Introduction

In December 2020, the Beacon Chain was officially launched. Over the following months, several centralized exchanges began developing their own Staking as a Service (SaaS) solutions. With time, retail investors realized that staking ETH on platforms like Coinbase or Binance was much easier than acquiring 32 ETH and running a solo validator. However, the Beacon Chain encountered an issue as the stake started to concentrate in the hands of a few large corporations. Many teams began working on solutions to enable anyone to stake their ETH in a decentralized manner, leading to the birth of Lido. Since then, the protocol has become increasingly problematic, currently accounting for over 32% of the total stake according to rated.network. Several other protocols, such as RocketPool's rETH, Frax's frxETH and soon Stader’s ETHx, are now emerging to compete for market share with Lido.

Lido

Lido was the pioneer in the liquid staking market and has maintained its position as the leader ever since. Although the protocol is often mistakenly referred to as a centralized staking platform, this is not accurate. Currently, Lido relies on the services of 30 different node operators who handle the staking process on their behalf. While a validator set consisting of 30 operators may not be considered highly decentralized, it is still a significant improvement compared to staking with a single centralized exchange. Lido is actively working on expanding the distribution of its validators, aiming for a more decentralized setup.

Pros

• Prominent LST with deep liquidity

• User-friendly GUI for retail investors

• High yield and MEV capture due to low fees

• Integration with DeFi protocols like Aave and Maker

• On-chain voting and upcoming dual governance

Cons

• Higher slashing risk due to fewer node operators

• Not fully aligned with Ethereum’s vision

• VCs have high voting power in the DAO

Through their V2 upgrade, Lido introduced a staking router that functions like a Lego piece, enabling various solutions to be built upon it. This includes the implementation of a Distributed Validator Technology (DVT) validator set, which allows permissionless stakers with a bond and/or a NO score (a node operator score based on performance), or a combination of the two. By adopting this approach, Lido contributes to Ethereum's decentralization and censorship resistance while also mitigating the risks of regulatory capture and slashing risks.

While Lido's V2 approach contributes to the decentralization of the Ethereum network, it is essential to recognize that Lido itself poses a threat to Ethereum's overall security. It is crucial that Lido's share of the total network never exceeds 20%. Achieving this goal requires a collective social effort, emphasizing the importance of taking action. As a result, I encourage everyone to explore alternative staking solutions. So, what are the available alternatives? Let's delve into them below. Keep reading! 👇

Rocketpool

Rocketpool gained significant popularity during the Merge due to its distinct approach, focusing on achieving absolute decentralization and permissionless onboarding of node operators. This unique strategy set it apart from Lido. Initially, their onboarding mechanism resulted in rETH trading at a slight premium. However, with their recent upgrade called Atlas, this issue seems to have been resolved. The upgrade reduced the node operators' bond requirement from 16 ETH to 8 ETH, along with some RPL tokens. Additionally, Rocketpool offers a range of features for node operators to enhance their yield, such as the smoothing pool, wich aggregates the validators' execution layer rewards (tips + MEV) and distributes them accordingly like a mining pool.

Pros

• Amazing community and support

• Lower slashing risk due to many distributed nodes

• Decentralized validator set

• Permissionless node operator onboarding

Cons

• Inefficient withdrawal design

• No on-chain governance (RPL holders can signal the oDAO via Snapshot)

• Thinner liquidity around rETH

Personal notes

My main concern with RocketPool lies in their RPL requirement for node operators. While it hasn't posed much of a problem thus far, I anticipate issues arising in the future. Currently, creating a validator necessitates posting a bond of 16/8 ETH, along with 10% of the protocol-provided ETH in RPL. In the short term, this may drive RPL's value up significantly. However, in the long run, this approach may prove problematic.

Unlike Lido, the RocketPool protocol does not receive any portion of the 14% collected on rETH; instead, this yield is passed on to node operators. Still, RPL should appreciate in value because node operators need it to create validators. However, what happens if no new money enters the system? In such a scenario, the token will lack buyers(node operators), leading to a slow bleed downwards caused by the 5% inflation rate, this inflation is distributed to node operators and the oDAO for fulfilling its duties. Furthermore, since the oDAO ultimately makes the decisions, the token cannot be effectively utilized for governance.

In my opinion, a better model would involve significantly lowering the RPL bond or making it optional. Additionally, redirecting some fees to the DAO treasury and implementing a revenue-sharing mechanism could be beneficial adjustments to consider.

Withdrawals dilemma

I did a detailed read on this exact problem that you can check out here, but in short permissionless staking protocols, there is no direct control to request a node operator to stop staking. Withdrawal options include using the deposit pool or the secondary market at a discount, but selling large sums on the secondary market is inefficient due to limited liquidity. If the deposit pool is empty and another protocol attempts a vampire attack, users can only exit through the secondary market. As more people exit, the discount increases, creating an arbitrage opportunity for node operators. However, this mechanism is unfair as it adds an additional cost for users to retrieve their funds. In extreme scenarios like a bank run, trapped funds can become problematic as node operators may not constantly monitor price fluctuations.

Frax

Frax finance has adopted an intriguing approach to introduce frxETH by implementing a dual-token model. In this model, frxETH serves as the staked token, while only sfrxETH accrues interest from the staking process. Meanwhile, the simple frxETH tokens can be utilized as LP (liquidity provider) tokens on the Curve platform. This unique setup grants frxETH a competitive advantage in terms of yield compared to other Liquid Staking Tokens (LSTs). The outstanding frxETH tokens, which remain staked, contribute to the overall higher yield for sfrxETH holders.

These factors work in synergy, driving the Frax flywheel forward. Additionally, it's noteworthy that the upcoming fees will be directed towards veFXS holders, further enhancing the potential benefits of the ecosystem. However, while the enticing high yield of sfrxETH may catch one's attention, it is essential to consider the associated risks tied to Frax's liquid staking solution.

Decentralization & Security

Regrettably, Frax suffers from a weaker decentralization compared to the aforementioned protocols. As far as my current knowledge goes, the validators are operated by certain Frax team members, which raises concerns about both security and decentralization. Additionally, I would strongly advise the Frax team to enhance client diversity. According to rated.network, they predominantly rely on Lighthouse for over 82% of their nodes, with the remainder utilizing Prysm. A more diverse client base would contribute to a stronger and more resilient network.

However, the most significant security threat lies in their withdrawal credentials, which are all set to their 3/5 multisig, as seen here. This configuration means that if three out of the five members of the multisig are compromised, your funds held in frxETH could be at risk of being lost. In the current era of Liquid Staking Tokens (LSTs), I find this level of vulnerability unacceptable.

It's important to note that attacks are not the sole cause for concern. Governments or regulatory bodies can simply request the multisig holders to censor specific funds, and the key holders must comply if they wish to preserve their freedom. This potential for censorship poses a serious threat to the integrity and trustworthiness of the platform.