Direct and Indirect Staking: stETH and rETH

In the context of blockchain, let's easily explain staking in English. Staking involves depositing tokens and receiving rewards in return. It also allows depositors to contribute to security and delegate to others using the deposited tokens. Currently, one of the most widely used staking methods is Ethereum staking.

Ethereum operates as a peer-to-peer (P2P) network running on various nodes, and because it's a P2P network, rewards need to be given to nodes to prevent the network from stopping. Rewards are currently distributed in fractions of Ethereum, with the value around $2000 per Ethereum. However, simply providing computer resources doesn't guarantee rewards. Without a staking system, individuals with powerful computers could potentially harm the network, so Ethereum implements staking.

To participate in staking, one needs to have 32 Ethereum and contribute computer resources to help Ethereum run smoothly. If you fail to provide sufficient resources or engage in actions that harm the network, your 32 Ethereum will be deducted. On the other hand, if you consistently provide resources without causing any threats, you will receive rewards. These rewards come from newly minted Ethereum tokens. Ethereum's network stability benefits from the provision of resources, and individuals providing these resources receive rewards. This system has been running successfully for several years.

Staking appears attractive because it offers a stable income. While the current staking interest rates of 3-4% may not seem very appealing in a high-interest-rate environment, some people are betting on the price of Ethereum rising. However, there are several hurdles to consider. The requirement of having 32 Ethereum is one hurdle, and the complexity of the process makes it challenging for those who are not familiar with blockchain development. Additionally, staking and unstaking can take a significant amount of time. If someone wants to stake but cannot overcome any of these three hurdles, they won't be able to participate in staking. This has led to attempts to solve these issues through blockchain applications, with Lido Finance being one of the most successful solutions.

In fact, Lido Finance holds a market share of over 30% in the Ethereum staking market, making it a successful project. The mechanism behind Lido Finance is straightforward. People who want to stake can exchange ETH and stETH at a 1:1 ratio in the Lido Finance app. Stakers receive stETH and can exchange it back for ETH if they want to stop staking. The ETH collected is used for direct staking in 32 ETH increments, and rewards are distributed to stakers, excluding a 10% fee. Users indirectly participate in staking by exchanging tokens, incurring a 10% loss but gaining significant benefits.

• Staking is possible even without having 32 Ethereum.
• You can participate without technical development or operational skills.
• There are no electricity or computer costs.
• You can withdraw your funds instantly.

Considering these hurdles, the 10% fee for receiving rewards seems like a reasonable trade-off. Therefore, Lido Finance's app has been successful and recognized as a project that leverages token utility. One drawback of Lido Finance is that there are very few individuals who directly stake Ethereum, less than 50. To address this, the Rocket Pool project was introduced, allowing anyone to become a node operator. These projects have their own challenges, which are separate topics, but both Lido Finance and Rocket Pool offer tokens like stETH or rETH. While direct stakers don't have proof of staking, those participating indirectly through tokens like stETH or rETH have proof of their stake. Currently, they can also provide liquidity to decentralized exchanges like stETH:ETH or rETH:ETH, earning additional rewards. Therefore, the 10% fee becomes more lucrative.

It is likely that more projects will emerge in the future, utilizing stETH and rETH for second and third-layer applications. Staking is not just about participating in the Ethereum network's consensus process; it also involves gaining additional privileges beyond voting in the Ethereum network. I will provide a more detailed explanation of re-staking in the future, but creating indirect staking through tokens and smart contracts and attracting more people is one direction that Web 3 projects should pursue.

Image source: Generated through OpenAI's DALL·E.