Key Insights
- Rocket Pool is positioned in the Ethereum staking marketplace as a decentralized and user-friendly product with a clever alignment mechanism between stakers and validators.
- Rocket Pool has experienced the greatest percent growth since The Merge out of any liquid staking derivative (LSD), entrenching its position as a legit contender for LSD dominance.
- With the Redstone Upgrade complete, Rocket Pool is focused on ensuring rETH liquidity through strategic partnerships, executing their scalability roadmap, and internal operational structures (such as the Incentives Management Committee) to streamline DeFi adoption.
- Rocket Pool’s user base looks primed to grow, especially as the scalability roadmap continues to offer new products and services for ETH stakers, including less ETH bonded minipools (LEBs), staking-as-a-service (SaaS), and solo staker migration.
Introduction
Following Ethereum’s successful transition to Proof-of-Stake (PoS), the node and validator landscape has emerged as an ideological microcosm of an age-old tension between decentralization and operational efficiency. On the side of operational efficiency lie large staking custodians such as Lido and Coinbase, both of which have recently come under notable criticism. On the other hand, Rocket Pool has established itself as the decentralization messiah amongst leading staking providers.
Yet, at a glance, the protocol remains behind competitors in actual usage. Building on its initial investment in ethics over operational efficiency, Rocket Pool benefits from a strong narrative tailwind into a market destined for growth. It has developed into a mature protocol with a liquidity and partnership strategy. All things considered, Rocket Pool represents an opportunity for significant upside in the liquid staking marketplace.
Rocket Pool in a Nutshell
Ethereum’s successful transition to PoS enables any user to participate in the network by running their own node and becoming a validator of new Ethereum blocks. This type of participation comes with heavy capital requirements and is generally technical in nature. To resolve these challenges, decentralized custodians (such as Rocket Pool) allow users to stake ETH in their protocol. In exchange, users receive an LSD token which can be leveraged in the wider ecosystem. LSDs allow ETH holders to stake their ETH with a decentralized custodian without having to run a node on their own.
Rocket Pool Protocol
The Rocket Pool protocol serves two primary user groups: users who wish to participate in ETH staking and users who want to stake ETH and run a node. Ethereum proof-of-stake requires 32 ETH to run a validator on the Ethereum Beacon Chain. Rocket Pool provides a unique solution by pairing smart node operators (supply side) with prospective ETH stakers (demand side). This relationship enables node operators and stakers to collaborate and achieve the 32 ETH threshold together.
Smart Node Operators (SNOs)
Any party holding 16 ETH can operate as an SNO by running a Rocket Pool Minipool Validator. To do so, the party must provide 16 ETH and stake at least 10% of the validator’s ETH value in RPL, the protocol’s governance token, as a security promise to Rocket Pool. In exchange, Rocket Pool aggregates and assigns 16 ETH in user-deposited ETH to the Minipool Validator. Smart node operators receive three forms of compensation:
- RPL Rewards: Node operators are eligible for RPL rewards, funded via RPL’s 5% emissions rate. RPL rewards are weighted by the proportion of total effective RPL posted as collateral.
- Commission Rate: Node operators receive a 15% commission from stakers whose ETH is added to their minipool.
- Staking Rewards: Node operators can collect commission-free staking rewards for any ETH they have staked themselves.
Since the Redstone upgrade following the Ethereum Merge, validators have received priority fees, paid by users to incentivize faster processing of their transactions. They have also implemented maximum extractable value (MEV) capture strategies to receive additional revenue. Smart node operators can participate in MEV Boost relays and may select pre-approved Rocket Pool whitelisted strategies that fit their situation (regulated, non-regulated, etc.).
Users
On the demand side, users (i.e., stakers) may deposit as little as 0.01 ETH to the Rocket Pool Deposit Pool in return for rETH, the Rocket Pool LSD token. rETH represents a user’s stake of ETH in the Rocket Pool Protocol, and rETH accrues staking rewards as Rocket Pool node operators generate those rewards. Once deposited into the Rocket Pool protocol, deposits accumulate in the deposit pool, and 16 ETH of deposited ETH are matched with a node operator’s 16 ETH.
Rocket Pool Governance
The Rocket Pool Protocol is governed by two primary governing bodies: the Oracle DAO (oDAO) and the Protocol DAO (pDAO).
The oDAO comprises node operators who run the smart node software and function as an on-chain DAO. It ensures that Rocket Pool contracts function correctly by relaying information such as the Minipool validator balances, the RPL:ETH Ratio, and RPL reward distributions. The oDAO also completes tasks for the protocol such as ensuring the protocol is optimizing the ETH available in the deposit pool.
Users become members of the oDAO by invitation only. These high-profile members of the Ethereum and Rocket Pool community include Etherscan, Beaconchain, Lighthouse, Nimbus, and Bankless. They are also required to post an RPL bond that acts as a good behavior bond. Members may receive additional RPL rewards in exchange for performing oDAO duties.
The pDAO is governed by node operators, whose governance and voting power are proportional to their effective RPL stake within the protocol. The pDAO is broadly responsible for managing the Rocket Pool treasury and signaling the future of the Rocket Pool protocol. Over time, the expectation is that the pDAO will oversee a greater scope of protocol parameters including: RPL inflation, rewards, auctions. fees, and deposit parameters. The pDAO manages the Rocket Pool pDAO Treasury, which is funded, in part, via RPL inflation.
Rocket Pool Tokens: rETH & RPL
The Rocket Pool ecosystem is composed of two tokens: rETH and RPL.
rETH
rETH is the LSD token of the Rocket Pool protocol. rETH represents an equal amount of ETH deposited into the protocol plus an equivalent share of the ETH staking rewards accrued to the protocol. While the balance of held rETH will remain constant, the balance of ETH backing the token in the Rocket Pool protocol continues to increase. In other words, the rETH token accrues value by increasing in market value against ETH over time.
One distinct advantage rETH holds for users is rETH holders’ ability to actively unstake their position. ETH stakers must await EIP 4863 to withdraw their staked ETH position directly from the Beacon Chain. However, Rocket Pool allows the rETH holders to ‘unstake’ their position by exchanging it back to ETH. They do so by enabling users to access the liquidity of the deposit pool, which comprises ETH waiting to be staked by node operators. rETH may also be exchanged for ETH on decentralized exchanges, provided sufficient market liquidity facilitates the trade.
rETH’s status as a non-rebasing token holds a distinct advantage over the base state of similar LSD tokens such as stETH. While stETH rebases, its underlying balance increases as yield accrues to the underlying staked ETH. On the other hand, rETH’s underlying balance remains constant despite its backing increasing (via staking rewards accumulated in the Rocket Pool smart contracts).
Because of their constant balance, non-rebasing (and wrapped rebasing tokens) are better into DeFi applications. All tokens depend on arbitrage and market forces to maintain their value, even if their balance does not reflect accrued yield directly. Lido, for example, also offers wstETH, which converts the rebasing stETH to a DeFi-friendly token, rather than requiring an additional transaction for the end user. Depending on the jurisdiction, a non-rebasing token can also be tax efficient; each daily rebase event, which changes a token’s balance, will register as a taxable event. A non-rebasing token only has two taxable events: stake and unstake (or buy and sell on the market side).
RPL
RPL is the native token of the Rocket Pool protocol. RPL is used by node operators to vote on protocol governance and serves as a form of insurance for stakers and validator penalties or slashing. RPL is subject to a 5% annual inflation rate, currently distributed as follows:
- 70% to node operators staking RPL.
- 15% to oDAO members for oracle data.
- 15% to the pDAO Treasury.
The RPL token distribution was largely conducted between a pre-sale, conducted on Sep. 22, 2017, and a crowdsale, conducted on Jan. 4, 2018.
Traction
Liquid staking currently represents the largest category of Beacon Chain staking depositors on the Ethereum network. It is responsible for 33.5% of the total deposits. Even so, the liquid staking marketplace offers tremendous upside, as only 11.9 % of the total ETH supply is currently staked.
As users become more familiar with the concept of staking, the amount of staked Ethereum is expected to increase significantly, especially once EIP 4863 enables withdrawals from the Beacon Chain. While Rocket Pool has lagged behind its primary competitor, Lido, the protocol has seen a dramatic surge in engagement. Rocket Pool has enjoyed the largest percentage growth of all major staked ETH depositors since The Merge.
While Rocket Pool’s emphasis on decentralization has earned it favorability in the eyes of Ethereum security maximalists, Rocket Pool’s future growth strategy will likely be driven by rETH’s utility in DeFi. As LSDs continue to expand across Layer-2s, both Lido and Rocket Pool have put significant weight behind incentives on Arbitrum and Optimism.
In July, Rocket Pool’s emphasis on decentralization gained them favor amongst major Optimism delegates when applying for 600,000 OP in liquidity incentives. In stark contrast, Lido’s proposal never even made it to vote, let alone approval. Loopring voted similarly in a recent poll to prioritize token integrations. While Layer-2 communities have embraced the bridging of LSDs, the percentage of rETH held on Arbitrum (1.04%) and Optimism (1.60%) still represents a trivial amount of total rETH supply. On mainnet, Rocket Pool experienced another massive win on Oct. 26, 2022, when rETH was successfully voted into MakerDAO as a collateral type.
Competitive Landscape (Becoming a DeFi Stable)
Rocket Pool represents the third largest LSD protocol, with nearly 300,000 ETH staked since its inception. Rocket Pool has two clear competitors in the LSD market landscape with significant traction in staking markets:
- cbETH: Coinbase’s custodial liquid staking derivative represents the most centralized product offering. While Coinbase currently custodies over 2 million staked ETH, its LSD offering was a relatively late entry to the market.
- stETH: Lido is the clear market leader with 4 million staked ETH. It has established market dominance early due to operational efficiency and a focus on DeFi integration. Lido established its position as the lead LSD partly due to its integration of stETH with DeFi and Lido’s investments in robust DeFi liquidity.
Despite Lido’s dominance as a protocol, Rocket Pool’s emphasis on node operator diversification demonstrates a dramatic contrast in some key metrics. For example, while Lido holds 29.95% of all validators on the Ethereum network, its entire validator set is run by just 29 node operators. In contrast, Rocket Pool’s validator share is only 10% of what Lido has, but it has 1,647 individual SNOs operating its validator share.
As mentioned previously, DeFi utility is expected to be a significant driver of LSD adoption. rETH integrations with DeFi applications would allow users to generate a yield greater than what users can receive from staking alone.
Aside from the smart contract vulnerability risk that all DeFi protocols face, Rocket Protocol will likely have to deal with risks associated with its use of oracles governed by the oDAO. Theoretically, collusion between oDAO participants could arise, although this is an unlikely event given past actions by the DAO.
Risks
Rocket Pool has conducted multiple audits, including the most recent audit by Sigma Prime. One high-severity risk and two medium-severity risks were marked as resolved by Rocket Pool developers.
From a market perspective, Rocket Pool remains behind Lido and Coinbase in overall market dominance. The opportunity for growth, as outlined in the traction section of this report, represents a significant upside. Many have speculated that MEV coordination between more centralized node operators (mainly Lido and Coinbase) could result in more attractive yields. In this way, those staking providers would gain a distinctive yield profile that could threaten rETH’s attractiveness.
Roadmap
Following the protocol’s successful launch of the Redstone Upgrade,Rocket Pool has shifted its focus from protocol development towards establishing rETH as a primitive of DeFi across protocols and Layer-2. Other objectives include increasing decentralization at the organizational level through the development of the Rocket Pool DAO and by further outlining the protocol’s MEV policy.
As stakers increase, Rocket Pool plans to provide a robust market for rETH holders to enable them to take advantage of efficient markets for lending, borrowing, and trading. As a first step towards executing its strategy, Rocket Pool approved a proposal to define and fund the pDAO on Aug. 24, 2022. Rocket Pool introduced a committee structure for the DAO, and an Incentives Management Committee was proposed shortly thereafter. The committee, loosely based on Lido’s reWARDS Committee, proposed an annual budget of 67,500 RPL. It also requested approximately $154,000 of runway per month, with half earmarked strictly for incentives.
On Aug. 2, 2022, a Rocket Pool blog post outlined the launch of the Rocket Pool DAO’s Phase 0 governance structure. It described the DAOs governance process and delegate system and established an expectation for future DAO development. As Rocket Pool continues to gain traction, the DAO will face additional scaling challenges and opportunities in its journey for organizational decentralization. While a formal post is in the works, Marceau of Rocket Pool has alluded to some of the scaling solutions in development on Twitter, which include:
- Less ETH bonded minipools (LEBs): The idea of providing minipools with a reduced collateral requirement from 16 ETH to as low as 4 ETH.
- Staking as a Service (SaaS): A solution for larger ETH holders to participate in staking in a trust-minimized way.
Integrated solo staker migration: A straightforward migration solution for large staking providers to convert existing validators to Rocket Pool, providing benefits such as revenue smoothing, the potential for increased yield, easier operation, and additional liquidity.
Conclusion
Rocket Pool is the third largest LSD protocol. That being said, the protocol has set its sights much higher. Rocket Pool’s investments in decentralization are beginning to pay off from a narrative standpoint, and the protocol has relaunched into relevancy following the success of the Ethereum 2.0 Merge. With nearly 90% of ETH unstaked, Rocket Pool represents one of the most exciting protocols, targeting a massive total addressable market in 2023.
