What is VaaS technology, and why can it realize the non-custodial pledge of Ethereum?
Original Author: Kyle
The U.S. Securities and Exchange Commission (SEC) recently announced charges against cryptocurrency exchange Kraken, alleging that its staking services amounted to offering unregistered securities products in the United States. Kraken has agreed to pay $30 million and shut down all of its US staking services.
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What is a pledge?
Staking comes from a proof-of-stake (PoS) consensus mechanism, where nodes are run by people who lock or “stake” their cryptocurrency to generate blocks, similar to proof-of-work (PoW) consensus, where nodes are secured by investing energy and computing power blockchain. Staking has gained increasing attention in recent years, especially after Ethereum transitions from proof-of-work to proof-of-stake in 2022.
For individual investors, operating their own nodes may be a bit cumbersome. So centralized entities like Coinbase, Binance, and Kraken have a place. Firms offering staking services must register with regulators as securities platforms and obtain SEC approval to offer such products, the SEC said. Of course, Kraken provides a rate of return exceeding the normal value in the pledge service, making it the first object of regulation to stop.
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The Future of Decentralized Staking
The complexities surrounding the Ethereum proof-of-stake network may prevent ordinary users from becoming stakers. Therefore, potential stakers often need to rely on decentralized protocols and tools. Liquidity staking will be a powerful infrastructure for decentralized Ethereum because it allows anyone to create or join a liquidity staking network in a permissionless, trustless manner, for any reason.
Ethereum needs to leverage new underlying infrastructure to benefit itself, and in the process, benefit the wider community. What decentralized staking tools do is to increase the choice of ETH pledgers. After all, no one will refuse to use a safe way to make their ETH generate a stable annual income of 6% -8%.
One way to decentralize Ethereum is through the growing number of Liquidity Staking (LSD) projects. In these projects (such as Lido, Rocket Pool, FraxETH, etc.), anyone can obtain unique benefits from validator services and LSD projects, while sharing fungible liquidity collateral tokens with all participants.
Ethereum liquidity staking projects can be divided into three different parts:
Fund aggregation (receiving ETH and distributing staked ETH tokens);
Operations management (withdrawal key management, updating balances, financial transparency, node operators, custody responsibilities, etc.);
LSD maintenance (LSD token liquidity, such as stETH, rETH, etc.);
On points 1 and 3, the LSD project naturally has advantages, however, on point 2, there are still pain points. In order to be able to issue LSD tokens, the LSD project must tightly control the funds mortgaged to ETH in the hands of the project official. After all, in essence, LSD tokens are equivalent to the "passbook" of your deposit, and the LSD project as a "bank" , must personally control these Ethereum.
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Mining Pool Advantages of the VaaS Model
The main reason why it is difficult for ordinary users to run an Ethereum PoS validator node at home is that the required hardware threshold is too high and requires 24*7 maintenance. Then, those who like to be hands-off shopkeepers, but don’t mind paying a little premium, can choose the Validator as a Service (VaaS) model. It needs to be emphasized that this is a viable business model, but not necessarily the best option.
The reason why the VaaS model is so attractive is that users do not need to purchase their own hardware or software, and they can control the private key for cash withdrawal in their own hands. For users, they do not need any technical barriers, but they can personally manage their own private keys for pledged ETH.
Specifically, the mining pool of this service is to replace the user in the verification work, and at the same time let the user fill in the future Ethereum withdrawal address by himself. This is like a whitelist, these ETHs will never be misappropriated by a third party, and can only be transferred to a whitelist address that the user personally controls. Therefore, this method of completely safe funds is also called "non-custodial".
At the same time, the VaaS mining pool charges relatively low service fees, because it does not need to spend money to maintain LSD liquidity or undertake distribution work, so VaaS service providers will not charge the same high proportion of pledge rewards as some of the original head pledge agreements. It has the following advantages over traditional mining pool services:
Security: Compared with traditional mining pool services, VaaS requires users to personally own the private key for cash withdrawal, while VaaS mining pools cannot know the user's private key throughout the process, which is also the most important.
Simplified operation: The mining pool service provided by VaaS can make users not require any technical knowledge of miners. Users only need to go through simple operations to pledge their ETH to the mining pool.
Reliability: Compared with traditional mining pool services, VaaS provides higher reliability. Because it is a professional operator, various technical means can be used to ensure the correctness of the verification during the pledge process.
Economic benefits: Compared with traditional mining pool services, VaaS can bring higher economic benefits. Because it does not need to maintain LSD liquidity, the overhead is smaller, and a lower ratio can be accepted.
At present, some VaaS service providers have provided such services one after another. It allows users to control the private key for cash withdrawal, and only provides technical maintenance services to participate in verification on behalf of users. It is a standard "non-custodial" mining pool.
We all know that the beacon chain has attracted more than 500,000 validators. The core of the Ethereum Shanghai upgrade is EIP-4895, which will unlock the ETH that is currently locked on the Ethereum network and is being pledged. This move will attract more investors to participate in the pledge of Ethereum and get a pledge reward of up to 6%-8% per year. At the same time, after the Shanghai upgrade is completed in Q1-Q2 this year, it will also allow VaaS-type pledge schemes to obtain better liquidity, that is, through cash withdrawals instead of LSD tokens.
Ebunker official website: https://www.ebunker.io
Ebunker official website: https://www.ebunker.io
