid staked ETH market and they’re currently quoting 3.88% APR. Unfortunately, Coinbase charges a high 25% fee on all the rewards earned by staking your ETH with them.
cbETH rewards accrue a bit differently than stETH. Instead of a rebase, cbETH rewards accrue to the token itself. Meaning that if you stake one ETH with Coinbase, you won’t get exactly one cbETH in return. This is because the value of cbETH is slowly increasing over time as Coinbase validators earn more and more rewards.
To simplify, just know that someday when withdraws are enabled Coinbase will give you more ETH than what you put in when you’re ready to unstake.
Frax is a stable coin that recently released an ETH staking derivative as well called frxETH. For now, it’s a bit centralized – but they’ve confirmed that they are planning to enable anyone to run a validator once the Ethereum Shanghai upgrade is released.
Frax currently pays over 8% APR, which is double its competitors. This is because they do things a bit differently. When you deposit your ETH with Frax, you get frxETH in return. frxETH doesn’t regenerate any rewards on its own, but you can choose to swap your frxETH for staked Frax ETH (sfrxETH) which generates the rewards from their validators. Or, you can take stake your frxETH in DeFi (like Curve) so you can earn swap fees and DeFi fees from there.
Currently 50% of Frax ETH is earning fees in defi, and 50% is earning fees from the stakes, from the rewards, or from the validators. And because only half of the Frax ETH is earning 100% of the staking rewards, staked Frax ETH earns about twice as much as all the other providers. It’s a pretty cool system!
Rocket Pool (rETH)
The last liquid staking derivative will cover is Rocket Pool, or rETH. rETH is permissionless. On their site, rocket pool currently quotes a 6.61% APR for note operators and a 4.15% APR if you want to stake without being a node operator. To buy rETH on Uniswap, you currently pay a 6% premium.
As Pete explains, Rocket Pool’s “problem” – despite there being many good things about RPL – is that they need node operators. As opposed to Lido or Coinbase, which can just spin up a new validator anytime they want to. In Lido’s case, they have trusted parties and they can say “here’s another 32 ETH, please spin up another validator.”
But if somebody comes along and deposits 16 ETH worth in aggregate into Rocket Pool’s pool, they need somebody to sign up and say, “Here’s my 16 ETH and I’m gonna run a new mini pool.” The problem that Rocket Pool is having is that not enough people signing up to do that.
The problem is their deposit pool. There’s actually a limit on how much they will allow to sit in their deposit pool, not actually being staked because they don’t have enough node operators. They’ve reached that limit, and there was a time when you actually couldn’t buy rETH from Rocket Pool because that deposit pool was full. in the case of Rocket Pool, if you want to run a node – instead of 32 ETH, currently you need 16 ETH and at least 1.6 ETH worth of the RPL token.
Your 16 ETH is instead of the 32 ETH that you’re putting your own stake in your own node. Rocket Pool then matches that with 16 ETH from their pool. So as an end user, if you’re not running a node and you just want to stake with Rocket Pool and get some RPL – say you take 0.1 ETH and deposit it, and you get 0.1 rETH – there would now there’s 0.1 ETH sitting in a pool.
So that’s gonna sit there in the pool until that accumulates to at least 16 ETH. Then, somebody who is willing to run a new (what Rocket Pool calls) “mini pool” (think node) – the pool is going to provide that 16 ETH to match the node operator’s 16 ETH, bringing us to the required 32 ETH needed to run a node.
Importantly, you don’t need to apply to be a Rocket Pool node operator (hence the “permissionless” part). Anyone can do it.
The way they make that work is you have your own 16 ETH at stake, which if you suffer any penalties, it comes out of your 16 ETH. This is how the pool insures itself in addition to the RPL deposit (you have to have a deposit of at least 1.6 ETH worth of RPL, which essentially goes into an insurance pool.)
Swell is also a new player in the scene. They’re an interesting hybrid between permissioned and permissionless node operators.
Swell also has a unique value accrual method. They have swETH, which is a pegged token (it remains one to one pegged with Ethereum). But when you deposit to get swETH you receive an NFT, and the value that’s in your staked ETH actually accrues to that NFT.
As with all sound investing principles, putting all your eggs in one basket introduces further risk. Some people choose to diversify their liquid staking assets. However, that involves having multiple baskets and greatly increases complexity. It requires keeping track of where everything is and what’s going on with all these different ecosystems.
Whether or not you choose to diversify will come down to 1) your personal net worth you have invested and 2) and how much of your time you can afford to spend keeping track of it all. However, diversifying will indeed at least spread your risk, but none will protect if something goes catastrophically wrong with Ethereum itself – so you might want to diversify that, too!