foreign
[Music]
hello everyone
I am Darren Langley and I work on
rocketpool which is a decentralized
liquid staking protocol
so at Rocket pool we've spent the last
six years building our liquid staking
protocol so today I'm going to take you
through some lessons that we've learned
along the way
so in this talk we're going to break
down what is a liquid staking protocol
what are some of the design choices uh
what are the challenges of building a
truly decentralized protocol and then
what are the opportunities
so
it's staking
so liquid staking is built on ethereum's
proof of stake system
um a little tangent I couldn't be more
excited that ethereum is now a proof of
stake
um chain and congratulations to all the
researchers uh core developers and um
sort of and coordinators that have made
it happen it's fantastic
so when you stake you are participating
in ethereum's proof of stake consensus
why would you want to do that so the
most important thing is that you're
contributing to the security of ethereum
uh we also earn staking rewards for
being a good node operator
so her ethereum has a couple of uh kind
of barriers oh sorry ethereum mistaking
has a couple of barriers first of all
you need technical experience to run
like a validating node
you also need
a fixed 32 eth per validator
um the state eth is actually kind of
naturally illiquid
it exists on the beacon chain earning
rewards but you can't really use it for
anything else which is by Design but
most of the 32 East that you stake is
not actually at risk
except under the kind of most dire of
consequences or situations
uh currently it's also a one-way thing
so withdrawals are coming soon um but at
the moment you you're staking and you're
that's it
so
uh the rewards from staking East come in
two juicy flavors
the first one is consensus rewards
um which comes from new eth inflation
and then you get that by kind of
Performing your node operator duties so
that's a testing being part of a sync
committee and proposing blocks
as I said before
um withdrawals aren't available at the
moment but they will be
um potentially after the Shanghai hard
Fork
uh execution will the next type of uh
reward is the execution rewards they
come from users so they uh come from
Priority fees which are the non-burnt
part of a transaction fee
and then potentially Mev if you're
extracting Mev
that's actually available today and
pretty much in real time
so how a staking protocol captures and
then distributes those fees or those
rewards is key to its design
so how does liquid staking work
a liquid Staker deposits any amount of
eth into the protocol
and in return they receive a liquid
staking token
and the ease that they deposited gets
matched with the node operator the node
operator interacts with the protocol and
deposits the eth into into the beacon
chain
node operators then earn rewards by
being good node operators
and the liquid staking token accrues the
value as yield
so to unstake a liquid sticker burns the
liquid staking token for and gets back
their ease or actually more East than
they put in generally
um and you you can either do it kind of
in the primary mechanism or you can do
it on a secondary Market
so this is the very basic outline of how
liquid staking works but as we'll see
every step has some design choices and
trade-offs to to be made
so why liquid staking
so it's kind of important to know why
you're doing this what benefit does it
serve
so it turns out that there are
significant benefits to ethereum as a
whole
so liquid staking encourages greater
participation and that in turn provides
greater security and decentralization
there's a little star there because it
only contributes to decentralization if
the validator set or the node operators
are decentralized and not just one
entity
uh it liquid staking facilitates
unstaking through like a primary
mechanism through the protocol itself
um or on a secondary market so it
reduces validator churn
it also Fosters Innovation and capital
efficiency and through the use of these
liquid staking tokens in D5
okay so on this section I'm going to
focus on liquid token design but there
are some equally big design spaces on
the Node operator side and and some
definitely some interesting challenges
on that side as well
so first thing you realize when you're
designing a liquid staking token is that
node operators earn rewards at different
rates
they may also be penalized and in worst
case scenarios they can be slashed
so there's a couple of ways of handling
this
the first way is to have a fungible
token that shares rewards and losses
across the entire protocol
or you can have a non-fungible token
where rewards and losses are specific to
each node operator or each validator
then you can kind of have that this
hybrid of the two
um although you've got to be careful you
don't end up in a worst of Both Worlds
each of these approaches have some
different trade-offs and you have to
kind of weigh up um which ones
so the next one is safety
so there is eth backing you know backing
the liquid staking token
So What mechanisms are in place to
protect that collateral
ethereum's proof of stake system is a
very forgiving protocol
but it is possible to lose your your
stake either partially or in like the
extreme cases fully
safety mechanisms built into the
protocol need to account for things like
slashing protection
aligning incentives and general risk
management
so Rewards
so how are rewards delivered to token
holders
how does the token reflect the yield
that the protocol actually is producing
so generally there are two approaches to
this there's rebasing and non-rebacing
so a rebasing token its exchange rate is
like a notional one-to-one with eth
but the quantity increases
so the token increases in quantity over
time that's how the yield uh represents
itself or gets delivered
with a non-rebacing token the exchange
rate increases but the quantity is the
same quantity stays constant
so the the actual token increases in
value over time
um and there's some there's definitely
some kind of pros and cons of each of
these mainly that so with the rebasing
token it's very simple to understand
you're literally getting more of the
token
uh but it's extremely hard to integrate
so when the if the quantity is changing
all the time that's not really
compatible with most D5 protocols
with a non-rebacing token uh it's it's
harder to understand and if you go down
that route you'll spend most of your
life uh explaining to people what a
non-rebasing token is
um but it is much easier
to integrate uh it's it's just a
standard erc20 and it's supported by
most D5 protocols
it actually turns out that a
non-rebasing token is more tax efficient
as well so it depends on your
jurisdiction
um but within a rebasing token you have
like a taxable event every single day
whereas with a non-rebacing token you
have a taxable event new stake and when
you unstake
so liquidity
by tokenizing um steak teeth it can be
traded on secondary markets such as
exchanges this provides liquidity for
people to unstake their eth
did the price you pay on secondary
markets is dictated by the market so it
may present a liquidity discount or
potentially a liquidity like a premium
with large orders there can also be
slippage and so staking protocols can
offer like a if they can offer a primary
mechanism for unstaking eth so that you
can allow um liquid staking token
holders to actually swap back without
the discount and without the slippage
both of these mechanisms of undertaking
kind of reduce the need for validator
churn
okay so now you've got your token out in
the wild
I mean everyone's going crazy about it
um you need to start building utility
these come in the form of Integrations
with other D5 protocols
so there's kind of like a Maslow's
hierarchy of defy Integrations
um it goes something like this you
integrate into wallets and explorers
first then you build up some liquidity
this is the bit that takes time A lot of
time to build up liquidity you need to
get a breadth of liquidity and depth of
liquidity and that's important to kind
of get to the next phases
you also need to get good liquidity on
layer twos because you want to build up
um support in those in those ecosystems
and also provide good ux for stakers
so then the next layer is Oracles so
once you once you've got some liquidity
you get oracles the next one is D5
protocols particularly lending platforms
but also kind of options and index
platforms and fixed income products and
all loads of things
the last one is volts so volts are kind
of like yield optimization and platforms
they sit over top of loads of different
D5 protocols and optimize that yield
foreign
staking protocol is a set of smart
contracts that mediates between
depositors and node operators kind of
escrows funds into the ethereum's proof
of stake system and then back again
on withdrawal the protocol transparently
distributes those funds and ensures that
each party receives what they expect
in short withdrawals aware of most of
the action happens
okay so it's at this point in the
presentation I need to give a bit of a
disclaimer the information on this slide
is not final the capella specification
is still being kind of drafted but at
this point this is what it looks like
so after the Shanghai hard Fork
hopefully
um consensus rewards uh will be fully
withdrawable or partially withdrawable
so fully withdrawn is a node operator
initiated thing so a node operator
submits an exit message they get
processed by an exit the beacon chain
execute they come into this withdrawable
state and then their funds are returned
to a withdrawal credential
at that point they are no longer
validating they've done there's a
validator okay that's full exit
with partial withdrawn you're still
validating and in fact this is like an
automatic and ongoing process
so
um this is this essentially takes skims
the rewards um off the top so you have
32 Heath is your kind of initial deposit
and then anything else you make
um on top of that will be kind of
continually skimmed and sent to your
withdrawal credential automatically by
the um the beacon chain and the
consensus clouds
so withdrawal credentials are a key
element of the ethereum spec
um and they come in like two types
there's a Xerox zero which is this BLS
signature credential and 0x01 which is
an ethereum address that receives the
withdrawn funds
so most credentials in use today are 0x0
and that's because they were introduced
first and then much later 0x01 came came
ahead
so in the current plan Xerox zero
credentials we need to be converted into
a 0x01
um to allow you to withdraw
and there'll be like this special kind
of migration process that'll that'll
facilitate that
so 0x01 is important because it
facilitates the development of these
non-custodial staking protocols
um essentially because the 0x01 address
can be a smart contract and so that's
smart contract can you know take custody
of funds they can deposit them into the
um the beacon chain into the into the
deposit contract and then when it
withdraws it can then distribute the
funds to all the parties
so building a decentralized staking
protocol is easy
not so much
there are significant challenges to
developing a truly decentralized staking
protocol
so as for permissionless being an open
and public piece of infrastructure is
key to a protocol success and it's and
it's also it's important for its
alignment with ethereum being
permissionless is a is a noble Pursuit
and it's critical for ethereum to for
retaining its credible neutrality
so being permissionless subsequently
leads to trustless designs which I
believe are much more resilient in the
long term
like ethereum itself decentralized
staking protocols have to rely on a
combination of cryptography and crypto
economics to balance incentives and
penalties ensuring that the participants
have aligned interests
but it is challenging but personally
this is what it makes it this is what
makes it interesting work
so scaling
being a competitive market participant
is important to ensure that ethereum
remains decentralized
scaling a decentralized staking protocol
is much harder than scaling a
centralized provider
the two aren't even really comparable
a decentralized staking protocol has to
rely on Ingenuity to scale but never
lose sight of its kind of core value
a decentralized staking protocol is
actually a community
a community of node operators who are
passionate about securing ethereum
scaling is certainly a challenge but it
is one that can be overcome
so Reliance on oracles
so semi-trusted oracles are essential
for decentralized staking protocols
today
the consensus and execution layer are
separate Concepts and they've only just
been merged together
so oracles are required to Aggregate and
Report validator performance information
to the protocol smart contracts
there's actually an EIP that's being
considered for Shanghai and it's eip4788
what it does is it adds access to the
beacon chain state route to the
execution layer so that smart contracts
can verify proofs about the beacon chain
state
this is key to reducing the role of
these semi-trusted Oracles in the
decentralized staking protocols but it
is important generally to combine those
two concepts and allow Innovation to
particularly around validator status and
finality on the execution layer
so what are the opportunities
okay so this might be a bit
counter-intuitive but ethereum doesn't
need more stake it needs more individual
node operators
so I believe this quote is from
superfizz so uh thanks Fizz if you're
watching
um
decentralized staking protocols have an
opportunity to redress the balance
so by lowering the collateral
requirement for node operators
there are more potential node operators
available
by streamlining setting up a node and
running a node it's easier to onboard
new node operators
and if you lower the barrier to entry
for spinning up a staking business
built on top of a decentralized staking
protocol
this allows a whole ecosystem of Niche
staking businesses to compete with large
providers
more node operators
the more node operators we have the more
decentralized ethereum is
being a node operator
is not as hard as you think
okay so execution reward smoothing
so
execution rewards so the ones that come
from like transaction fees and
potentially Mev are extremely variable
this is because Brock proposes are
chosen at random
so at this time if you have like one
validator you'll receive approximately
five proposals per year
um on average
but you could get two or you could get
10.
so this variability hits small node
operators hard but harder actually hard
the hardest
um
as a decentralized staking protocol
There's an opportunity to provide a
reward smoothing pool that participants
pull their proposals
to achieve a consistent return
rather than this highly variable return
so a smoothing pool actually levels a
playing field the small node operators
they can kind of compete with the larger
node operators
this is a particularly interesting when
you think about Mev Mev you can have on
average you can you can earn you know a
decent amount from Mev but every now and
again there'll be one of these Lottery
blocks the highest block I think that's
recorded was 100 East block
um that doesn't happen very often uh but
that hence why it's a lottery block but
if you do get one of those blocks
then this is what the smoothing pool
helps with
so I'm Darren Langley
um I'm from rocketball you can catch me
on Twitter and that's me thank you very
much
[Applause]
hi my name is Benjamin with
rubicon.finance I wanted to ask I
understand rocket pull nodes are
collateralized with RPL how do you
protect against a tail rest scenario
where if the price of RPL eth is is
dropping the average collateralization
of the network uh starts to fall and how
can the protocol like uh become robust
uh in light of basically uh you know
relying on RPL youth price to guarantee
security
so in actual fact uh so RPL is used as a
backstop so the the first thing that
they we so with a with a rocket pool
node uh the node operator supplies 16
each and the liquid stakers Supply 16
Heath
um and then the node operator also
supplies to marpl like it's minimum of
10 so it's about 1.68
um and uh but the eth is hit first so if
they if they get slashed or um if if
they you know if they're an absolutely
terrible node operator and then
essentially their ether it gets hit
first and then RPO is used as a backstop
because you can actually lose a little
bit more than 16 in like a like the
worst worst case scenario yeah
okay
multi-part question okay so first part
um how hard is it to run a rocket pool
node like you need to know Unix or can
you just run a script and it installs
everything second part okay how many
nodes can you run on one powerful PC
right cool okay good question uh so
running a rocket pool no you do need to
know probably a little bit about
um Unix maybe you can run it on
different things we don't necessarily
support Windows
um but you can run it on on then a Linux
box you do need to know a little bit
about Linux uh speeding up a rocketball
node is I think pretty much four
commands
um in your and it's four commands and
you've you've spun up a validating node
um so we've made it we've streamlined
the process uh we have this thing called
a smart note stack and it streamlines
the process of actually spinning up a
node we connect everything up for you we
handle upgrades for you it's it's really
easy
um the other question the other part of
that question was
all right that's right all right that's
yeah that's that is a hard question to
answer so terminology wise a node is
like the box that's running it and then
you have validators so you can have
a lot now whether now whether you
whether that's a good idea or not is is
another is another matter so what you
would tend to do is you probably want to
distribute across multiple nodes
um if you had a lot
um but you can run a lot
um different clients different consensus
clients and different execution clients
have different performance profiles
um but you know yeah you can run a lot
on
I don't think we've I don't think we've
um we haven't modeled it uh but it is it
didn't like the hundreds yeah
it depending on it also depends on the
box if it's a powerful machine then you
can do that yeah
cool
yeah all right awesome thank you very
much guys
[Applause]