The token economy of the Ethereum 2.0 pledge pool: what is a pledge token?

Source | StakeWise

This article is divided into two parts, what are staked ETH tokens (that is, tokens obtained by staking ETH), and how do they work?

This article was co-authored by Collin Myers @StakeETH and edited by Lito Coen of Cryptotesters and Francesco Renzi of Superfluid.

We are in an era full of innovation and progress.

We don’t need to look too far, there are many innovative projects now——Since the launch of Eth2 Staking, various third-party staking platforms have rushed to launch (https://cryptotesters.com/ethereum-staking-platforms). There are centralized exchanges like Binance, and there are DeFi projects like Rocket Pool and StakeWise, and they are all different.

While these projects have their strengths and weaknesses, they all have one thing in common: they all try to provide solutions that reduce the necessary friction for anyone staking ETH. What are these frictions?

First of all, staking ETH has a certain technical complexity, which exceeds the processing capacity of ordinary users. Furthermore, at least 32 ETH needs to be pledged to run a validator node, which is an unattainable amount for ordinary users when the price of ETH continues to rise (as of this article, the price of ETH is about 1290 US dollars). Finally, staked funds will have an 18-24 month lock-up period, a security measure designed to transition from the current Ethereum blockchain to Ethereum 2.0 in a safe and controlled manner.

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This is where Ethereum 2.0 staking pools come in. They accumulate ETH from multiple users and run Ethereum 2.0's staking infrastructure on behalf of users, enabling anyone to earn staking rewards regardless of skill level or deposit size.

In addition, they alleviate the staking-induced illiquidity by minting ETH1 tokens (as proof of users' staking principal and their rewards on the ETH2 chain). These pledged tokens provide opportunities for token holders: users can exit the pledge early by exchanging tokens for ETH on secondary markets such as Uniswap. They are also able to use staked ETH tokens in DeFi (such as staking in Aave).

However, the token model is implemented differently between different 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 thus should be priced differently on the secondary market. At the same time, Rocket Pool's rETH token is different from the stETH implementation, just like CREAM's crETH2, Stkr's aETH, etc.

Simply put, there are many differences in the token mechanism of different pools, so it can cause confusion and have bad consequences for end users. However, these differences can be categorized and evaluated to find out the advantages of certain pools over others. Furthermore, this comparative analysis lays the groundwork for us to devise different valuation methodologies that allow users to gain price efficiency among different Eth2 staking tokens.

This article aims to educate the community on the types of token economics used by different staking pools. We hope that people can avoid disastrous losses due to insufficient understanding of the product, and hope that the community can actively discuss and contribute to finding effective pricing and arbitrage opportunities in the Eth2 staking pool industry.

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Mainly divided into two modes: single token design (capture the pledge principal and rewards together into the same token); dual token design (capture the pledge principal and rewards into two different tokens respectively) .

The single token structure is based on a concept of rebalanced/repriced tokens. This design is the most commonly used and is used by most staking pools due to its simplicity. Pools mint a single token for users based on their deposits, thereby attempting to capture the amount of staking rewards and penalties accumulated under the same token. It can be done in two ways:

➤ The accumulated staking rewards and penalties on Eth2 will be reflected by the real-time changes in the token balance (hence called "rebalancing"). In phase 1.5, users can use their staked ETH tokens to :1 ratio to redeem ETH.

➤ The accumulated staking rewards and penalties on Eth2 will be reflected in the token price (hence called "re-pricing"). In phase 1.5, the ETH that can be redeemed by one unit of pledged The total amount of rewards and penalties fluctuates.

To illustrate the difference between these two token mechanisms:

1. Balance change: Deposit 1 ETH in the pool and get 1 staked ETH token.

As the pool's total rewards and penalties increase or decrease, each participant's token balance in the pool changes accordingly. For example, 1.1 ETH = 1.1 staked ETH token balance. As a result, the user's staking rewards will be captured, and the token balance on their address will keep increasing, minted by the pool for the user. Waiting until phase 1.5, all staked ETH tokens will be redeemed for ETH at a 1:1 ratio.

Lido Finance and Binance use this design.

Please note: 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.

2. Price change: Deposit 1 ETH in the pool, and get the corresponding staked ETH token according to the token exchange rate of ETH/ETH2 during the same period.

The exchange rate given in the pool is determined by the ratio of ETH to the total number of tokens in the pool, and changes according to the total amount of rewards and punishments accumulated in the pool.

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

As the total rewards and penalties in the pool increase or decrease, the user's staked ETH token balance will remain the same, but the amount of ETH that can be redeemed for each staked ETH token in the pool will change. In other words, 1 staked ETH token = 1.1 ETH in the pool.

Therefore, the price of each staked ETH token changes from 1 ETH to 1.1 ETH, which represents the user's staking income. At Phase 1.5, users will redeem ETH with their staked ETH tokens at the final ETH/ETH2 ratio.

Examples of this model include Rocket Pool, CREAM, Stkr, and StaFi.

Note the change in the exchange rate — it records the growth of user staking rewards.

Although these two single-token designs use different mechanisms to reflect the accumulation of rewards, they have one thing in common: bundling deposits and rewards in the same token. This means that any time a user buys or sells the token on the market, or acquires tokens through staking, they are receiving/selling deposit principal and any rewards accumulated in the past pool.

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In contrast, under the dual token structure, there are two rebalanced tokens (mapping deposits and rewards, respectively).

The user's deposit in the pool (some people like to call it the principal) is mapped in (deposit ETH token) deposit ETH token. Like other rebalancing tokens, it is minted at a 1:1 ratio based on the ETH deposited by users.

for example:

for example:

1. Dual Token: Deposit 1 ETH in the pool and get 1 deposit ETH token (stETH).

The balance of deposited ETH tokens remains constant as the rewards in the pool grow. However, when it appears in the user's address, it will trigger the generation of reward ETH tokens (rwETH) to mirror the growth of revenue in the pool. As long as the user holds the deposit ETH token, the reward ETH token will be generated in the address.

At stage 1.5, both deposit ETH tokens and reward ETH tokens can be redeemed for ETH at a ratio of 1:1.

The only staking pool designed with dual tokens is StakeWise.

Note that the total number of deposit ETH and reward ETH tokens is always equal to the total number of ETH in the pool; both tokens have an exchange rate of 1.

The dual token structure allows for the creation of a new type of hybrid instrument similar to bond dynamics, but with the difference that dual tokens distribute the pledged balance into different accrual values ​​and different cash flow expectations (principal and interest).

For example, when users get reward tokens, they can gradually sell reward ETH tokens in the STRIPs market, and some users can get staking bonuses without staking themselves.

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Original link:https://stakewise.medium.com

ECN's translation work aims to deliver high-quality information and learning resources for the Chinese Ethereum community. The copyright of the article belongs to the original author, and the source of the original text and the ETH Chinese website must be indicated when reprinting. For long-term reprinting, please contact eth@ecn.co for authorization.