The State of Staking in February 2023

https://consensys.net/blog/codefi/codefi-staking/the-state-of-staking-in-february-2023/

If you’re familiar with Star Wars, you would know Gold Leader’s famous quote, “Almost there”. That’s exactly what I think of when I think of the Shanghai/Capella upgrade. 

Whilst there’s still no official schedule, the Shanghai/Capella fork for mainnet is looking increasingly likely in the first half of April. On February 28, Sepolia was successfully forked ,and Goerli/Prater is targeting March 10. From there, a month seems a reasonable upper bound for completing the implementation of withdrawals on mainnet.

Within a few days of the Shanghai/Capella fork, the ETH that has been collected in 41% of validator accounts on the consensus layer will be “re-balanced” to their associated withdrawal addresses on the execution layer. There are many possible actions for those ETH holders: restake new validators; sell their rewards; switch to other tokens and protocols to reduce their ETH concentration; do nothing… on it goes. 

Looking at the withdrawal visualization from Metrika, we can see that the deposit queue has been growing the last few days. This is after months of almost no waiting at all. We will see in March whether the imminent arrival of withdrawals will actually translate into more staking activity as entities and individuals begin to stake with more confidence now that they will be able to exit their position.

February has seen a lot of US regulatory focus on staking. The specifics have been discussed by others in the ecosystem and I’m not a lawyer to parse or interpret those actions. What appears to be clear is that, much like the many debacles of 2022, there are more reasons to invest in and focus on facilitating the real “OG” benefits of crypto: self-custody, decentralized markets and solo staking or, at the least, direct staking. All these offer complete clarity and transparency on what is happening to a holder’s assets. The challenge, of course, is how to make the decentralized user experience as smooth as that of a centralized service. It’s hard, but it’s not impossible. The innovation in the wallet space is enormous. I have no doubt that new ideas, workflows and principles will emerge that transform that experience.

Now that withdrawals are here, from a staking perspective, it is time to lift our heads a little. Wallets aren’t the only area seeing exciting innovation. Distributed Validator Technology (DVT) has reached mainnet with Obol, with their first live validator. This is a huge first step and I am sure that other DVT providers will make their implementations available sooner rather than later. Briefly, DVT allows individuals or groups to run the same validator account in multiple places without incurring the slashing risk you’d normally expect. They do this by “sharding” or slicing up the validator key into many pieces. Any single operator only holds one piece – a subset is required for the signing to be valid and pushed to the Ethereum network. This adds resilience for solo stakers and reduces their security risk. There’s plenty more detail to expose here and it is definitely a topic that we will return to.

The other innovation making noise in staking is the eigenlayer protocol. I must admit – when I first read about this idea it reminded me all too clearly of rehypothecation (re-use) models and strategies in traditional finance. But having dug a bit deeper, I think it could provide a great platform for innovation and leverage the security offered by the billions of ETH locked up in staking for new ideas and networks. It’s actually very simple. As an ETH staker, you will be able to specify the Eigenlayer contract to be your withdrawal credential. Once that’s done, you will be able to pick different services or protocols you want your stake to support. You’ll now be rewarded for both the original staking on Ethereum and the additional services being supported. The most important thing is that mainnet will continue to have first claim on the staked ETH and so the base layer is not made vulnerable.

I understand that Eigenlayer is not yet live and the team hopes to be ready by the Shanghai/Capella fork. Regardless of when it does arrive, it could prove a fascinating evolution.

Codefi Staking

At Codefi Staking, we continue to focus on completing the implementation of withdrawals. We participated in the Zhejiang fork and are now readying for Goerli/Prater. To be honest, we’re quite looking forward to retrieving some of the Goerli-ETH we’ve staked and been rewarded from the last two years!

A recent board comparing the Gnosis network with Ethereum showed some interesting data points:

  • Lighthouse is now the dominant consensus layer client on both networks. Not quite reaching the tipping point of 67%, but not far away. The centralization risk that runs is something for the community, and ourselves, to consider. Codefi Staking currently runs Teku and Lighthouse on a 50:50 basis but once withdrawals are complete, we will start exploring adding new clients to our platform
  • Amazon Web Services (AWS) and Hetzner servers account for over 36% of nodes on Ethereum mainnet. The Azure number is a fraction of that. I’m a little cautious about the precision of these numbers but I think the big picture is probably true: AWS dominates the space. This is one of the reasons that Codefi Staking is split over Azure and AWS. Furthermore, customers can pick and choose where their validator spins up both in terms of cloud and region.

March is going to be a busy month with the finalization of withdrawals and also with some other exciting announcements. Some of the team will be at Paris Blockchain Week so I hope you get a chance to drop by and say hello.