Since the Merge, the number of active validators has increased by over 11% to 487,000. While rewards haven’t jumped to the pre-downturn expectations of 8-12%, they are averaging around 6%. This is with blockspace demand at seemingly perennially-low levels. What is interesting is that the process of randomizing block production post-Merge is creating even ‘chunkier’ reward profiles: some even believe that there are some ‘lucky’ validators that propose more blocks than the ‘normal’ ones.
We don’t think the logic of this assertion holds up: whether your infrastructure is terrible or overpopulated (AWS is, apparently, a favourite cloud provider for staking operations), the probability of a particular validator being selected to propose a block is unaffected by these parameters. So long as the validator is part of the active validator set, then it has an equal chance of being selected from among the almost 500K others.
Perhaps one of the reasons for this speculation is that there have been a few ‘famous’ rewards for proposers since the Merge, the standout being ~375 ETH earned by a single validator for proposing one block. That’s a 1000% return in one epoch. Zero credit risk. MEV is now responsible for over 85% of blocks being produced post-Merge. The development and rollout of the MEV-boost sidecar has been hugely successful and is pervasive across almost all validator operators. Rated.network have just launched a dashboard to monitor relays—it seems much like the more “traditional” mevboost.org tool.
Staking in 2023
I don’t want to get into the details or the broader implications of some of the events that have rocked the crypto ecosystem the last few months. However, I think it does make sense to re-emphasise why all of these occurrences might actually reinforce the case for staking:
- The staking reward profile is transparent. You can dig deeper and deeper into the spec and uncover exactly what it does, when and why.
- Depending on how you’ve staked, there is no counterparty risk.
- Operational and technical risk can be managed. All clients (both consensus and execution layer) are open source.
- For as long as the protocol has utility, block production will continue and rewards will be allocated to proposers and attestors of those blocks.
Recent events may slow down the adoption of crypto and the arrival of new, more traditional participants into the space. However, I think the route that starts with buying/holding crypto and ends with DeFi lending and liquidity-provider token farming, and other weird and wonderful opportunities, now firmly goes through Staking-town. A 6-7% reward of no counterparty risk is, in some ways, difficult to imagine for a traditional participant. And it is that credibility that will need restoring and nurturing as we move into next year.
Withdrawals
They are coming! The exact date of withdrawals hasn’t, and won’t, be fixed. But the Ethereum Core Devs have agreed on delivering the withdrawal functionality early next year in the Shanghai release. Some dates in March have been proposed, but personally, I think April is more likely. I suppose we will find out more in January as shadowforks are deployed and tested.
From the perspective of Codefi Staking, we will target being ready with withdrawals for our customers when it is deployed across mainnet. As I’ve mentioned in previous newsletters, there are some potentially interesting challenges ahead:
- How will an early staker who used a BLS key efficiently and securely perform the conversion from 0x00 to 0x01 so they can participate in the “skim”? This becomes especially challenging if the early staker activated a lot of validators.
- How big will the voluntary exit message (VEM) queues and then withdrawal queues become? What effect will they have on the value and popularity of liquid staking derivatives?
- What effect will withdrawals have on new repositories of ETH being staked? Will there just be a churn from one operator to solo to other operators?
Codefi Staking
Last month, I mentioned that we’d been facing some challenges post-Merge. Using our Lido validators as representative (this isn’t necessarily so, given we have a distributed platform), we can see performance returning to our previous levels. I expect this to further improve over the next few months as we continue our program of improving and optimizing our service.
MEV is deployed across all our validators. We are in the midst of implementing validator-level MEV capabilities, which will allow individual customers to pick and choose what relays to register with for a particular validator. We think this will allow our customers to serve their customers’ specific needs. This will also help customers to distribute their validator registrations and ensure they do not add to any potential centralization pressure that might exist.
The other main news from Codefi Staking is that we are now multi-cloud. Again, we expose that flexibility to our customers – allowing them to select where their validators are and what consensus client they run on. We want to spend 2023 continuing to expose operational and technical risks to our customers and empower them to make choices that fit their risk appetite when they stake their ETH.
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