introduce
Ethereum is the largest proof-of-stake (PoS) blockchain by total staked value. As of July 15, 2024, ETH holders have staked over $111 billion worth of ETH, or 28% of the total ETH supply. The amount of ETH staked is also referred to as Ethereum’s “security budget” because stakers can be penalized by the network in the event of double-spend attacks and other violations of the protocol’s rules. In return for maintaining Ethereum’s security, stakers are rewarded through protocol issuance, priority fees, and maximum extractable value (MEV). The ease with which users can stake ETH through liquid staking pools without sacrificing the liquidity of the asset has led to a demand for staking that has exceeded Ethereum developers’ expectations. Based on the current state of staking, developers expect ETH’s staking rate to grow further in the coming years. To mitigate this trend, developers are considering major changes to the protocol’s issuance policy.
Staker Type
There are six main types of Ethereum users who can earn rewards through staking. The following table details an overview of each of them:
Among these stakers, the largest number are custodial stakers, i.e. those who entrust their ETH to professional staking node operators. Although there are not many professional operators, they are the type of staking entity that manages the most staked ETH.
Liquidity staking, re-staking, and liquidity re-staking pool protocols are not considered in this analysis because these entities do not directly run the staking infrastructure or fund its use. However, these entities do receive a percentage of the rewards from stakers using their platform; they are middleman entities that facilitate the relationship between custodial stakers and professional (or amateur) stakers, and are therefore important players in the Ethereum staking ecosystem. Lido is a liquidity staking protocol and is by far the largest staking pool operator on Ethereum, accounting for 29% of ETH staked. Given the adoption and critical role of liquidity staking pools on Ethereum, it is important to understand the risks of liquidity staking.
Among these stakers, the largest number are custodial stakers, i.e. those who entrust their ETH to professional staking node operators. Although there are not many professional operators, they are the type of staking entity that manages the most staked ETH.
Liquidity staking, re-staking, and liquidity re-staking pool protocols are not considered in this analysis because these entities do not directly run the staking infrastructure or fund its use. However, these entities do receive a percentage of the rewards from stakers using their platform; they are middleman entities that facilitate the relationship between custodial stakers and professional (or amateur) stakers, and are therefore important players in the Ethereum staking ecosystem. Lido is a liquidity staking protocol and is by far the largest staking pool operator on Ethereum, accounting for 29% of ETH staked. Given the adoption and critical role of liquidity staking pools on Ethereum, it is important to understand the risks of liquidity staking.
The next section of this report will delve deeper into the risks of staking based on the technology and entities used to earn staking rewards.
Pledge Risk
The risks associated with staking largely depend on the method and technology of staking. Here are three broad categories that define staking methods and their associated risks:
Direct staking: Users or entities directly operate their proprietary staking hardware and software. The risks of directly staking ETH include staking penalties and slashing risks. Staking penalties due to reasons such as long machine downtime may cause users to lose part of their staking rewards; in addition, slashing events due to reasons such as validator software configuration errors may cause users to lose part of their staked ETH balance, up to 1 ETH.
Delegated staking: A user or entity delegates their ETH to a professional or amateur staker for staking. The risks of delegated staking include all the risks of direct staking, in addition to counterparty risk, as the entity you delegate staking to may not fulfill its responsibilities or obligations. ETH holders can delegate their ETH to a trust-minimized staking service provider, such as an entity controlled by smart contract code, but this carries additional technical risks as the code may have vulnerabilities or the system may be hacked.
Liquidity staking: Users or entities entrust professional or amateur stakers to stake in exchange for liquidity tokens representing their staked ETH. The risks of liquidity staking include all the risks of direct staking and delegated staking. In addition, due to market volatility and delays in validator entry or exit, liquidity risk may lead to decoupling events, where the value of liquidity staking tokens deviates significantly from the value of the underlying staked assets.
Total ETH staked using three different methods
Another risk to be aware of with these three staking methods is regulatory risk. The further away ETH holders are from their staked assets, the greater the regulatory risk of staking activities. Delegated staking and liquid staking require ETH holders to rely on different types of intermediary entities. In the eyes of legislators and regulators, these entities may need to comply with certain rules and regulatory frameworks to operate, depending on their structure and business model.
In addition to regulatory risks, it is also necessary to elaborate on the protocol risks associated with these three types of staking activities. Protocol risks arise from the fact that the network can impose penalties on users who intentionally or unintentionally fail to meet the standards and rules in the Ethereum consensus protocol. There are three main types of penalties. They are ranked from least severe to most severe as follows:
