In-depth analysis of ETH2.0 mortgage pool and token model
Editor's Note: This article comes fromDecentralized financial community (ID: China_DeFi), reprinted by Odaily with authorization.
Editor's Note: This article comes from
Decentralized financial community (ID: China_DeFi)
Decentralized financial community (ID: China_DeFi)
, reprinted by Odaily with authorization.
Lido
StakeWise
RocketPool
CREAM
Stkr
According to ETH2GO.com data, ETH2.0’s current pledge yield is 9.9%.
This article was co-authored by members of Cryptotesters and Consensyscodefi.
After understanding, you can get the following value points:
List of ETH2.0 pledge related projects
Understand the risk points of participating in proxy pledge by understanding the token model of ETH2.0
Practitioners can understand ETH2.0 from the perspective of a single bond. Referring to the US housing loan and its derivatives market, the pledge of ETH2.0 will also be magnified at least several times under the influence of leverage
The cryptocurrency space 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 both trying to find a solution to the necessary friction anyone encounters when staking ETH. 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 withdraw from the lucrative ETH mortgage market.
How can mortgage pools solve this problem?
This is where ETH2.0 collateral pools come in. 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.
Additionally, they attempt to alleviate lengthy liquidity requirements by generating ETH1 tokens representing deposits and rewards users earn 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 pools, which undoubtedly has 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 for price efficiencies between different Eth2 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 want the community to contribute to the discussion of effective pricing and arbitrage opportunities in the Eth2 pool industry.
Mortgage ETH token model
We can distinguish between two different structures: a single token designed 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/re-pricing 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. It can be done in two ways:
Staking rewards and penalties accumulated on ETH2 are reflected in changes to token balances (hence the term "rebalance") such that in phase 1.5 each staked ETH token should be exchanged 1:1 for ETH in the pool .
Staking rewards and penalties accumulated on ETH2 are 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 of tokens increases with the amount of rewards and penalties in the pool fluctuation.
The differences in these token mechanisms are best illustrated with examples:
I. Balance change: Deposit 1 ETH into the pool and get 1 pledged 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 mortgaged 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.
Note that the balance of staked ETH tokens is always equal to the amount of ETH in the pool; the 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 yet received any rewards, 1 ETH = 1 mortgaged ETH token.
As the pool rewards and penalties increase, the user's balance of staked ETH tokens will remain the same, but now, the token claim per unit of ETH in the pool changes. In other words, 1 staked ETH token in the pool = 1.1 ETH in the pool.
Rocket Pool, CREAM, Stkr and StaFi use such tokens.
Dual Token Design
Note the change in the exchange rate - it captures the growth in staking rewards users get.
While using different mechanisms 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’ll discuss the implications of this design choice in another post, but when evaluating pools, users should consider the design factor as it will guide users’ APR expectations and predictions about secondary market pricing for tokens.
Dual Token Design
Instead, the dual token structure is based on the concept of two rebalancing tokens that reflect deposits and rewards, respectively.
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 minted 1:1 with ETH deposited by users.
When deposited in an address, deposit ETH tokens do not grow, but instead accumulate rwETH (reward ETH) tokens, reflecting the growth of the user's stake in the pool in a 1:1 ratio. 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's an example to illustrate:
Deposit 1 ETH into the pool and get 1 ETH token (stETH).
As the pool reward grows, the balance of deposited ETH tokens will remain the same, but its presence in the address triggers the accumulation of reward ETH (rwETH) tokens to reflect the growth of the pool reward. It accrues rewards in ETH tokens for as long as the deposit ETH tokens are held.
After Phase 2, all tokens will be redeemable 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 instruments with different accruals and cash flow expectations (principal and interest), enabling Manage mortgages more efficiently and rationally.
For example, as rewards are earned, they can be gradually sold in an efficient market for STRIPs to users who wish to stake for benefits without staking themselves.
What Powers All Tokens
When it comes to the core principles of how staked ETH tokens work, the design choices of different pools become more subtle, but can still have a significant impact.
off-chain oracles
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 balances (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 communicating 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 token balances. 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.
Still, these solutions are not ideal, and users are advised to pay attention to whether the pool is running its oracles in a sufficiently decentralized manner.
Example StakeWise Beacon Chain Oracle Arrangement
Balance Refresh Rate
Every update of token balances in an ERC-20 contract involves gas fees, 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 a stake pool validator via epoches (via a beacon chain explorer) and know that its balance is going to drop significantly before its balance is reflected in the token. 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 with the risk of imbalance in the event of a slash. 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 pools they hold or provide liquidity to. In the future, services like Beaconcha.in may offer subscriptions for notifications about slash events, which would help spread the word about slashes and make the secondary market for collateralized ETH tokens more efficient.
profit and loss socialization
The mortgage income and losses of all fund pools are proportional to the size of user deposits and 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 examining the activation queue of Eth2 validators (which, at the time of writing, has been going on for about 19 sky). 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 distributed equally between all participants in the pool as if all deposited ETH were earning returns, when in reality not all deposited ETH ETH is productive. 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, and get hit less themselves. 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 easiest way to describe this interplay is that new users effectively borrow from their own rewards in the future, thereby skipping the activation queue and starting earning rewards sooner.
In general, the faster and longer the number of new deposits in the pool grows, the greater the drag on the income of existing users. 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.
service charge
Pools’ service fees typically 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.
There is a common misconception that staking pools automatically restake rewards, 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.
in conclusion
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.
Compounding effects can be really powerful over long periods of time, but can make a noticeable difference even in shorter periods of time. Chart assumes 10% APY in the network
