Since Ethereum's successful shift to Proof-of-Stake (PoS), the landscape of nodes and validators has emerged as an ideological microcosm of an age-old contradiction between decentralization and operational efficiency. This tension is at the heart of blockchain technology. Large staking custodians such as Lido and Coinbase, both of which have received significant criticism in recent months, are on the side of operational efficiency. On the other side, Rocket Pool has made a name for itself among the industry's most prominent staking providers as the "decentralization messiah."

But, at first look, the protocol is still lagging behind its rivals in terms of real use. Rocket Pool reaps the advantages of a powerful narrative headwind as it enters a market that is poised for expansion. This is possible as a result of the company's early investment in ethics rather than operational efficiency. It has reached the point where it can be considered a mature protocol, complete with a liquidity and partnership plan. When everything is taken into account, Rocket Pool gives a possibility for a substantial profit in the liquid staking market.

Rocket Pool explained

The successful move of Ethereum to Proof-of-Stake has made it possible for every user to participate in the network by operating their node and becoming a validator of new blocks of Ethereum. This form of engagement often requires a high level of technical expertise and comes with significant financial constraints. Users are given the ability to stake ETH in decentralized custodians' protocols, such as the one offered by Rocket Pool, in order to overcome these issues. In return for their participation, individuals will earn an LSD token that can be used throughout the whole ecosystem. LSDs make it possible for holders of ETH to stake their ETH with a decentralized custodian without the need for those holders to independently host a node.

rpl overview

Source: Rockpool

Rocket pool mechanism

Users who want to stake ETH and users who want to stake ETH and manage a node are the key user groups that the Rocket Pool protocol caters to. Users who want to engage in ETH staking are a secondary user group. To operate a validator on the Ethereum Beacon Chain using the proof-of-stake algorithm, you will need 32 ETH. Rocket Pool offers a one-of-a-kind solution since it brings together potential ETH stakers and smart node operators, who represent the supply side (demand side). Due to the nature of their connection, node operators and stakers are now able to work together in order to meet the threshold of 32 ETH.

Smart Node Operators (SNOs)

Running a Rocket Pool Minipool Validator grants the ability to function as an SNO to any entity that has a minimum of 16 ETH. In order to do this, the party must give Rocket Pool 16 ETH in addition to staking at least 10% of the validator's ETH worth in RPL, the protocol's governance token, as a kind of security commitment. In return, Rocket Pool will pool together all of the ETH that has been placed by users and provides that amount to the Minipool Validator. The following are the many types of compensation given to operators of smart nodes:

RPL Rewards: Node operators are eligible for RPL incentives, which are supported by the 5% emissions rate charged by RPL. The percentage of total effective RPL provided as collateral has a bearing on how much weight is given to RPL awards.

Stakers whose ETH is contributed to a node operator's minipool are subject to a fee rate of 15% of the total amount staked by that staker.

Staking Rewards Node operators have the ability to earn staking rewards for any ETH that they have staked for themselves without having to pay any commissions.

With the Redstone update that came after the Ethereum Merge, validators have been able to accept priority fees, which are payments made by users to encourage the processing of their transactions more quickly. In addition to this, in order to increase their overall income, they have put measures into place to capture the greatest amount of value that can be extracted. Operators of smart nodes are allowed to take part in MEV Boost relays and have the option of selecting pre-approved Rocket Pool whitelisted techniques that are tailored to their conditions.

Users

On the demand side, users (also known as stakers) have the ability to deposit as little as 0.01 ETH into the Rocket Pool Deposit Pool in exchange for rETH, which is the Rocket Pool LSD token. This is done in exchange for the Rocket Pool LSD token. The amount of ETH that a user has staked in the Rocket Pool Protocol is denoted by rETH, and rETH accumulates staking rewards in proportion to the number of Rocket Pool node operators that create those rewards. Deposits are added to the deposit pool after they have been made using the Rocket Pool protocol. A node operator's 16 ETH is matched with the 16 ETH that has been deposited by other users.

Governing the Rocket Pool

The Oracle Decentralized Autonomous Organization (oDAO) and the Protocol Decentralized Autonomous Organization control the Rocket Pool Protocol (pDAO).

The oDAO is made up of node operators who are responsible for running the smart node software and acting in the capacity of an on-chain DAO. It does this by transmitting information on the balances of the Minipool validators, the RPL:ETH ratio, and RPL reward payouts. This helps to guarantee that the Rocket Pool contracts operate as intended. The oDAO is also responsible for carrying out duties for the protocol, such as ensuring that the protocol is making the best use of the ETH that is available in the deposit pool.

Only users who have been given an invitation may join the oDAO. Etherscan, Beaconchain, Lighthouse, Nimbus, and Bankless are a few examples of the prominent members of the Ethereum and Rocket Pool communities, respectively. In addition to that, they are required to post an RPL bond, which serves the purpose of a good conduct bond. In return for fulfilling their oDAO responsibilities, members are eligible to obtain extra RPL incentives.

The pDAO is run by its node operators, and the governance and voting authority of each node operator is directly proportionate to the amount of effective RPL stake they have inside the protocol. The pDAO is charged with the overarching responsibility of administering the Rocket Pool treasury and indicating the direction the Rocket Pool protocol will take in the future. During the course of time, it is anticipated that the pDAO will be responsible for monitoring a wider range of protocol parameters, such as RPL inflation, rewards, auctions, fees, and deposit parameters. The pDAO is responsible for the management of the Rocket Pool pDAO Treasury, which is partially supported by RPL inflation.

rETH & RPL

rETH and RPL are the two tokens that make up the Rocket Pool ecosystem respectively.

rETH

rETH is the Rocket Pool protocol's implementation of the LSD token. rETH is equal to the amount of ETH that was initially placed into the protocol, plus an equivalent portion of the ETH staking rewards that have been accumulated by the protocol. Despite the fact that the total amount of stored rETH will not change, the total amount of ETH that is supporting the token in the Rocket Pool protocol will continue to grow. To put it another way, the rETH token's value increases over time as a result of its rising market value relative to that of ETH.

The capacity of holders of rETH to actively unstake their position is a significant benefit that rETH bestows to its users. In order to remove their staked ETH position straight from the Beacon Chain, ETH staking users will need to wait until EIP 4863 is implemented. Nevertheless, Rocket Pool gives rETH holders the ability to "unstake" their position by letting them exchange their cryptocurrency back into ETH. They are able to do this by providing users with the ability to access the liquidity of the deposit pool, which is made up of ETH that is waiting to be staked by node operators. It is also possible to trade rETH for ETH on decentralized exchanges, so long as there is enough liquidity in the market to make the transaction possible.

As compared to the base states of other LSD tokens, such as stETH, the fact that rETH does not undergo rebasing gives it a significant competitive advantage. As the underlying balance of stETH is being rebased, yield is being accrued to the underlying staked ETH, which causes the balance to rise. The basic balance of rETH, on the other hand, does not change despite the additional support it receives.

Non-rebasing tokens (as well as wrapped rebasing tokens) are preferable for usage in DeFi applications due to their more stable balancing properties. Even though the balance of the token does not directly represent the yield that has been accumulated, the value of the token is still determined by market forces and arbitrage. For example, Lido also provides wstETH, which, instead of needing an extra transaction on the part of the end user, turns the rebasing stETH token into a DeFi-friendly token. Since each daily rebase event, which alters a token's balance, would record as a taxable event, a non-rebasing token may also be tax-efficient. Nevertheless, this depends on the jurisdiction in which the token is used. Staking and unstaking are the only two taxable occurrences for a token that does not undergo rebasing (or buy and sell on the market side).

RPL

The Rocket Pool protocol uses the token known as RPL as its internal currency. RPL is a kind of insurance for stakers and validator penalties or slashing, and node operators utilize it to vote on protocol governance. Moreover, RPL is used by node operators to vote on protocol governance. RPL is subject to a yearly inflation rate of 5%, with distributions now occurring as follows:

70% will be distributed to node operators that stake RPL.

15% of the oracle data will be given to oDAO members.

15% will go straight into the pDAO Treasury.

The majority of the RPL tokens were sold during a crowd sale that took place between a pre-sale that took place on September 22, 2017, and a crowd sale that took place on January 4, 2018.

Current state

At the moment, the type of Beacon Chain staking depositors on the Ethereum network that is responsible for the most funds is known as liquid staking. You may attribute 33.5% of the total deposits to this factor. Even so, the liquid staking marketplace has a great opportunity for growth given that just 11.9% of the entire quantity of ETH is staked at the moment.

It is anticipated that the total quantity of Ethereum that has been staked will rapidly rise as users get more comfortable with the idea of staking. This is particularly the case if EIP 4863 permits withdrawals from the Beacon Chain. Although Rocket Pool has fallen behind its biggest competition, Lido, there has been a significant increase in the number of people using the protocol. After The Merge, Rocket Pool has had the most percentage increase of all major staked ETH depositors. This development has enabled Rocket Pool to become the leader in the industry.

Although Rocket Pool's focus on decentralization has gained popularity in the eyes of Ethereum security maximalists, it is probable that rETH's usefulness in DeFi will be the primary driver of Rocket Pool's future growth strategy. This is because rETH has a lower transaction fee than ETH. Both Lido and Rocket Pool has placed a large amount of emphasis on the incentives associated with Arbitrum and Optimism in response to the ongoing spread of LSDs throughout Layer-2s.

When Rocket Pool submitted their application for 600,000 OP in liquidity incentives in July, they put a strong focus on decentralization, which resulted in a favorable reception from prominent Optimism delegates. In sharp contrast, Lido's idea never even made it to vote, much alone adoption. A recent poll about the priority of token integrations was voted on in the same manner by Loopring. While Layer-2 communities have shown support for the bridging of LSDs, the percentages of rETH held on Arbitrum (1.04%) and Optimism (1.60%) are still very insignificant in comparison to the entire supply of rETH. Another significant victory for Rocket Pool came on the mainnet on October 26, 2022, when rETH was accepted as a valid form of collateral after being voted on by the MakerDAO community.

Competitors landscape

Since its launch, almost 300,000 ETH has been staked on the Rocket Pool platform, making it the third biggest LSD protocol. There are two obvious rivals for Rocket Pool on the landscape of the LSD industry, both of which have substantial traction in the stakes markets:

lsd market share

Source: Dune analytics

Coinbase's custodial liquid staking derivative, known as cbETH, is the product offering the highest degree of centralization. Despite the fact that it is presently holding more than 2 million ETH that has been staked, Coinbase's LSD product was a rather late entrant into the market.

stETH: With 4 million ETH staked, Lido is clearly in the lead as the market leader. It has quickly established itself as the dominant player in the industry due to its high operating efficiency and its emphasis on DeFi integration. Lido has established itself as the leading LSD in part due to the integration of stETH with DeFi and Lido's investments in solid DeFi liquidity. All of these factors contributed to Lido's rise to the top.

In spite of Lido's preeminence as a protocol, Rocket Pool's focus on node operator diversity reveals a striking divergence in many important measures. For instance, despite the fact that Lido controls 29.95% of all validators on the Ethereum network, its whole pool of validators is managed by just 29 node operators. In comparison, Rocket Pool's validator share is just 10% of what Lido has, but it is operated by 1,647 different SNOs independently. This is in contrast to Lido's 100%.

As was stated before, it is anticipated that the usability of DeFi will be a primary driver in the adoption of LSD. Users would be able to earn a return that is bigger than what they can obtain from staking alone if rETH connectors with DeFi apps were implemented.

In addition to the vulnerability risk connected with smart contracts, which is a risk that is shared by all DeFi protocols, the Rocket Protocol is likely to have to deal with risks that are related to its usage of oracles that are overseen by the oDAO. Given the history of the DAO, the possibility of members in the oDAO engaging in illegal collusion seems remote, despite the fact that such an occurrence is conceivable in theory.

Risks associated

Rocket Pool has submitted its business to a number of audits, the most recent one being carried out by Sigma Prime. The developers of Rocket Pool have highlighted the resolution of one danger with a high severity as well as two hazards with a medium severity.

In terms of their overall market domination, Lido and Coinbase continue to maintain a significant lead over Rocket Pool. The potential for further expansion, as described in the "traction" portion of this study, is a significant positive aspect of the situation. Several people have hypothesized that more MEV cooperation between more centralized node operators (namely Lido and Coinbase) might lead to more profitable returns. In this manner, such staking providers would be able to acquire a unique yield profile, which might pose a threat to the desirability of rETH.

The future ahead

Rocket Pool has moved its attention from protocol development toward establishing rETH as a primitive of DeFi across protocols and Layer-2 after the successful launch of the Redstone Upgrade by the protocol. This transition came about as a direct result of the success of the Redstone Upgrade. Increasing decentralization at the organizational level by way of the establishment of the Rocket Pool Decentralized Autonomous Organization (DAO) and by further clarifying the protocol's MEV policy are two more goals.

redstone update

Source: Rocketpool

Rocket Pool intends to establish a strong market for holders of rETH as the number of stakers grows. This will allow holders of rETH to take advantage of efficient marketplaces for lending, borrowing, and trading. On August 24, 2022, Rocket Pool gave its approval to a proposal that would define and finance the pDAO as the first step toward putting its vision into action. A committee structure was first implemented for the DAO by Rocket Pool, and soon after that, a proposal for an Incentives Management Committee was made. The group, which was mostly inspired by Lido's reWARDS Committee, suggested allocating 67,500 RPL to the yearly budget. In addition to this, it asked for around $154,000 in monthly runway, with half of this amount set aside specifically for incentives.

An article on the Rocket Pool blog dated August 2, 2022, provided an overview of the introduction of the Phase 0 governance framework for the Rocket Pool DAO. It provided a description of the governance process and delegate system used by the DAO and created an expectation for the evolution of the DAO in the future. In its path toward organizational decentralization, the DAO will confront new scaling problems and possibilities as Rocket Pool continues to gain popularity. These challenges and chances will be opportunities. On Twitter, Marceau of Rocket Pool has made a passing reference to a few of the scaling solutions that are currently in development. These solutions include the following:

The concept of offering minipools with a decreased collateral requirement from 16 ETH down to as little as 4 ETH is referred to as "less ETH bonded minipools," or "LEBs."

Staking as a Service, also known as SaaS, is a method that allows bigger holders of ETH to engage in staking in a manner that minimizes the need for trust.

Integrated solo staker conversion is a simple migration solution for major staking providers to convert their current validators to Rocket Pool. This solution offers a number of advantages, including the possibility for greater return, simpler management, extra liquidity, and income smoothing.

Conclusion

The Rocket Pool LSD protocol is the third biggest of its kind. Having said that, the procedure has significantly raised its expectations. As a narrative strategy, Rocket Pool's efforts in decentralization are starting to pay off, and the protocol has relaunched into relevance as a direct result of the success of the Ethereum 2.0 Merge. Rocket Pool is one of the most intriguing protocols, and its goal for 2023 is to reach a big total addressable market. Over 90 percent of ETH in the pool has not yet been staked.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Rocket Pool: An LSD with smart alignment between validators and stakers