Ethereum Staking 101
16 May 2024
Read Time 5+ MIN
Regarding our recent announcement regarding Staking on Ethereum with the VanEck Ethereum ETN, you may be wondering what is “Staking” and how can a regulated financial product such as the VanEck Ethereum ETN participate in the security of the Ethereum network? In order to address these questions, we will cover various topics on staking, starting with a brief refresher on Ethereum and why we need decentralized consensus in the first place.
Bitcoin, Ethereum, and many other cryptocurrencies operate on a decentralized system, where no single entity can alter the ledger without the consensus of the majority. This removal of intermediaries empowers participants to collectively uphold the ledger's integrity. But how is this ledger protected from tampering? Bitcoin achieves this through Proof of Work, where miners must solve complex puzzles to create blocks, preventing falsification through verifiable proof. In essence, the cost of double spending outweighs any potential gain. Ethereum, on the other hand, has transitioned from Proof of Work to Proof of Stake. This system incentivizes validators to uphold the ledger's integrity by staking capital, which they risk losing if caught cheating. This shift from electricity-based to capital-based security ensures the network's stability while rewarding positive contributions. In simpler terms, Ethereum's validators safeguard the network's operations, akin to service providers, with staking rewards reflecting their role. So, who are these validators?Ethereum’s Top 10 Staking Service Providers
|
Name |
Type |
Ethereum Staked (Ξ) |
# of Validators |
Market Share |
Ethereum Earned (Ξ) |
|
Lido |
Liquid Staking |
9,341,660 |
292k |
28.60% |
537k |
|
Coinbase |
CEXs |
4,421,538 |
138k |
13.50% |
292k |
|
ether.fi |
Liquid Restaking |
1,184,800 |
37k |
3.60% |
5k |
|
Kiln |
Staking Pools |
1,120,288 |
35k |
3.40% |
24k |
|
Binance |
CEXs |
1,072,960 |
34k |
3.30% |
148k |
|
Renzo |
Liquid Restaking |
1,006,080 |
31k |
3.10% |
3k |
|
Figment |
Staking Pools |
841,344 |
26k |
2.60% |
44k |
|
Rocket Pool |
Liquid Staking |
789,916 |
25k |
2.40% |
37k |
|
Kraken |
CEXs |
767,553 |
24k |
2.30% |
138k |
|
Staked.us |
Staking Pools |
617,212 |
19k |
1.90% |
66k |
Source: Dune, data as of 09/05/2024. Historical performance is no guarantee for future results. This should not be interpreted as advice for specific service providers. Additionally, some service providers are such as Lido are outsourcing the actual node management to other providers.
A common misconception is that staking and even mining (in Bitcoin) is done by mostly by companies in countries like China and Russia. This is far from the truth, the approximate geographical distribution for professional staking entities is more like the following (excluding “Other countries” which accounts for 21.64%):
Geographical Distribution of Staking Entities
Source: Rated.network, data as of 09/05/2024.
What are staking rewards?
Now, delving a bit deeper into the technical aspects of staking is essential for a thorough understanding of the technology. It's worth noting that the specific mechanisms of staking vary across different protocols. For Ethereum, the process unfolds as follows: A prospective validator deposits a minimum of 32 ETH (or multiples thereof) into the Ethereum Staking contract, alongside pertinent data including the public keys of the validator and withdrawal address. Upon successful validation of the deposit by the network, the validator joins the Entry Queue, essentially a waiting list for new validators. Upon reaching the front of the queue, the validator becomes active and is entrusted with fulfilling its duties henceforth. Active validators remain in this state until either their balance falls below 16 ETH due to slashing or they voluntarily exit the system. Rewards accrue from two categories:
- Execution layer rewards (encompassing block rewards, transaction fees, priority fees, and MEV) and Consensus layer rewards (which include attestations, validations and participation in committees when chosen). These rewards are approximately 20% of the total reward package (historically).
- Consensus rewards are distributed every epoch (approximately every 6.4 minutes), while execution rewards are paid when the validator is selected to propose a block. These rewards are approximately 80% of the total reward package (historically).
Execution layer rewards are not predefined, they are wildly variable and also only given if your validator is chosen to propose the next block. Keep in mind that there are currently over 1 million validators, and there is just 1 block per 12 seconds. If you have just one validator, the chance of being selected to propose a block is 0.71% on a daily basis. This means that the average number of days it takes to receive one block proposal is about 140 days. For the VanEck Ethereum ETN, with the current staked percentage, we represent 725 validators. About 5 Ethereum blocks per day are proposed by our validator nodes. Investing in the VanEck Ethereum ETN comes with the additional benefit of actively contributing to Ethereum’s security and decentralization.
Average Staking Rewards (30d)
|
|
APR % |
Rewards per validator (in ETH) |
|
Network total |
3.56% |
+1.139 ETH |
|
Consensus Layer APR % |
2.87% |
+0.918 ETH |
|
Execution Layer APR % |
0.69% |
+0.221 ETH |
Source: Rated.network, Data as of 09/05/2024. Historical performance is no guarantee for future results. Staking rewards are not guaranteed and the staking yield shown is not an indication for future staking yields.
How does Staking work in Practice for the VanEck Ethereum ETN?
Our staking methods are entirely non-custodial, ensuring that the custodian of the ETNs assets retains full control over the staked assets, thus eliminating any lending risks. For investors in the Ethereum ETN, no action is required to receive rewards; they are automatically factored into the coin entitlement of the ETN. Whether an investor acquired the ETN last year or last week, the total staking rewards accrued during the previous timeframe are equally distributed (after deducting staking provider fees and taxes). Staking rewards* are included in the end-of-day NAV on a daily basis, with a cut-off point at 4 pm CET. So, how does staking work in practice for the ETN?
- VanEck utilizes the ETN's collateral for staking by instructing the custodian to deposit ETH into a validator deposit address. While the validator node is owned and maintained by the staking provider, control of the deposited ETH remains with the custodian, securely stored in cold storage.
- Once deposited, the validator node continuously receives consensus layer and execution layer rewards. These rewards are reinvested, and sometimes staked again, into the note on a daily basis, reflecting in the ETN's performance.
- This process is meticulously managed, scaling up or down as needed to ensure the Ethereum ETN remains redeemable on any business day. Rigorous processes and monitoring are in place to effectively manage the liquidity requirements of the ETN.
*Staking Rewards are not guaranteed.
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