Stay True and Surprise: An In-depth Analysis of Ethereum Staking SAAS, a Rational Choice for Security and Returns
Title of the original article: "Playing Safe and Smart: Staking as a Service - A Rational Choice for Security and Returns on Ethereum"
Author of the original article: @darkforest_lian
The development of Liquid Staking Derivatives (LSD) on Ethereum is thriving. For the average cryptocurrency player, participating in LSD is sufficient, but there isn't a deep understanding of the underlying logic and security implementation when it comes to staking. The widespread adoption of LSD by numerous users poses a significant risk of centralization in the Ethereum ecosystem, which is a considerable threat.
Decentralization is not the team's responsibility but a rational choice made by each user based on their own interests. And I want to say that Staking as a Service (SAAS) is an Ethereum staking method that balances security and returns, which aligns with your own interests.
Staking as a Service (SAAS) is a staking method suitable for users with moderate to larger capital. However, there is a shortage of information about SAAS in both Chinese and English sources, resulting in the loss of a significant number of users who could have participated in SAAS under certain conditions. One of the significant advantages of SAAS compared to LSD is its higher security, lower reliance on third parties, lower costs, and potentially higher returns. Cryptocurrency players holding 32 ETH or more should seriously consider this method.
Speaking from my own experience, when researching the staking field of Ethereum, I constantly questioned myself about what I consider to be the most crucial factor. After asking myself hundreds of times, I still believe that the security of assets is of paramount importance as this investment decision spans several years and may even serve as passive income for a lifetime. From this perspective, LSD cannot provide me with enough peace of mind.
According to @0x todd's classic article "Exploring Staking: 4 Ways to Control the Ethereum Network"
There are only two staking methods that meet this demand.
solo home staking
staking as a service
For most ordinary people, they do not have enough technical knowledge or energy to run their own nodes. Therefore, although solo staking is the most decentralized and has relatively no cost or commission loss, it is too difficult. I will not discuss it further here.
This article focuses primarily on staking as a service. SAAS, in plain language, means that you provide funds - 32 ETH, and node operators provide the technology (software and hardware). The two of you work together to participate in staking.
SAAS is not a familiar concept for most Ethereum users, even for seasoned defi degens, because most of the staked liquidity tokens (LST) in defi are derivatives of two other staking methods: pooled staking and centralized exchange staking. The former includes well-known tokens such as lido's stETH, rocketpool's rETH, and FRAX's sfrxETH, which account for a large share of trading volume and TVL in various DEXs. The latter is represented by coinbase's cbETH and Binance's BETH.
Although these last two staking methods differ in decentralization, they share one thing in common: stakers cannot personally control the two keys for Ethereum POS validation and withdrawal. Therefore, you have to trust that the third party will not act maliciously. Whether your faith will collapse, you will only know on the day something goes wrong. After all, having been in the crypto world for 10 years, I've seen all kinds of absurd things.
If we look at the future cycle of the next few decades, there will definitely be even larger black swan events. So, there is nothing more important than taking control of your own destiny.
Investment decisions made with a sense of luck often result in complete failure, and the level of failure that destroys your life only requires one.
If you agree with the above views, then why not join me in delving into SAAS and truly take control of your assets?
The Ethereum official website evaluates SAAS staking in the following aspects:
1. Open Source
The critical code is 100% open source and available to the public, allowing forking and free use.
2. Audit
The critical code has undergone formal audits, and the audit results have been publicly released and made available to the public.
3. Bug Bounty
A public bug bounty program has been conducted for critical code to reward users for reporting or fixing vulnerabilities.
4. Real-World Testing
The service has been opened to the public and put into use within a specified time frame. It is preferable to have been running for over a year.
5. Permissionless
Users can participate in the service without any special permission, registration, or KYC verification.
6. Diversified client
The service provider should not run more than 50% of the total validators using the majority of validator clients. It is preferable for this metric to be less than 50%.
7. Self-hosted
Users keep all validator credentials, including signing and withdrawal keys.
On the other hand, we can also judge which node operator is more stable and secure based on the data from the Ethereum staking dashboard rated.network.
From the perspective of node operators on the website, we can see that the market share of major node operators is not too high, with no single operator surpassing 3%. This makes pooled staking, particularly Lido, relatively decentralized.
Here, I have listed the implementation of several major node operators in terms of the six criteria.
However, these six dimensions are too general and do not provide much guidance for users' selection. For example, it is difficult to determine whether a protocol is fully open source. It may only put some components of the protocol on GitHub, and it is hard to know if the core code is completely open source.
Moreover, each node operator has a different approach to handling the two keys, especially the verification key that the protocol party needs to keep. This actually tests their understanding and implementation capabilities of security. Lido's data in an article can reveal this kind of diversity.
Dirk and Web3 Signer are two different ways to protect validator keys. They are both designed to provide secure key management to protect validators' private keys from unauthorized access and malicious attacks. Unfortunately, most node operators have not adopted the basic management method of protecting validator keys through external signing.
So I would like to evaluate the node operator in a more reasonable way:
1/ Security
For SAAS, the custody of the withdrawal key is entirely your own responsibility. As long as you ensure that your withdrawal address private key is not leaked, no one can take away your staked Ethereum. This is completely different from LSD. Node operators have no involvement, which is why it is called self-custody.
The remaining key, the verification key, is where node operators can demonstrate their security concepts and execution methods.
In this regard, Attestant, a node operator, provides a very detailed discussion on the technical means of protecting the verification key. (Original Article)
Simply put, the verification key is in a dilemma. Although the verification key itself cannot access funds, if it is obtained by an attacker, it can lead to indirect attacks such as extortion or direct destructive attacks that result in the loss of funds for the user. Therefore, security is crucial.
At the same time, the verification key needs to be always accessible: validators need to sign multiple messages in each epoch (approximately 6.5 minutes). Therefore, the accessibility requirement for the verification key is also very high.
In general, we can have security or accessibility, but not both. This is the dilemma that node operators need to solve regarding the verification key.
In addition, the entire security system has a high degree of asymmetry.
In addition, the entire security system has a high degree of asymmetry. Attackers only need to sign a single arbitrary message to achieve their destructive goals, while users have ongoing objectives.In other words, attackers only need to win once, but users must win every time.
So one way to protect and verify the key is to add layers of security on top of the original plaintext storage. These security techniques include remote passphrase, remote signer, threshold signing, and distributed key generation. It's impressive how these layers of security technologies are stacked together. If you are interested, you can learn more about the mentioned articles above.
The ultimate goal is to reject single-server failures and achieve threshold signatures using DKG technology. If one of the servers is compromised, there won't be a permanent weakness. By re-entering the key, the stolen key held by the attacker becomes unusable.
In another article that I believe all SAAS users should know, it mentions several node operators who use threshold remote signing technology:
Attestant
Cryptomanufaktur
Certus one
P2P.org
Stakely
Staking facilities
Some of these node operators can be found on rated.network and they have performed exceptionally well with relatively high effectiveness ratings and no slashing history.
2/ Earnings
The issue of security has been resolved, which largely solves the issue of income. Because when the node operator can ensure the security of the verification key and has a mechanism to ensure the timely and effective issuance of correct messages, your income will naturally be guaranteed. In addition, I think there are three key indicators to help you choose the node operator with the best income.
1. Validity Rating
Usually, the main indicator for users to choose a node operator is APR. You will check the APR income of each operator over a period of time. However, due to the complex reward structure of Ethereum (the APR for each month or even quarter highly depends on many random variables, such as the number of blocks created or the MEV extracted, and it cannot reflect the true performance of the operator), it is best to compare the staking providers based on the validator's validity rating rather than APR.
I have explained this indicator in detail in my previous article, "Comprehensive Guide to Ethereum Staking Metrics - rated.network".
In the long run, the validator's validity rating is a good predictor of APR because it measures how well the validator fulfills its duties. If the validator does not miss any proof blocks, it has 100% validity and receives 100% of all possible rewards.
Among the top players in market share, the highest and lowest validity ratings can differ by one percentage point over an extended timeline. However, it seems that the contribution to APR is not significant under random income disturbances. Still, you should choose a node operator with a higher validity rating, and that won't go wrong.
By comparison, the validity ratings for LSD-like projects in the same time period are generally not so ideal.
Another interesting point is that stakefish, allnodes, P2P.ORG, kiln, etc., these large node operators are also participating in lido or rocketpool. So, if you don't care much about the liquidity of Ethereum staking and the composability of DeFi, or if you just want to prevent yourself from making impulsive decisions and losing your chips, you can choose the same node operator as the LSD protocol while holding your private keys. This way, you don't need to share 5% or even 10% of your earnings with the LSD protocol, which can increase your benchmark earnings and extend the timeline, resulting in significant gains.
In summary, using reliable node operators can reduce risks and increase returns.
2.MEV Income Extraction
The number of MEV relays connected by a node operator affects the amount of MEV income you can receive. Currently, there are ten active MEV relays. By connecting to each relay, a validator will receive more bids and can choose the most valuable ones to earn higher MEV rewards. On Rated, we can see that the largest node operators in the BLOCK SPACE DISTRIBUTION column have almost identical graphs. Almost all blocks are relayed through MEV-boost, maximizing the value extraction of MEV and increasing APR returns.
From the relay landscape interface on Rated, we can see the importance of increasing our earnings through MEV relays.
Over the past 30 days, the rewards from the consensus layer have been insignificant for those not using MEV-BOOST, with almost no difference. However, the rewards from the execution layer can be increased by nearly 4 times when using MEV-BOOST. This difference is not significant in the recent low gas fee market. In April, using MEV-BOOST even increased the rewards from the execution layer by more than 10 times. This is the role of MEV in increasing APR staking returns.
Of course, a higher proportion of MEV blocks is not necessarily better, as there is a high risk of missing a block when the time to propose a block is too long. Therefore, node operators do not achieve a 100% success rate when creating blocks.
By the way, let me introduce the projects in the ten active MEV RELAY tracks. Some of them have their own coins, but most of them do not. However... it seems that these projects in this track are not very profitable and are quite risky.
3. Slashing
Ordinary small-scale slashing does not have a significant impact or loss for both individual stakers and the entire Ethereum ecosystem. If only 1, 100, or even 1000 validators are slashed within 36 days, the penalty will be equal to 0 ETH. However, if the number of slashed validators increases to about 1.1% of all validators (currently 6.4k), the penalty becomes 1 ETH, and an additional 1 ETH is slashed for each additional 1.1% of validators.Therefore, if 1/3 of the network is slashed, the fine will offset all the equity (32 ETH). This mechanism is in place to prevent attacks on the network and should never be triggered accidentally.
We can compare the data on penalties between several leading SAAS node operators and several top LSD projects. Most SAAS projects have been running for a long time, while coinbase and rocketpool in LSD have not been running for very long. However, based on the penalty data, SAAS is clearly better overall, except for stake.us.
Comparison of penalty data between LSD and SAAS
A potential large-scale penalty is an absolute disaster for Ethereum stakers, which is why the Ethereum community is highly pursing client diversity. Currently, there are two dominant consensus layer clients, Prysm and Lighthouse, which account for a total of 74%. The execution layer client is even more dominated by a single client. It can be said that if any of these clients experience a serious bug, it could lead to a severe penalty event in Ethereum's POS. Therefore, for individual stakers, it is crucial to choose node operators with client diversity, especially those with minority clients, as they can potentially save the day.
3. Cost
If Ethereum staking is a long-term investment for you, choosing a staking method with lower fees is of utmost importance in order to improve your earnings over a longer time span. This is similar to choosing between actively managed funds and passive index funds in your investments, and I believe this is understood by mature investors.
Because most SAAS node operators are targeting institutional clients or directly connecting to the LSD project, I have only found a few node operators that individuals can participate in. Some node operators can negotiate rates with them, such as P2P.ORG, which offers a rate of only 5% for clients with more than 10 validators. Compared to the rate of 25% for cbETH on Coinbase, it can be said to be quite attractive.
stakefish's fee structure is also unique. They don't require consensus layer earnings, only 25% of the execution layer earnings. In my opinion, this fee method is quite clever because as the number of stakers increases, consensus layer earnings will continue to decline, and once a bull market opens, the increase in priority fees and MEV income in gas fees will greatly increase execution layer rewards, allowing stakefish to obtain higher profits.
kiln allows Ethereum staking through Ledger Live. Since I am not currently using Ledger, I am not sure about the specific fees and staking methods.
Overall, Allnodes has the lowest cost. According to the current Ethereum price of $1900, the annual fee for the advanced plan is only 4% of the earnings. One thing I like is that the fees are calculated in US dollars, so if the future Ethereum price rises significantly, other operators' fees based on Ethereum will become very high.
4/Operational
In most staking service providers, you need to generate validator mnemonic yourself. Basically, they will provide two ways: one is the Ethereum official tool, and the other is their own tool. The mnemonic needs to be properly stored, and two .json files, keystore and deposit, need to be generated. Note that you need to carefully keep the mnemonic. If it is lost, you will not be able to initiate a withdrawal request, and your Ethereum will be permanently staked.
In a way, this doesn't seem like a problem for lifetime stakers. After all, your interest is automatically deposited into the withdrawal address every few days, and as long as you have the wallet key of the withdrawal address, you won't worry about having no money to spend. But let's face it, one choice is still missing.
The above operations have some psychological pressure for new participants in staking, although they are not complicated. It is recommended to practice more before actually doing it. You can also try it on the Goerli test network. Some staking service providers have also prepared simpler staking options, such as stakefish's NFT staking method, and P2P.ORG almost allows one-click staking without much operation. However, convenience comes at a certain cost. The withdrawal address for stakefish's NFT staking is not your own address, but a whitelist contract address. P2P.ORG generates and manages validator keys for you, and you need to make your own choice balancing security and ease of operation.
V. Overall Assessment
Staking Rewards is a website that provides information and tools related to cryptocurrency staking. You can learn about staking rewards, expected returns, and guidelines and resources for participating in staking from this website. It also compares and ranks different staking projects and has its own rating system. It divides certified node operators into three levels: AAA, AA, and A. I have listed some AAA-level node operators. Interested friends can continue to delve into it.
Conclusion
This is an investment research I wrote for myself. Although SAAS and LSD are both Ethereum POS staking, the popularity can be described as polar opposites. Few people pay attention to SAAS, and there is almost no in-depth Chinese content in this field. Most of the English content is written by the project team. After all, the threshold of starting a node with 32 ETH is not low, but I believe that there will still be people with this demand. At least for those who participate in LSD, if they can have a clear understanding of the operational indicators and security management methods of the node operators underlying the LSD project, it will be of great help to their investment in the LSD project.
In my opinion, every staker in the Ethereum network needs to make choices that align with their own values based on their actual situation and clarify what is most important to themselves. Decentralization is not the responsibility of the team, but a rational choice made by each user based on their own interests and independent thinking.
Sun Tzu's "The Art of War" says "The art of war is to subdue the enemy without fighting."
In my view, SOLO and SAAS are undoubtedly the "subduing" that medium-sized Ethereum stakers must uphold. Only by ensuring the security of funds can you have the capital to "astonish" and make a big splash in the LSD race. This is truly the way of investment - to hold steady and surprise.
