ITSA Insight: Rocket Pool’s Liquid Staking and Smart Nodes
Ethereum staking was introduced with the launch of the Beacon Chain in December 2020. Staking is the act of depositing 32 ETH to activate validator software on the Ethereum blockchain and has been active for the past two years. Validators have replaced the miners after The Merge in 2022 and will be responsible for storing data, processing transactions, and adding new blocks to the blockchain. Since not everyone can invest 32 ETH to become a validator, different solutions have emerged. One of these solutions is Rocket Pool. Launched in November 2021, Rocket Pool is a community-owned staking protocol that lets users stake any amount of Ethereum tokens — with no need to run complex infrastructure. Rocket Pool not only allows users to stake any amount of ETH but also to deploy tokenized assets rAssets on DeFi applications. Like Lido Finance, Rocket pool offers liquid staking, which involves an ERC-20 liquidity token representing staked ETH. The unique feature of Rocket Pool is its decentralization. The protocol is built with the intent of trustless ETH staking.
Authors: Valentin Kalinov, Christian Viehof
Ethereum Staking and Rocket Pool
Natively Ethereum does not support pooled staking, but many third parties are offering additional services. In addition, there are different types of staking solutions:
- Solo staking — As the name suggests, this model requires you to run your node and deposit 32 ETH to become a validator. It is technically the most demanding way to be part of the validator network. The model also offers the highest rewards because one is not dependent on third parties.
- Staking as a service(SaaS) — SaaS offers users to deposit 32 ETH for a validator but delegate node operations to a third party. This way, they avoid dealing with hardware.
- Pooled staking — Staking pools are a collaborative approach to allow many with smaller amounts of ETH to obtain the 32 ETH required to activate a set of validator keys.
- Centralized exchange staking— Many centralized exchanges like Coinbase, Binance, or Kraken provide staking services for their users. This is the easiest way to get into Ethereum staking. However, users depend entirely on the centralized exchange to keep their funds safe. These also offer lower staking rewards.
Staking protocols like Rocket pool is a collaborative approach to allow smaller ETH holders to obtain the 32 ETH required to activate a validator node. The best-known pooling solutions right now are Lido, Rocket Pool, and StakeWise. Rocket Pool is considered to be the most decentralized Ethereum staking protocol. Pooled staking has a significantly lower barrier to entry when compared to solo staking, but it is less convenient compared to centralized exchanges. It offers the right balance between not having to run your hardware and not heavily relying on third parties at the expense of lower rewards.
Rocket pool’s offerings
ETH token holders can simply stake their tokens for rewards or become paid node operators. There is a two-sided market, where stakers are paying the service providers, and service providers are paid to run the nodes. Node operators are paid both in ETH and Rocket Pool’s native token, RPL. Rocket Pool’s nodes need to deposit only 16 ETH instead of the 32 ETH required by Ethereum. The other 16 ETH are covered by the staking pool, where stakers have deposited their tokens. When depositing ETH, node operators must also deposit a minimum amount of RPL to act as collateral in case they incur any penalties because of slashing. These types of validators are called minipools.
When staking, users receive stacked ETH (rETH) in return. The rETH tokens represent the initial deposit value plus the staking rewards. With rETH, users can claim their ETH in the future. As of today, Ethereum does not allow un-staking until the following network upgrade sometime in 2023. Nevertheless, users can use their rETH just like ETH and deploy these on DeFi applications for additional yields. rETH automatically accrues staking rewards based on the protocol’s performance, which means that rETH grows in value over time. For example, if a user deposits initially 10 ETH and gets 10 rETH in return after a few years, one would be able to get more ETH for their rETH tokens depending on the protocol performance. This would mean that even holding rETH in your wallet, the value of it would increase against ETH. Rocket Pool’s protocol design allows users to trade back their rETH for ETH plus rewards if there is enough liquidity. This mechanism offers greater capital flexibility than solo staking, as people don’t need to wait a few years for the next Ethereum upgrade to unlock unstacking.
RPL Token and Governance
Rocket Pool is governed by a two DAO structure — the Protocol DAO (PDAO) and the Oracle DAO (ODAO). The Protocol DAO governs the protocol’s configuration settings(Inflation of the token, distribution awards, bond recovery, min and max of RPL to run a node, etc.) and is made up of the user’s staked RPL tokens. The Oracle DAO provides services such as connecting the Beacon and ETH1 chains and includes elected members by the community. The members of the ODAO hover around 15, depending on the configuration. The ODAO members run special nodes similar to the Rocket Pool nodes. These nodes appear the same as the validator nodes yet have different tasks by providing services to the DAO and validating token balances between chains. Rocket Pool’s ODAO will monitor blocks produced by node operators and apply a 10% ETH penalty if the Fee Recipient is not set appropriately, for example. The RPL token is an integral part of the protocol and serves many purposes. To join the DAO, a new member must be first invited and post an additional RPL bond that acts as a good behavior bond. If the member acts maliciously, other DAO members can propose to slash their stake. The RPL token is also part of the rewards structure of the protocol. It is also used as insurance for the rETH value protection, with nodes staking RPL as insurance in case of failure to meet network demands.
The classification of RPL according to the ITC:
Economic Purpose (EEP): RPL is listed as a Settlement and Governance Token (EEP21TU03) similar to the other stablecoins in the industry.
Industry Type (EIN): The issuer of RPL is active in the field of Cloud Computing, Distributed Systems and Decentralized Applications (EIN05DA03).
Technological Setup (TTS): RPL is an Ethereum ERC-20 Standard Token (TTS42ET01). The Class “Ethereum ERC-20 Standard Token” captures every token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain.
Legal Clam (LLC): The RPL token does not entitle its holder to any legal claim or rights against the issuing organization, therefore it is listed as a No-Claim Token (LLC31).
Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. Rocket Pool Pty Ltd. is based in Australia and manages the protocol development therefore RPL is listed as a Private Sector Legal Entity (LIT61PV).
Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information on the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). The RPL token qualifies as a Utility Token (REU51UT) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.
The International Token Standardization Association (ITSA) e.V.
The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.
- The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
- The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
- ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.
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Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis, as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via email@example.com and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.
Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via firstname.lastname@example.org and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.