Staking vs Liquid Staking on Ethereum

Staking and Liquid Staking on Ethereum are becoming two popular ways to earn passive income in the cryptocurrency space. In this article, we’ll look at the similarities and differences, the benefits and challenges of each, and how SafeStake will handle both scenarios when all three phases of SafeStake have been implemented.

Simple Staking on Ethereum

Now that Ethereum has transitioned from PoW to PoS, the network requires users to stake their ETH to run validators to participate in the consensus process and secure the network. In most PoS networks, including Ethereum, validators are chosen ‘randomly’ based on the number of tokens they have staked, and the rewards for participating in the consensus process are distributed accordingly.

In Stage 1, the SafeStake protocol will allow simple staking on Ethereum, supporting deposits of 32 ETH which is the amount Ethereum’s Beacon Chain requires to run a validator. In Stage 1, the SafeStake protocol only handles the registration of validators and operators on the SafeStake network, not the deposit, which is handled by the Beacon Chain’s staking deposit smart contract.

Since SafeStake is based on a four-operator DVT scheme, a user depositing 32 ETH will be able to select four operators that will form a ‘committee’ to manage their validator. SafeStake operators are responsible for running the threshold signature scheme that supports the decentralized staking service as well as performing Beacon Chain duties on the validator’s behalf.

If a validator is offline, it misses attestations (very small rewards) and potential chances to propose new blocks (larger rewards). Excessive time spent offline, malicious behavior, or an ETH balance falling below the 32 ETH threshold are all possible reasons a validator can be subject to more severe penalties called ‘slashing,’ and be forcibly removed from the network. Therefore, validator uptime and security should be top priorities for both solo stakers and institutions when they are choosing a staking provider.

When the SafeStake operators come together to sign data on behalf of the validator they are managing, the validator earns rewards in the form of small amounts of ETH and pays its operators a fee in STATE tokens (soon to be $KEY) for their services.

The benefits of simple staking with a turnkey service:

  • Easy Setup: Like the vast majority of direct staking protocols, SafeStake implements an easy-to-use interface for users wishing to become validators on the Ethereum network (32 ETH).
  • Fault-Tolerant: A fault-tolerant system with high availability to minimize the risk of being offline and the associated penalties.
  • Passive Income/Rewards: Crypto investors can earn rewards directly without the need to actively manage their assets.
  • Decentralized: DVT helps the Ethereum ecosystem become more resilient and creates a more stable and secure environment for stakers.
  • Security: With SafeStake DVT, nobody EVER possesses your validator key and the original key can NEVER be recreated. Once the key shares are generated, you can take the key offline and put it in cold storage for safekeeping. SafeStake’s built-in threshold signature architecture will produce a signature that is ‘equivalent’ to the original but not the same, similar to how fingerprint matching is done.

The challenges of simple staking:

  • High Barrier to Entry: A user must have 32 ETH plus fees to pay for gas to run an Ethereum validator.
  • Penalties: If a validator fails to perform its duties on the Beacon Chain, it will be penalized with small deductions of ETH from the initial 32 ETH balance.
  • Limited Liquidity: Until the Shanghai update happens, staked ETH is illiquid and cannot be traded or sold as it is locked in the smart contract. Even then, daily withdrawal limits have been put in place that will make withdrawing staked ETH a prolonged process.
  • No Compounding Earnings: Staking rewards in simple staking contracts don’t compound.
  • Technical Challenges: To create a validator, users need to be able to execute commands in their computer’s terminal program. The generation of the new key pairs and the installation of the validation software are performed in the terminal.

Liquid Staking on Ethereum

Liquid Staking takes things to a whole new level, allowing users to stake their ETH and earn rewards while maintaining the liquidity of their deposit. With liquid staking, users deposit their ETH into a protocol’s smart contract and they receive a liquid token version of their staked ETH in return. These liquid staking tokens (LST) can then be invested in other DeFi protocols and traded on exchanges, while still earning ETH staking rewards.

SafeStake Pooled Staking: Improved Simple Staking

Since one of the major barriers to ETH staking is the high entry cost, Stage 2 of SafeStake will offer an attractive alternative to solo stakers and retail investors who do not have the required 32 ETH, or for institutions or large staking services wishing to decentralize their operations.

This stage introduces ‘mini-pools’ that only require an initial 8 ETH deposit. In this scenario, an operator on the SafeStake network (called an ‘initiator’) deposits 8 ETH to create a mini-pool (and start the DKG process) while the remaining 24 ETH come from three other 8 ETH deposits. When the other 24 ETH are ‘pooled,’ the initiator chooses three additional operators to manage the pooled validator.

Stage 2 will also introduce liquid staking, giving users a liquid staking token (sfETH) in return for their ETH deposit so they can maximize their profits.

SafeStake Stage 2 has a number of advantages:

  • Ethereum Decentralization: It helps avoid undue concentration of power in the hands of centralized protocols and the undue influence of more powerful validators.
  • Peace of Mind: Our highly secure and decentralized protocol ensures neither users or operators can access the validator private key.
  • High Availability: Maximizes staking rewards and mitigates slashing.
  • Added Security: The operator committee managing a SafeStake validator must include at least TWO operators from the ParaState DAO, the governing body of SafeStake.
  • Lower Staking Threshold: Helps expand Ethereum’s validator base and improves the security and decentralization of the blockchain network.
  • It’s Easy: No technical expertise or knowledge of how to run a validator is required to participate.
  • Diversified Portfolio: Our Liquid Staking solution will allow ETH holders to diversify their portfolio by using their sfETH tokens in other DeFi protocols to acquire other crypto assets and/or increase profits with things like crypto-backed loans.
  • Compounding Earnings: Retail stakers can earn double rewards — earnings on staked ETH and earnings in DeFi using sfETH assets.
  • No Oracles: With SafeStake, there is no need for an oracle to monitor staking rewards and deposits.
  • Operator Income Potential: Users can run operator nodes and charge fees to manage validators for stakers.
  • Staking Rewards: Up to 10% APY!!! (*compounded)

Important note for initiator operators: Initiators must assume the risk of inactivity penalties and slashing while the remaining 24 ETH are pooled. This risk should be mitigated by making a small additional ETH deposit to cover penalties that are incurred between the time the mini-pool is activated and the remaining ETH are deposited.

SafeStake Stage 3 — further lowering the ETH staking threshold

In Stage 3, SafeStake will allow any user with more than 0.1 ETH but less than 32 ETH to earn staking rewards by running a pooled validator. The protocol will still require an initiator to deposit 8 ETH to activate the mini-pool and DKG, but then the pool will be filled by many ETH deposits, some as low as 0.1 ETH.

Stage 3 Benefits

  • Low Staking Threshold with Immediate Liquidity: Any user with as little as 0.1 ETH will be able to earn rewards for staking their ETH without the funds being locked.
  • Increased Liquidity: Since users can always access their funds, the positive impact on the supply and demand of ETH in circulation is immediate and helps control market volatility.

Challenges of Liquid Staking:

  • Withdrawals for these types of LSD options at SafeStake are subject to penalties of up to 2%.
  • Depegging risk: The price of the staked derivative/stake tokens may depeg from its original price. This may happen because of a lower market price for the new token.

Final Thoughts

Whether you are a solo staker, retail investor, big whale holding lots of ETH, or institution, SafeStake is on the path to offer easy-to-use and highly secure alternatives for ETH staking.

A more decentralized Ethereum is on the horizon, with DVT technology leading the way. SafeStake will be the first ETH staking pool written in Rust to implement DVT distributed validator technology (DVT) using protocol-level DKG (Distributed Key Generation) to increase decentralization, security, and reliability for Ethereum validators and the entire ecosystem.

About ParaState

Parastate is participating in ETH 2.0 PoS with a new tech stack called SafeStake, a trust-minimized middle layer that promotes decentralized ETH 2.0 staking. SafeStake is the first Ethereum liquid staking pool protocol written in Rust that implements distributed validator technology (DVT). It utilizes HotStuff consensus, BLS Threshold Signature architecture, and protocol-level DKG to provide robust security and reliability, so validators can maximize their ETH staking rewards.

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