Ethereum

Rocket Pool — Maintaining Decentralization on Ethereum | of Richmore Capital | March 2022

Rocket Pool — Maintaining Decentralization on Ethereum |  of Richmore Capital |  March 2022

A Silent Guardian, Vigilant Protector, Rocket Pool.

Merging has been a constant topic of conversation for years in the Ethereum community. It simply means that the Ethereum blockchain, which is currently a proof-of-work blockchain in a mold similar to Bitcoin, will transition to a proof-of-stake blockchain. This allowed people to stake their ETH for ETH2.0 on the Beacon chain which cannot be undone. This allows you to secure the network and earn passive income on your Ether by doing this.

Heads up: The Beacon Channel is a new blockchain that supports the proof-of-stake network that the current Ethereum mainnet will merge with. Think of it as the backbone of Ethereum 2.0.

Enter Rocket Pool which is a community-owned decentralized and trustless staking protocol. It is a protocol that allows you to stake it and still be liquid when you receive the rETH token. What’s the point of all this? Since the Ethereum foundation previously had a threshold of 32 ETH to stake Ether, the foundation now directs you to Rocketpool if you have less than this amount. It lowers the barrier to entry in order to get a return on your ETH (especially during this price action).

Why use Rocket Pool?

Rocket Pool gives you access to a decentralized service that rewards you for securing the protocol instead of going through centralized exchanges (CEX) like Coinbase and Binance that take a cut, causing you to lose valuable ETH. There has been a market for CEX because obviously not everyone has had the ability to run a node that requires 32 ETH. However, there is no free lunch.

As Rocket Pool lowers this barrier to 16 ETH, the barrier to entry is halved. Additionally, even if you cannot run a node for 16 ETH, the protocol still allows you to stake ETH with as little as 0.01. This is favorable for smaller market players who wish to conserve liquidity while simultaneously earning rewards.

Additionally, Rocket Pool allows “normal” participants to run a node which is how Ethereum was meant to be used. It’s without permission. Its competitor Lido which is the 3rd largest staking pool is not permissionless. It’s refreshing to see protocols like Rocket Pool paving the way for smaller players as well.

Most validators (knots) that the Beacon channel currently uses Prism (Implementation of the ETH node2), which is fine as long as Prysm works flawlessly. However, if Prysm went down, it would affect the entire network as the concentration of nodes on Prysm stands at 66% of the network. Rocket Pool uses very little Prysm, which is beneficial for network decentralization. If Prysm goes down, verification of transactions and consensus becomes a problem because 2/3 of the validators would be down. This is why Rocket Pool has an important role to play in the decentralization of the network and the use is encouraged. Rocket Pool is getting closer to running 1% of validators on the Ethereum network. Ranking can be tracked here.

(If you are interested in running a node, you can find the instructions here.)

Tokenomics

The tokenomics of the protocol has changed over the years. The protocol allows you to get a better return by staking ETH inside the protocol than outside the protocol. However, there are two tokens to consider when interacting with the protocol. The first is rETH which is the liquid staking token of the protocol. These tokens represent the amount of ETH you have deposited and act as a receipt for the staked ETH. You can either acquire rETH by staking your ETH in the protocol or by using a decentralized exchange (DEX) like Uniswap to buy it on the market. The rETH token can also be found on layer two solutions including Arbitrum, zkSync, Optimism, and Polygon.

Here is how the rETH token accumulates value:

rETH ratio: ETH = (total ETH staked + Beacon Chain rewards) / (total ETH staked)

Since the rETH token collects rewards by being staked, its value is bound to increase against native ETH.

The second token to consider in the equation is the RPL token, which is the native token of the Rocket Pool protocol that gives you governance rights and incentivizes staking inside the protocol rather than outside. The token has a total supply of 18,000,000 and an inflation rate of 5% to reward participants who work in the best interests of the protocol.

Considering people run nodes for a deposit of 16 ETH, rETH’s performance is based on those nodes. If they perform poorly as stakers, there is a chance that their rewards will be reduced, which would slow the accumulation of value for people holding rETH. This is why the protocol added an additional incentive by requiring node operators to deposit 1/10th of ETH as collateral in RPL tokens. This guarantee acts as a safety net in case a node operator sees their rewards reduced.

In return for providing this guarantee, node operators earn RPL rewards in addition to ETH staking rewards and consensus participant node commission. This means increased security for node operators as well as more rewards earned.

A question that might arise as you go through this is why Oracle DAO and Protocol DAO receive an allocation of 15% of the annual issue respectively?

Oracle DAO and DAO protocol
Oracle DAO consists of node operators on Rocket Pool protocols that run oracle nodes. These work like regular nodes except for one thing, they perform additional oracle tasks for the protocol. Oracle’s tasks involve reporting validator balances on the Beacon chain and RPL:ETH ratios, etc. They are rewarded for these services.

Protocol DAO is responsible for settings regarding the protocol and will run on RPL governance. This will be tied to protocol development and ensuring things like treasury are working properly. The DAO protocol is not yet fully operational but its release phase. However, the responsibilities assumed by Oracle DAO and Protocol DAO are the reason why they get their respective allocation from the annual shows.

How to stake ETH on Rocket Pool

So how do you stake your ETH on Rocket Pool?

  • Acquire ETH on a DEX like Uniswap (or CEX if you prefer)
  • Go to game.rocketpool.net
  • Stake your ETH on the site
  • You receive rETH in return which will increase in value over time while you can stay liquid and use the token in other DeFi protocols.

Main competition

Rocket Pool’s main competitor is the well-established Lido Finance. The protocol has made stETH the industry standard for staked ETH2.0 which is liquid and can be used to participate in DeFi. The stETH token does not work the same as rETH because stETH is tied 1:1 to ETH and represents the amount of ETH you have staked. Whereas rETH works similarly to an index which appreciates in value over time and rises against native ETH as mentioned above. However, the downside of Lido Finance despite the amazing job they have done is that it is licensed and much more centralized than Rocketpool. You need to get permission to run a node for Lido finances. While anyone can start a Rocket Pool node as long as they meet the prerequisites.

Although Lido has 52,832 stakers on ETH, they only have 22 active node operators, i.e. not so decentralized. Considering that Lido also currently holds 21% of all ETH2.0 staked through their validators, further distribution is for the benefit of the network. Rocket Pool, on the other hand, has 888 Node Operators and the number is growing.

Another rising competitor is StaFi Protocol, which also gives you the ability to stay liquid while staking your ETH. Competition is healthy and good for the long-term sustainability of the Ethereum network.

Encourage liquidity

To trick people into using rETH instead of stETH or ystETH (Yearn Finance version of stETH), a pool of cash has been added on the curve promote decentralization. This means that the rETH token is capable of accumulating rewards in addition to earning yield by being staked in ETH2.0. Curve emissions are directed to the rETH/wstETH pool and currently give you a maximum APY of around 9%. It’s a juicy yield, to say the least. The pool is located here. This pool has gained fantastic support from major space players, Tetranode being one of them who is welcome. @jasperthefriendlyghost makes a fantastic thread covering this if you want to dive deeper.

There is also another pool consisting of ETH/rETH this gives you a smaller reward of around 1.05% max APY on top of ETH2.0 staking. The choice is yours.

Risks

As with all DeFi protocols, there are some risks involved. The main risk you run by depositing your old ETH to Rocket Pool is smart contract failure. However, the protocol has been duly audited by credible auditors such as Sigma Prime, Consensys Diligence, Trail of Bits, and Immunefi Bug Bounty. With these audits done, the protocol is deemed safe and in good standing. A major achievement would be surprising but it is of course a higher risk than betting it on the Ethereum launch. However, this would mean that your deposited ETH would be illiquid and locked until the merger is complete.

personal thoughts

I will always support decentralization because that is the philosophy behind this industry. This is why I would approve of using Rocket Pool in case you sit down on a solid amount of ETH that you want to earn a return on. Since you can also increase this yield right now in the Curve pool, this is a good opportunity that will benefit the Ethereum network in the long term future. However, since many people are maxi-profits, there are other opportunities that might be more attractive in the short term, as I have covered in other articles. Nonetheless, Rocket Pool is a net plus for Ethereum and hopefully the growth will continue.