Author: Javier Ron - Research @firstset
TLDR
- The combination of capital and technical barrier of entry has pushed the solo staker category to represent between 1% and 6.5% of the total ETH staked, based on Dune Analytics and Rated estimates
- Rated reports that almost 50% of all staked ETH is handled through the top 4 staking entities, which either run their own centralized validators, or delegate to a limited set of established Node Operators (NOs).
- This concentration of both stake and infrastructure by a handful of entities is against Ethereum’s vision of decentralization, and more concretely a risk for Liquid Staking Protocols (LSPs)
- LSPs have become aware of this situation and are opening up to increasingly permissionless models for NOs, with the aim of reducing the share of the established node operators.
- The biggest challenge for new NOs is to build trust among LSPs
- In consequence, each of these protocols have devised their own way of establishing trust with unknown NOs, as well as different reward mechanisms to attract new potential NOs and compete with other LSPs.
- Firstset has created a table summarizing the most relevant protocols’ key points ranging from Liquid staking, Lido CSM, Ether.fi, Rocketpool as well as others such as Stader and Puffer
- In this post we have given an overview of the most relevant liquid staking protocols from the perspective of aspiring node operators. This includes collecting information on their requirements and reward mechanisms, as well as some of their particularities.
- In the second part of this series, we will discuss the pros and cons of these protocols, and point out what we gather to be the most attractive option. Furthermore, we will discuss what we believe to be the best path for aspiring small- and medium-scale Node Operators to approach permissionless operation.
This is a series about the current state and possibilities of node operation on Ethereum’s Liquid Staking Protocols (LSPs).
It is aimed for people or entities interested in entering the node operation arena at small- or medium-scale, and using LSPs. We assume the reader knows the basics around running an Ethereum node, and participation in the proof-of-stake consensus mechanism.
The first part aims to give an overview of the most relevant LSPs allowing permissionless participation, describing their requirements and particularities. We believe that this information is valuable for potential node operators, and will help users to decide which path is more aligned with their specific interests.
In the second part of this series we take this information and discuss what we believe to be the best path for aspiring small- and medium-scale node operators (NOs).
Introduction
Macro overview of stake ETH
Up until recently, the only way to actively participate and earn yield in the Ethereum proof-of-stake protocol was to join as a solo staker. Doing so entails several requirements. From those, the most difficult to meet is the required stake of 32 ETH, a prohibitive amount for most.
Despite the fact that the Ethereum Foundation deemed that solo staking is the best staking option for securing Ethereum, the combination of capital and technical barrier at entry has pushed the solo staker category to represent only 1% to 6.5% of the total stake, based on Dune Analytics and Rated estimation.
In other words, between 94.5% and 99% of staked ETH is managed by non-solo stakers.
Taken from: https://dune.com/hildobby/eth2-staking
LSPs are an answer
It has been possible for < 32 ETH holders to participate in a passive manner via Liquid Staking Protocols (LSPs): Pools that receive and accumulate ETH from stakers; and delegate operation of validators to NOs. In this model, the liquid staking protocols (and their NOs) get a cut of the stakers’ yield in exchange for their service.
Generally, participation as a NO in the most relevant LSPs has been restricted to a handful of teams, which have the reputation and means to do so at scale. For example, Kiln, the largest NO according to Rated, has close to 47,000 active validators, corresponding to ~1,504,000 in staked ETH, or ~$3.7bn at today’s price(at ETH: $2.5k) and equivalent ~4% of all staked ETH. 
. Most of this of this amount is not directly owned by Kiln, but it’s delegation received from LSPs.
Rated reports that almost 50% of all staked ETH is handled through the top 4 staking entities, which either run their own centralized validators, or delegate to a limited set of established Node Operators (NOs).
Risk of current staking ecosystem
This concentration of both stake and infrastructure by a handful of entities is against Ethereum’s vision of decentralization, and more concretely a risk for LSPs. Imagine a scenario where a subset of the largest NOs stops working —either because of an attack, failure of underlying infrastructure, or even willingly— with a specific LSP, this could result in significant financial loss for both the affected protocol, and their stakers. Such scenario however unlikely, is not impossible.
In simple terms, liquid staking is a convenient option for <32 ETH holders that want to stake in Ethereum. Yet, this convenience has resulted in actual node operation and PoS validation to become very much centralized.
So, this situation is not ideal. How do we get out of it?
Luckily, LSPs have become aware of this situation and are opening up to increasingly permissionless models for NOs, with the aim of reducing the share of the established node operators.
However, to participate as a NO for an LSP, one needs to acquire a certain amount of trust. After all, the LSP is entrusting unknown NOs with their ETH, at the risk of inefficiency, or worse, slashing.
In consequence, each of these protocols have devised their own way of establishing trust with unknown NOs, as well as different reward mechanisms to attract new potential NOs and compete with other LSPs.
The following table summarizes the most relevant protocols’ key points. Liquid Staking and Solo Staking are included as baselines for comparison:
Staking Comparison - Single Validator - Permissionless
| Solo Staking | Liquid Staking | Lido CSM (currently in testnet🚧) | Ether.fi ”Solo Staker” | Rocket Pool ”Node Staker” | Stader | Puffer | Diva | |
|---|---|---|---|---|---|---|---|---|
| APR Formula | Beacon APR | Beacon APR * ~75-90% | (Bond * Beacon APR) + (32 * Beacon APR * 6%) / Bond | Ether.fi rewards 5% of validator rewards to operator. | (Bond * Beacon APR) + (32 - Bond * Beacon APR * 14%) / Bond. Not counting MEV. + ~10% APR on RPL collateral | (Bond * Beacon APR) + (32 - Bond * Beacon APR * 6%) / Bond. 12.4% SD | (32 * Beacon APR) - 1 VT/day | (Bond * Beacon APR) + (32 * Beacon APR * 10%) / Bond / 16 |
| Example of APR Assuming Beacon APR = 4% | 4% | 3.6% | 9.5% (1.3 ETH bond) | — | 5.68% ETH 10.45% RPL | 5.44% ETH 12.5 SD | ~5% ETH | 1.02% ETH |
| Entry cost | 32 ETH | No minimum | 2.4 ETH for first validator. 1.3 ETH for subsequent validators | 0 ETH — 2 ETH | 8 ETH —16 ETH + RPL collateral (10% of borrowed ETH) | 4 ETH + SD collateral (0.4 ETH) | 1 ETH (if using Trusted Execution Enclave) | 1 ETH |
Example operation cost (USD) per month: Dedicated server on Hetzner  |
~90 USD/month | — | ~90 USD/month | ~90 USD/month | ~90 USD/month | ~90 USD/month | ~150 USD/month (TEE is requiered) | ~90 USD/month |
| Onboarding period | Validator queue | Immediate | Validator queue | Application period (2 weeks) + Validator queue | Validator queue | Validator queue | Validator queue | Validator queue |
| Tech expertise required | Yes | No | Yes | Yes | Yes | Yes | Yes | Yes |
| Agency on node diversity |  |
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: Per node. you can run many validators per node, but you need at least one node to run one validator. The operation cost does not scale linearly with number of validators, as the count of validators increases, more automation and monitoring tools are needed.
Particularities
- Lido CSM
- Currently testnet only. Mainnet deployment will be voted by the end of 2024
- The NO has to provide a bond as collateral for slashing events. The bond for the first validator is 2.4 ETH, and 1.3 ETH for each subsequent validator.
- Ether.fi
- The NO has to provide a 2 ETH bond as collateral for slashing events.
- To be able to participate as a NO with no bond, the operator must commit to run the node for 2 years.
- The nodes will be run as part of an Obol DVT cluster.
- The operator can receive initially up to 96 ETH.
- 2 week testnet trial-period before allocation of stake.
- Rocket Pool
- Requires both ETH self-stake, and collateral in RPL tokens. The RPL requirement is at least 10% and up to 150% of the borrowed ETH amount in RPL token. This is an ongoing requirement, meaning that if the price of RPL drops with respect to ETH, the node operator must supplement the collateral until at least 10% is reached again.
- The deposited RPL collateral also generates rewards.
- Stader
- Requires both ETH self-stake, and collateral in SD tokens. SD is Stader’s own token.
- SD collateral goes from 0.4 to 8 ETH in SD token. The specific percentage is chosen by the node operator. similar to Rocket Pool, this is an ongoing requirement.
- SD deposit also generates rewards.
- Puffer
- Bond is 2 ETH, but can be reduced to 1 ETH if executing Secure-Signer software, which requires specific hardware and configuration for Trusted Execution Environments (e.g. Intel SGX)
- All PoS rewards are given to the node operators. However, node operators must pay upfront for the “right” to validate, with one Validation Token (VT) per day. The cost of one VT is ~90% of the daily rewards of a single validator. The price of the VT token is set by Puffer, and greatly influences the APR of the node operator.
- Diva
- The node is to be operated as part of a 16-participant DVT cluster, where each participant holds a key share.
- Requires a 1 ETH Bond per key share. This causes the node operator reward to be very diluted.
Clarifications
The table considers running only a single validator. However, hundreds of validators can be run within a single node, thus the operational costs of running nodes get reduced in proportion to the total amount of validators per node. One validator manages 32 ETH of stake, so a single node could manage tens of thousands of ETH. However, too much stake on top of a single node is not a very good idea in terms of fault-tolerance.
- Distributing validators over several nodes with tech like Vouch or DVT solutions give effective fault-tolerance.
All node operation options require roughly the same amount of tech expertise. This includes running nodes, setting up the validators, monitoring, and maintenance.
All node operation options give freedom to the operator to choose their preferred stack, and geographical location. This is potentially beneficial as diversity is fundamental for systemic resilience of Ethereum.
In this post we have given an overview of the most relevant liquid staking protocols from the perspective of aspiring node operators. This includes collecting information on their requirements and reward mechanisms, as well as some of their particularities.
In the second part of this series, we will discuss the pros and cons of these protocols, and point out what we gather to be the most attractive option. Furthermore, we will discuss what we believe to be the best path for aspiring small- and medium-scale Node Operators to approach permissionless operation.
About Firstset
We commit our intellectual, social and computational capital to help bootstrap the cryptoeconomic networks of tomorrow. We are a team of crypto-native node operators and builders with a mission to support emerging chains and other kinds of decentralized networks from day one.
