ETH2.0's Encrypted Economic Art

Original Title: In-depth Analysis of ETH2.0 Mortgage Pool and Token Model

Original Source: ChinaDeFi

According to ETH2GO.com data, the current pledge rate of ETH2.0 is 9.9%.

This article is jointly written by Cryptotesters and relevant members of Consensyscodefi.

Understanding can get the following value points:

• ETH2.0 pledge related List of projects
• Lido
• StakeWise
• RocketPool
• CREAM
• Stkr
• passed Understand the token model of ETH2.0 Understand the risk points of participating in the agency pledge
• Practitioners can understand ETH2.0 from the perspective of a single bond, refer to the US housing loan and its derivatives market, the pledge of ETH2.0 Under the effect of leverage, it will also be magnified at least several times

The field of cryptocurrency is experiencing unprecedented growth and innovation. One only needs to be in the staking space to see this is true - it's been less than a month since ETH2 went live, but users have already been offered a number of third-party staking platforms. They range from centralized exchanges like Binance to DeFi projects like RocketPool and StakeWise, and they all differ in every way.

However, amidst all the differences, they have one thing in common: they are all trying to find a solution to the problems anyone encounters when staking ETH. friction is necessary. What are these frictions?

One of them is that the technical complexity of staking ETH is beyond the skills of the average user. Furthermore, requiring the average user to pay a deposit of 32 ETH is increasingly out of reach for the average user given the rapid increase in ETH price over the past month (currently $1,025 at the time of writing). Finally, the mortgage fund has an illiquidity period of about 18-24 months, which is a safety measure implemented for people to transition to ETH2.0 in a safe and controlled manner.

Combined with the above restrictions, it will make less mature users exit the lucrative ETH mortgage market.

How can the mortgage pool solve this problem?

This is where the ETH2.0 mortgage pool is useful. They accumulate ETH from multiple users and run the ETH2 staking infrastructure on behalf of users, enabling anyone to earn staking rewards regardless of skill level or deposit size.

Furthermore, they attempt to alleviate lengthy liquidity requirements by generating ETH1 tokens representing deposits and rewards users receive on the ETH2 chain. By exchanging tokens for ETH on secondary markets such as Uniswap, these mortgage token holders are given the opportunity to exit their mortgage and have the ability to leverage their Ether holdings in DeFi (e.g., in Aave as mortgage).

But the implementation of the token model is different between the various pools, which will undoubtedly have some serious implications for end users. For example, Lido’s stETH token is not the same as StakeWise’s stETH token and should therefore be priced differently on the secondary market. Meanwhile, RocketPool’s rETH token is implemented differently from Stakewise’s stETH, as is CREAM’s crETH2, Stkr’s aETH, and more.

In short, there are many differences in the mechanics of tokens from different pools that can lead to confusion and undesirable consequences for end users. However, these differences can be categorized and evaluated to make an informed decision when deciding which staking pool to join. Furthermore, this comparative analysis lays the groundwork for a valuation methodology for collateralized tokens, allowing price efficiencies between different Eth4 tokens.

The main purpose of this article is to help educate the community on the different types of token economics used in popular staking pools today. We want to avoid costly mistakes caused by people not being well-informed about the product, and we hope the community will contribute to the discussion of effective pricing and arbitrage opportunities in the Eth4 pool industry.

Staking ETH Token Model

We can go between two different structures Differentiation: A single token design aims to capture both initial deposits and staking returns in one token. Whereas the dual token design splits the captured deposits and rewards into two different tokens.

Single Token Design

The single token structure is based on the concept of rebalancing / repricing tokens. This is the most popular design and is used by most pools due to its simplicity. By generating a single token to users upon deposit, the pool attempts to capture the accumulation of staking rewards and penalties within the same token. This can be done in two ways:

• Staking rewards and penalties accumulated on ETH2 are reflected in changes in token balances (hence the term "rebalancing ”), so that in phase 1.5, each staked ETH token should be exchanged for ETH in the pool at a ratio of 1:1.
• Staking rewards and penalties accumulated on ETH2 will be reflected in the token price (hence the term "re-pricing") so that in phase 1.5 the amount of ETH that can be redeemed for a unit token fluctuates with the amount of rewards and penalties in the pool.

The differences in these token mechanisms are best illustrated with an example:

I. Balance change: transfer 1 ETH Deposit in the pool and get 1 mortgage ETH token.

As the rewards or penalties in the pool increase, the token balance of each participant in the pool will change accordingly, that is, 1.1 ETH in the pool = 1.1 mortgage ETH token balance. Thus, staking income will be captured in addresses with increasing token balances, generated by the pool. Starting from phase 1.5, all staked ETH tokens can be exchanged for ETH at a ratio of 1:1.

This design is used by Lido Finance and Binance.

Please note that the balance of staked ETH tokens is always equal to the amount of ETH in the pool; the exchange rate remains at 1 throughout the staking period.

II. Price change: Deposit 1 ETH into the pool and receive pledged ETH tokens according to the exchange rate of ETH/ETH2 tokens during the same period. The exchange rate given in the pool is determined by the ratio of the total supply of ETH and tokens in the pool, and varies according to the amount of rewards and penalties generated in the pool.

Assuming that the exchange rate at the time of deposit is 1, that is, the pool has not received any rewards, 1 ETH = 1 mortgaged ETH token.

As the rewards and penalties in the pool increase, the balance of the user's pledged ETH tokens will remain the same, but for now, every ETH in the pool Units of token claims change. In other words, 1 staked ETH token in the pool = 1.1 ETH in the pool.

Therefore, the price of each staked ETH token changes from 1 ETH to 1.1 ETH, which reflects the user's staked earnings. In Phase 1.5, users can redeem all staked ETH tokens for ETH in the pool at the final ETH/ETH2 ratio.

Rocket Pool, CREAM, Stkr and StaFi use such tokens.

Watch the exchange rate change - it captures the growth in staking rewards users get.

Although different mechanisms are used to reflect the accumulation of rewards, single token designs have one thing in common: bundling deposits and rewards in the same token. This means that whenever a user buys and sells tokens on the market, or receives this token from a vendor when making a deposit, that user will receive/sell the deposit, as well as the rewards that have accumulated into the pool in the past.

We will discuss the implications of this design choice in another article, but when evaluating pools, the user should consider design factors as it will guide the user's APR expectations and forecasts for token secondary market pricing.

Dual Token Design

In contrast, the dual token structure is based on two and the concept of rebalancing tokens for rewards.

A user's deposit in the pool (some call it principal to earn rewards) is reflected in the deposit ETH token.

Like other rebalancing tokens, it is generated 1:1 with the ETH deposited by users.

Deposited ETH tokens will not grow when deposited in an address, but instead will accumulate rwETH (reward ETH) tokens in a 1:1 ratio Reflects the growth of the user's stake held in the pool. The sum of these tokens constitutes the user's overall collateral balance, and can be freely transferred between Ethereum addresses and used in smart contracts like single tokens.

Here is an example to illustrate:

Deposit 1 ETH in the pool and get 1 ETH token (stETH).

The balance of deposited ETH tokens will remain the same as the pool rewards grow, but its presence in the address triggers the accumulation of reward ETH (rwETH) tokens to reflect the pool rewards growth of. It accrues rewards in ETH tokens for as long as the deposit ETH tokens are held.

After Phase 2, all tokens will be exchangeable 1:1 for ETH in the pool, whether they represent deposits or rewards.

The only staking pool designed with dual tokens is StakeWise.

The dual token structure allows for the creation of a new type of hybrid instrument similar to bond dynamics, but with the difference that it separates the collateralized balance into ones with different accruals and cash flows Anticipation (principal and interest) tools, so that mortgages can be managed more efficiently and rationally.

For example, as rewards are earned, they can be gradually sold in an efficient market for STRIPs to those who wish to stake their interest without staking themselves user.

What powers all tokens

When it comes to staking ETH tokens how When working with the core principles, the design choices of different pools become more subtle, but can still have significant impact.

Off-chain oracles

In order to be an effective solution to illiquidity, tokens must accurately reflect the value of collateral held by users. This requires staking pools to always have an appropriate amount of ETH in the pool to support their token issuance. Pools do this by tracking the balances of their validators in the beacon chain and generating tokens against them.

Unfortunately, the ERC-20 contract responsible for generating tokens is not on the same blockchain as the validator's balance (ETH1 vs ETH2). The token contract on the ETH1 chain cannot directly synchronize the balance of the validators in the beacon chain. Pools overcome this limitation by using off-chain oracles, which work similarly to the way Chainlink is commonly used today.

Off-chain oracles allow communication with the beacon chain in the following ways: First, oracle operators must run both ETH1 and ETH2 nodes in order to communicate with both chains at the same time. Once both nodes are established, the oracle will collect information from the beacon chain about validators belonging to a particular staking pool and transfer it to an ERC-20 contract on the ETH1 chain. Once the information in the beacon chain is submitted to the ERC-20 contract, the number of tokens (or the rate at which new tokens are generated) is updated based on changes in validator balances. This change can happen both upwards and downwards, depending on whether the balance was increased (i.e. rewarded) or decreased (i.e. penalized).

Unfortunately, off-chain oracles have a downside: the entity that controls the oracle effectively controls the token balance. To alleviate this problem, pool operators require multiple oracles to submit the same information at the same time in order to update token balances through a consensus mechanism, and distribute oracles among independent entities to achieve a certain degree of decentralization.

Nevertheless, these solutions are not ideal and users are advised to be aware of whether the pool is running its oracles in a sufficiently decentralized manner.

StakeWise Beacon Chain Oracle Arrangement Example

Balance Refresh Rate

ERC Every update of the token balance in the -20 contract involves a gas fee, which can cost a small fortune in some cases. To optimize gas fees, most service providers tend to update token balances on a daily basis. Most people think this is sufficient, as the daily yield on staking is rather low (ranging from 0.005% to 0.063% per day), making more frequent updates irrelevant.

However, in the event of a massive curtailment event, daily updates may not be enough to resolve the issue. A "slash" occurs whenever a validator commits one of the slashable crimes, which results in a massive loss of a validator's balance (or, in the most extreme cases, the entire balance) in a matter of minutes. If many staking pool validators are slashed at the same time, there is nothing more catastrophic than updating balances more frequently than every 24 hours.

The problem here is that any user can track the amount of ETH in the stake pool validator via epoches (via a beacon chain explorer) This is reflected in the coin's prior understanding that it will drop significantly. Once users holding collateralized ETH tokens realize the mismatch between the ETH in the pool and the token supply, they will run the ERC-20 contract ahead of time and dump the tokens on the secondary market to save money, making no one Protection against impermanent loss of liquidity providers and excessive exposure in slashing collateral pools.

To avoid this, these pools can adjust the refresh rate of their ERC-20 contracts to a higher frequency to balance the increased gas cost Risk of imbalance in case of slashing. In practice, it is unlikely that the pool is prepared to update token balances more frequently (let alone every epoch!). Instead, they prefer to reduce the risk of slashing with improved security procedures, or are only prepared to increase the frequency of updates if a slashing event actually occurs.

Therefore, pool users and liquidity providers are generally advised to monitor the balances of validators belonging to the pools they hold or provide liquidity to. In the future, services like Beaconcha.in may offer subscriptions for notifications of slash events, which would help spread the word about slashes and make the secondary market for collateralized ETH tokens more efficient.

Socialization of profits and losses

The mortgage income and losses of all fund pools are related to the user deposits The size is proportional to the total deposit amount of the fund pool (proportional). This is done to avoid situations where some users earn less or more than others due to the performance of the validators randomly assigned to them. Assuming all aggregators act honestly, the main difference is that being randomly selected picks up more proposals, which includes higher pay, so socialization of payoffs sounds fair.

However, the socialization of rewards between pool participants still introduces a degree of unfairness into the staking process, especially when checking for Eth4 validators When activating the queue (at the time of writing this has been going on for about 19 days). For example, the total amount of rewards earned by validators is distributed among all token holders, while the tokens themselves are generated for new users upon deposit. Therefore, even users who have just deposited ETH will participate in the distribution of rewards (because they hold tokens), regardless of whether their deposit has been matched and activated on the beacon chain.

This means that the income of the pool is divided equally between all participants in the pool, as if all deposited ETH are earning returns, while Not all deposited ETH is actually productive due to the current activation delay of ~19 days. As a result, the APR for holding tokens will be different than the average APR for pool validators, so users should be prepared for this.

Rewards are distributed among all participants, even if not all deposited ETH has been activated

One user's loss is another user's gain. There are pros and cons to this situation - everything depends on the user's own point of view. From the perspective of a user who has just made a deposit, this socialization is beneficial as it allows them to skip the activation queue that is currently more than 3 weeks old. Instead, they start making money off their mortgage from the moment they deposit their funds. At the same time, pool losses caused by staking will also reach such users faster.

On the other hand, everyone who has activated ETH and received rewards is happy to share the burden of fines with new token holders, while taking the hit themselves will be less. However, under normal circumstances, if the pool is operating profitably, socializing income with people who have just deposited will reduce the profitability of existing users relative to their deposits. The pools with the fastest growth in deposits are the most affected by this.

Perhaps the simplest way to describe this interplay is that new users effectively borrow from their rewards in the future, thereby skipping the activation queue, and Start earning rewards faster.

In general, the faster and longer the number of new deposits in a pool grows, the greater the drag on existing users' income. Due to the popularity of pools, this shortcoming can be partially compensated by having greater liquidity for tokens. Users should consider these factors when choosing who to stake with, and pool operators may look for ways that they may only generate tokens when a new user's ETH is activated.

A Service Fee is Charged

Pools' service fees generally apply to the amount of rewards they earn , ranging from 8% to 23%. The calculation of rewards attributed to users takes this fee into account immediately, so token balance growth will reflect this fee. This is an important detail to keep in mind when judging the performance of different pools based on their growth rate.

For example, consider two staked ETH tokens from two pools with the same mechanism and the same validator performance. Tokens in pools with lower fees will naturally grow faster than those in pools with higher fees.

This feature is crucial for comparatively evaluating the prices of different tokens in the secondary market and their use in DeFi applications. Changes in net yield will result in price differences for different collateralized ETH tokens, where even at the same liquidity depth, lower fees mean a smaller discount to ETH.

Re-staking rewards

There is a common misconception that staking pools automatically reward of remortgages, so growth becomes compounded. Unfortunately, this is a myth - automatic re-staking is not possible in the current ETH2 spec, and users should be wary of anyone claiming to be re-staking rewards in the pool. Only during phase 1.5 will it be possible to withdraw rewards from validators before they can be re-staked and compounded in the pool. We're 18 months from that moment, so beware of false advertising.

Despite the lack of native support, restaking can also be done manually through pools using a dual token structure. Users of such pools can sell staking rewards separately from deposits and reinvest the proceeds back into staking. They can even earn compound returns as long as the reward tokens can be sold on the secondary market without a discount.

Composite effects can be really powerful over long periods of time, but even shorter periods of time can make a dramatic difference. Chart assumes 10% APY in the network

This naturally makes StakeWise the only operator with a dual token structure, but let's not rush into action: although we There is a strategy to keep the discount on awarding ETH tokens to a minimum, but we cannot guarantee that it will work. Until this concept is proven, compounding returns from staking prior to stage 1.5 will remain a difficult problem.

Conclusion

We hope that the A shared understanding can stimulate in-depth discussions on the merits of different staking pools in the Ethereum community, bring needed efficiencies to the market for staking ETH tokens, and protect stakeholders from unintended consequences of a lack of understanding of the product.

We believe that some concepts discussed in this paper deserve further analysis and discussion, especially the socialization of validator balance changes and the frequency of token contract updates, because They can have a profound effect on the APR generated by using the pool.

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