This article is a visual overview of the insurance protection behind three popular Liquid Staking Derivative Tokens (LSDs):
It aims to inform you about how the policies work and how much protection each pool has relative to each other. You can also skip ahead to the summary at the bottom.
The data and policy information gathered for this write-up were accurate as of 31 July 2022.
You can find my notes here for a little more background on Ethereum staking and the definition of LSD tokens.
When using an LSD token, you delegate your validating duty to a node operator, who pools ETH from LSD users and stakes on their behalf. Picking a suitable liquid staking token involves much more than insurance coverage. You will need to look at things such as historical/projected APR, node operator count, custodian risk, and DeFi integrations, amongst many other factors.
It is possible to lose funds when a node operator’s validator does not perform their duty well (e.g., being offline or incurring various slashing penalties). Most LSDs offer insurance to protect users from the slashing downside. Understanding the risk is complicated because the penalties depend on the likelihood and impact of each different scenario. What is the appropriate amount of insurance? I will not be answering that here; instead, I hope to help you understand the insurance policies behind each of these protocols.
In Lido, trusted Node Operators run validators on their users’ behalf. Insurance in Lido has moved through 3 states via governance:
Currently, Lido has a treasury of (estimated) 4565 stETH + 920wstETH, which equals ~5533 stETH. In the case of a slashing, we expect Lido DAO to burn up to this amount of stETH to bring stETH supply to parity to staked ETH. Any ether slashed beyond 5533 ETH will start to eat into the backing behind stETH.
As shown above, the insurance provides coverage for the entire pool but is small compared to the slashable ETH at stake.
Given that Lido has:
We can estimate that there are 128,401 validators with an average of 32.87 ETH in balance.
Per validator, Lido has, on average, 0.87 ETH in rewards and (5533ETH/128401 validators) 0.043 ETH in insurance cover.
Lido has outlined more scenarios here.
Rocket Pool does not purchase insurance or have a fund. Due to its permissionless and trustless nature, Node Operators (NO) are expected to post collateral as insurance. Liquid ETH deposits are matched 1:1 with Node Operator’s ETH as collateral, as well as 10-150% worth of RPL.
The diagram below shows the assets behind each Rocket Pool Validator
Assets will be used to buffer penalties in the following order (from top-down in the above illustration):
Even lesser rewards will be deducted when withdrawals are enabled. But essentially, rETH has (9.38 + (16 + 0.1724/2)) / (16 + 0.1724/2) = ~158% of slashing insurance per validator. This variable amount can go as low as 110% if the average RPL collateralization is at a minimum of 10%.
Stakewise recently purchased three months’ worth of slashing insurance from Nexus Mutual in a trial purchase that will last until 17 October 2022. Research into Nexus Mutual’s capital pool shows that they have over 120k ETH, adding up to over 150k ETH worth of funds. This amount is sufficient to provide the ~6k ETH required to cover all Stakewise’s validators at 3 ETH each.
For each validator, we have
Combined with the deductible, Stakewise essentially has 3 ETH coverage per validator. As in the diagram above, Stakewise doesn’t have insurance at the pool level; instead, they have it at the validator level. The insurance provides a 3 ETH buffer against a total possible slashing penalty of 32.76 ETH for each validator.
While all protocols have some form of slashing insurance, they behave differently across scenarios.
Many thanks to people who have helped me gather data, answer questions, or review the research!
Most references were already embedded within the article.
I stake with Rocket Pool and hold some RPL tokens. I do this because it has the best chance of limiting downside exposure.
I view insurance as a tool to help users manage tail risks and unexpected scenarios. While a catastrophic event is improbable, the risk is real, especially if a pool runs a client software with a bug. To this end, I believe that Rocket Pool’s rETH is the most resilient LSD token in the face of unexpected software bugs or other operational risks.
rETH also aids the growth of decentralized staking pools to improve the resilience and censorship resistance of the entire Ethereum network.