Comparison and Analysis of Ethereum and Polkadot Staking Mechanisms and Derivatives

With the upcoming Ethereum Shanghai upgrade, the staking withdrawal feature will be enabled, and Ethereum staking and related derivation fields have received widespread attention. Since its launch in 2019, Polkadot has been using the PoS mechanism and has recently introduced various new staking tools. This article will compare the staking mechanisms and current situations of Ethereum and Polkadot from multiple perspectives, and briefly analyze the development of the derivation track for both.

Stake Mechanism Comparison

Ethereum adopts a Proof of Stake (PoS) mechanism, where each validator needs to hold 32 ETH for staking. Validators must run a main beacon chain node and multiple validator clients, with each client corresponding to 32 ETH. These validators are randomly assigned to a "committee" responsible for validating shards in the network. Ethereum 2.0 requires a large-scale validator set to ensure availability and effectiveness: each shard needs at least 111 validators to operate the network, and 256 validators to complete the finalization of all shards within a period. If there are 64 shards, 16,384 validators are required.

Polkadot adopts the Nominated Proof of Stake (NPoS) mechanism, which includes two roles: "validators" who run nodes and "nominators" who nominate validators. Nominators do not need to run devices personally, but can still receive system rewards. Nominators can also join a nominator pool to further lower the participation threshold and simplify operational processes. NPoS allows Polkadot to require a smaller set of validators, with about 10 validators needed for each parachain, and only 1000 validators needed for 100 parachains. The Polkadot network currently has 297 validators and is expected to need 1000 validators during its mature phase; therefore, the "Thousand Validator Program" has been launched to increase the number of validators.

Current stake data

As of the time of writing, there are 16.44 million ETH in a staked state on Ethereum, with a staking rate of 14.3%, 513,000 validators, and a staking yield of 4.32%, with an inflation-adjusted yield of 4.55%. Polkadot has 592 million DOT in a staked state, with a staking rate of 46.4%, a number of nominators at 455,000, a historical staking yield of 15.39%, and an inflation-adjusted yield of 8.26%.

For PoS chains, the higher the staking rate, the stronger the network security. Currently, Ethereum's staking rate is relatively low compared to Polkadot and other PoS chains, possibly because the staked ETH cannot be withdrawn under the current version. The Ethereum "Shanghai" upgrade is expected to be completed in March, at which point it will support the withdrawal of staked ETH, and the staking rate may increase significantly. The ideal staking rate for Polkadot is 50%, and the actual staking rate mostly maintains between 40% and 60%.

Comparison of Lock-up Periods

Currently, the staked ETH in Ethereum cannot be withdrawn. Users will only be able to withdraw their staked ETH after the "Shanghai" upgrade is completed. Once the withdrawal function is enabled, the staking lock-up period for ETH is 27 hours, meaning that staked ETH can be withdrawn 27 hours after unstaking.

The staking lock-up period for Polkadot is 28 days, meaning that the staked DOT can be withdrawn 28 days after being unstaked. A longer lock-up period increases the security of the protocol, but due to lower flexibility and higher opportunity costs, it may reduce the attractiveness for stakers.

Stake Threshold Analysis

Ethereum only supports one native staking method, which is to run a validator by oneself. Each validator must deposit 32 ETH into the ETH2 deposit contract and have a dedicated computer that runs online 24/7, as well as a certain level of technical operational ability.

Although the Ethereum protocol itself does not support stake delegation, there are third parties in the market that provide node hosting services, outsourcing the node operation work to service providers. This method still requires a deposit of 32 ETH, suitable for users who have funds but are not familiar with the technology, but it requires a certain level of trust in the custodian.

The Polkadot protocol natively supports four staking methods, ranked from high to low based on capital thresholds: running a validator, direct nomination, running a nomination pool, and joining a nomination pool, with a minimum of only 1 DOT required for participation in staking. Polkadot also provides a "staking dashboard" website to facilitate user staking operations.

Running a validator requires a dedicated, always-on networked computer and an understanding of the relevant technical operations. In addition, a higher ranking of the staked amount of DOT is required to qualify for the active validator set. This DOT can be staked by oneself or by nominators. The required amount of DOT to become an active validator varies dynamically, with a current minimum of approximately 1.6 million DOT.

Direct nomination is when the nominator selects their trusted (up to 16) validators and stakes DOT under the validators. Nominators and validators share the same network rewards and must pay a certain commission to the validators (currently the average commission is 4.04%). If the nominated validators go offline or engage in malicious behavior, the nominator will also be penalized. To receive nomination rewards, one must meet the minimum bonding amount, which changes dynamically and is currently around 264 DOT.

The operation nomination pool is a newly launched feature aimed at further reducing the nomination threshold. Multiple small nominators can form a nomination pool, stake DOT into the pool, and then the pool as a whole acts as a nominator to nominate the selected validator set. Pool members share rewards and penalties based on their staking shares. To run a nomination pool, validators must be selected, and currently, operating a nomination pool requires 200 DOT.

Joining the nomination pool is the simplest staking method. There is no need to choose a validator yourself; you can join the nomination pool and earn staking rewards with just 1 DOT.

From the perspective of staking thresholds, Polkadot offers more native staking options compared to Ethereum, with a minimum of just 1 DOT required to participate in staking, and some staking methods do not require technical knowledge. In terms of both financial and technical requirements, the staking participation threshold for Polkadot is lower, which helps to attract more people to participate in staking, thereby increasing the decentralization and security of the network.

Development of Liquid Staking

Due to the lock-up period of staking, the locked funds cannot be used, which has led to the emergence of liquid staking. Liquid Staking Derivatives (LSD) allow users to earn staking rewards while maintaining the liquidity of their funds, thereby improving the utilization of capital.

After users stake their tokens in the liquid staking protocol, corresponding liquid derivation tokens can be generated. These derivation tokens have similar uses to the original tokens, such as participating in DeFi while also earning staking rewards. The existence of liquid staking can stimulate the economic activity of PoS chains because it eliminates the conflict between staking and participating in DeFi as two channels for earning returns, allowing users to enjoy both. Therefore, liquid staking is a very important track.

Due to the fact that the native staking funds of Ethereum cannot be withdrawn at present, the share of liquid staking is very high. In the first quarter of 2023, 44% of all staked ETH was done through liquid staking. The TVL of Ethereum's liquid staking has reached 10 billion USD, making it a huge market. One protocol holds an absolute dominant position in the Ethereum liquid staking market, with a market share of 73.42%, while the second-ranked platform has a market share of 15.76%.

Unlike the dominant position of liquid staking in Ethereum, the TVL of liquid staking products in the Polkadot ecosystem is relatively balanced. The TVL of a certain protocol on a certain parachain is $16.71 million, the TVL of liquid staking on another parachain is $14.14 million, the TVL of a certain project is $12.10 million, and the TVL of liquid staking on another parachain is $7.49 million. The total TVL of these four liquid staking protocols is only $50.44 million, while there are currently 592 million DOT being staked. Compared to Ethereum, the popularity of liquid staking in Polkadot is quite low, and there is still significant growth potential in the liquid staking market of the Polkadot ecosystem. Additionally, liquid staking products developed based on Polkadot parachains have some unique advantages, such as ease of cross-chain integration.

Overall, in terms of liquid staking, the liquidity staking adoption rate of Ethereum is quite high, while the adoption rate of liquid staking in the Polkadot ecosystem is relatively low; the Ethereum liquid staking market is dominated by one player, whereas there are no particularly prominent liquid staking products in the Polkadot ecosystem.

Summary

| | Ethereum | Polkadot | |--------------|--------------------------|-----------| | staking mechanism | PoS | NPoS | | stake rate | 14.3% | 46.4% | | Inflation-adjusted stake yield | 4.55% | 8.26% | | Stake Lock-up Period | Currently unable to withdraw, extraction function will be available after 27 hours | 28 days | | Stake Threshold | 32 Ether | Minimum 1 DOT | | Liquid Staking | Large market size, one dominant player | Small market size, relatively dispersed |

Overall, Polkadot's staking rate is higher than that of Ethereum, offering more native staking options with a lower barrier to entry, while Ethereum's liquid staking market has developed considerably. With the upcoming Ethereum Shanghai upgrade and the further popularization of Polkadot's ecosystem liquid staking, the landscape for both may change significantly.