# Liquid Staking Derivatives Decentralization Profile Analysis

## Introduction
The transition of the Ethereum mainnet from Proof-of-Work to Proof-of-Stake introduced the possibility for ETH holders to generate native yield through staking. The downside of this is that withdrawals from the staking system are not possible at this moment and they are expected to be slow once enabled. This means that users wanting to access this yield have to do it at the expense of not being able to access their liquidity for the time being.

In response to this, several protocols have emerged to offer ERC20 wrappers to represent a user's staked position. The user then can trade away their wrappers for ETH or other assets in the open market to exit their positions as well as participate in other DeFi activities such as borrowing with them. These wrappers are commonly called Liquid Staking Derivatives (LSD). LSDs tend to be yield bearing as they accumulate the underlying staked rewards.

Different LSD providers offer different degrees of decentralization on their infrastructure and Smart Contracts. Nevertheless, for the time being, non of them are fully decentralized due to the limitations of the staking infrastructure. The following is an analysis of the decentralization profile of some of the most [relevant LSDs](https://defillama.com/protocols/Liquid%20Staking).

# The Market
State of staked ETH landscape.

https://research.thetie.io/shanghai-effects-on-liquid-staking-derivatives/

https://www.defiwars.xyz/wars/eth

## Shanghi Expectations
Expect the % of ETH staked to increase

## Lido's stETH

### Generals

You deposit ETH on [Lido](https://lido.fi/)'s staking page, and Lido issues you stETH, a receipt token that serves as a representation of the ETH you have staked.

This enables you to engage in the DeFi activities as discussed above or simply retain it to accumulate ETH staking earnings, which are automatically sent into your wallet as stETH. Lido divides the 10% of ETH stake payouts across node operators and the DAO Treasury.

A problem with stETH is that it is a rebase token, which means that when you earn staking rewards, your balance rises. This is problematic when you need to offer liquidity because the staking rewards flow into the LP pool, which is designed to have a constant quantity balance.

Wrapped staked ETH, also known as wstETH, was later developed by Lido, but it rises in value over time rather than in balance.

### Lido's Infrastructure Decentralization
Lido is the largest LSD at this point in time with ~$8 Billion worth of ETH staked which represents around 30% of the total staked ETH (according to the following [Dune Dashboard](https://dune.com/LidoAnalytical/Lido-Finance-Extended)). At this rate, the risk of the Node Operators (NOs), participating in Lido, colluding into a [1/3 attack](https://arxiv.org/pdf/2102.02247.pdf) is very high as NOs have active communication channels and are in constant collaboration. Additionally, the approval of new NOs is subject to a governance process controlled by the LDO token and, hence, this process can be economically manipulated to increase the number of malicious NOs.

In other words, there is a high risk of Lido becoming a centralized point of failure for the Ethereum network security itself. Lido and the Ethereum Foundation are working on improving the protocol's descentralization and governance to prevent any abuse.

For the time being, incentivizing deposits into Lido that could lead to the expansion of their share of the total stake amount increasing the risks for the overall ecosystem. The risks mentioned here are further discussed in this [article](https://notes.ethereum.org/@djrtwo/risks-of-lsd) by one of the Ethereum Foundation's core researcher, Danny Ryan.

### stETH Contract Decentralization

- Contract deployment: [0xae7ab96520DE3A18E5e111B5EaAb095312D7fE84](https://etherscan.io/address/0xae7ab96520DE3A18E5e111B5EaAb095312D7fE84#code)
- Accrues staking rewards through rebasing mechanics; the stETH balance increases periodically
- stETH is minted 1:1 to the staked ETH and the rebases increase (or decrease) the supply based on the rewards. Once withdrawals are enabled, Lido will introduce 1:1 redeeming from stETH to ETH
- Lido uses Aragon's contracts for DAO management, all the infrastructure's permissions can be found [here](https://mainnet.lido.fi/#/lido-dao/permissions/app/0xae7ab96520de3a18e5e111b5eaab095312d7fe84)
- The stETH contract (as well as most of the rest of their infra) is an upgradeable proxy owned by the Voting Contract
- Therefore, the LSD's contract can be upgradede to anything should a vote for it reach quorum
- For a vote to pass, a minimum of 5% of the total supply must support the proposal and at least 50% of the total votes must be in favor. LDO's Total Supply is 1,000,000,000 so at a current price of $2.63 / LDO, it would cost ~$131,500,000.00 for a single actor to obtain 5% of the supply
- In a similar way, the LSD can be paused through a DAO Voting. Pausing disables transfer, approve, transferFrom, increaseAllowance, decreaseAllowance, transferShares, _mintShares and _burnShares
- Read more on superuser capabilities [here](https://docs.lido.fi/token-guides/steth-superuser-functions)

In summary, stETH's smart contract and infrastructure is exposed to several censorship and centralization risks. Integrating with it requires a high level of trust in the decentralization efforts, processes and checks of the LidoDAO.

### wstETH Contract Decentralization
- Contract deployment: [0x7f39c581f595b53c5cb19bd0b3f8da6c935e2ca0](https://etherscan.io/address/0x7f39c581f595b53c5cb19bd0b3f8da6c935e2ca0#code)
- Wrapper for stETH for integrators that can't support rebases
- Immutable
- Inherits decentralization risks of the stETH smart contract and infrastructure mentioned above

### Notes on Lido
- There is a stETH/ETH Chainlink [feed](https://data.chain.link/ethereum/mainnet/crypto-eth/steth-eth)
- There are currently no Tellor feeds for it: https://feed.tellor.io/
- A summary of their decentralization roadmap and progress: https://lido.fi/scorecard

### Liquidity
- 5m Ether TVL ~$7.54B
- [Balancer](https://app.balancer.fi/#/ethereum/pool/0x32296969ef14eb0c6d29669c550d4a0449130230000200000000000000000080) ~$242M
- [Curve stETH/ETH](https://curve.fi/#/ethereum/pools/steth/deposit) ~$1.49B
- [Curve rETH/wstETH](https://curve.fi/#/ethereum/pools/factory-v2-89/deposit) ~$3.3M
- 4.34 TVL / Liquidity ratio

## Rocket Pool's rETH

### Generals
[Rocket Pool](https://rocketpool.net/) is the third largest ETH liquis staking protocol with currently 381,120 ETH staked under management (2.31% of total staked supply).

In contrast to Lido, where only holders of LDO tokens may add new node operators, Rocket Pool's architecture and liquidity make deposits and withdrawals simple since no prior technical expertise is required to get started and anyone can run a Rocket Pool node.

To join Rocket Pool as a node operator, you must have a minimum of 16 ETH and 1.6 ETH worth of RPL. This equates to half of the 32 ETH that a single operator would need in the outside world. In order to lower the entrance barrier and boost decentralization, the amount of ETH needed will continue to decline in the future.

Any stakers wishing to join this decentralized network of Ethereum nodes will equal the remaining 16 ETH. When depositing, holders will get rETH, which, like wstETH, will gain value over time.

In addition to their personal staking benefits from the 16 ETH, node operators also earn extra RPL token payouts from the network, resulting in a larger yield than solo staking. However, in exchange, Rocket Pool retains a 5-20% fee of the rewards and delivers them exclusively to node operators.

### Rocketpool’s Infrastructure Decentralization

As Rocket Pool is permissionless, anyone can join the network, however this introduces the risk of malicious actors. Thus to safeguard the network, node operators have to deposit a minimum of 10% and up to 150% of their bonded ETH amount in RPL token, as insurance against slashing or other penalties.

To incentivize node operators to post more RPL collateral, they receive more RPL tokens incentives. There is no fixed supply for the RPL token and the current inflation rate for RPLs is 5%, with 70% of that going toward this RPL incentive. A further 15% is allocated to the Oracle DAO, and another 15% is sent to the Protocol Treasury.

The value accrual for RPL is also weaker than Lido as Rocket Pool gives 100% of the commission to its node operators and earns from its RPL token emission, which may not be the most prudent treasury management strategy, but it certainly makes Rocket Pool an attractive alternative to validators due to the higher yield.

If the value of RPL drops too much due to high inflationary rewards and not enough value accrual, it would require node operators to constantly buy RPL to meet the collateral target, which may be capital inefficient and the losses in RPL may reduce the confidence of the system and turn potential node operators away.

### rETH Contract Decentralization
- Contract deployment: [0xae78736Cd615f374D3085123A210448E74Fc6393](https://etherscan.io/address/0xae78736cd615f374d3085123a210448e74fc6393)
- Immutable
- Mintable by the [RocketDepositPool](https://etherscan.io/address/0x2cac916b2A963Bf162f076C0a8a4a8200BCFBfb4#code). This contract is immutable but can be migrated
- Although immutable, most contracts link to each other through a "registry" called [RocketStorage](https://etherscan.io/address/0x1d8f8f00cfa6758d7bE78336684788Fb0ee0Fa46#code) that contains a mapping to the latest logic for each component. Hence, almost all contracts in the infrastructure can be migrated by updating this mapping
- After bootstrapping, the RocketStorage maintainance is delegated to the Oracle DAO. This group of individuals can propose and execute the migration of any contract (including the deposit pool and the rETH token) with a 51% quorum. Read more on the [process](https://docs.rocketpool.net/guides/odao/proposals.html#making-a-proposal)
- The [Oracle DAO](https://docs.rocketpool.net/guides/odao/overview.html#requirements) is made up of a group of Node Operators that collectively maintain the infrastructure's settings and Smart Contracts. Membership is limited and invite only
- Should the OracleDAO act maliciously, they could modify any system setting or upgrade contracts for unlimited minting/other attacks

### Notes on RocketPool
- There is no price feed available for rETH on mainnet
- Very little transparency on their infrastructure's deployed contracts and the Oracle DAO's operations and governance. Couldn't find information on the members, proposals nor the Proposals deployed contract

### Liquidity
- 397K Ether TVL ~$598M
- [Balancer](https://app.balancer.fi/#/ethereum/pool/0x1e19cf2d73a72ef1332c882f20534b6519be0276000200000000000000000112) ~$67M
- [Curve rETH/ETH](https://curve.fi/#/ethereum/pools/factory-crypto-210/deposit) ~$7.9M
- [Curve rETH/wstETH](https://curve.fi/#/ethereum/pools/factory-v2-89/deposit) ~$3.3M
- [Uniswap](https://info.uniswap.org/#/tokens/0xae78736cd615f374d3085123a210448e74fc6393) ~3.67M
- 7.31 TVL / Liquidity ratio

## Shanghi Roadmap
([credit](https://research.thetie.io/shanghai-effects-on-liquid-staking-derivatives/)) - verification needed

> Rocket Pool is releasing a protocol upgrade that triples the amount of rEth that may be minted by staked node operator Eth, known as LEB8s, or “lower Eth bonded” minipools. In other words, for every 16 Eth brought in by a validator, Rocket Pool will be able to mint 48 rEth.

This should help clear the current rETH premium, in addition to the base effects of shanghai which should ease pressure on demand to withdraw via LSD.

Rocketpool is well-positioned to capture more of the market post-Shanghai
> Before Shanghai, a Rocket Pool protocol upgrade will allow solo node operators to easily transition their validators to Rocket Pool minipools, who will have a monetary incentive to do so in the form of increased Eth commission and RPL rewards.

> While it would be unreasonable to expect the majority of the operators to migrate, some significant portion are likely to. As shown in the second figure, solo operators represent nearly ¼ of all staked Eth.

# Frax ETH
See the [current market share](https://www.defiwars.xyz/wars/eth) of various LSDs

- fxsETH itself is just a wrapper, no interest.
- Have to stake into sfrxETH, an ERC-4626 vault, to gain the interest.

### Decentralization Status
Centralized Node operation, FRAX team runs. See governance functions and roadmap below.

### Governance

#### fxsETH
[fxsETH - deployed contract](https://etherscan.io/token/0x5e8422345238f34275888049021821e8e08caa1f#code)

- token can be minted _at will_ by Frax multisig.
- it can also be _burned from arbitrary addresses at will_ by the Frax multisig
- multisig can add new minters. current minters are fxsETH minter contract and multisig
- there is also a timelock, the timelock can do anything the multisig can do. the multisig could renounce it's rights and leave timelock as sole governance.

#### fxsETH Minter
[fxsETH Minter - deployed contract](https://etherscan.io/address/0xbAFA44EFE7901E04E39Dad13167D089C559c1138#readContract)
_ETH withholding:_ Governance can set a % of incoming ETH to “withhold” (i.e. not send to validator nodes) This is used to farm yield outside of the consensus mechanic. Currently 10%

_Sweep:_ Ether and ERC20s can be swept by gov. ETH should only accumulate up to 32 in the contract before a new validator is spun up and takes it in. Tokens should never be held here under normal operation

#### sfxsETH
[sfxsETH - deployed contract](https://etherscan.io/address/0xac3E018457B222d93114458476f3E3416Abbe38F)

- No notable governance rights, you're safe from arbitrary burning by pooling here or in liquidity

## Decentralization Roadmap
### Collateral
They consider stETH and rETH good collateral and may open them up as collateral for fxsETH! Making this more of a derivative that is also capable of being closer to the base layer.

### Nodes
Looking to move to something similar to rocketPool.
> Stake a portion of the minimum, get pooled with other ETH to get to 32

Minimum may be 4 ETH (maximum slash size) -Rocketpool may switch to this as well

### Liquidity
[curve fxsETH/ETH](https://curve.fi/#/ethereum/pools/frxeth/deposit)
`78834` ETH TVL on pool

### Peg Stability
Free-floating peg for sftxETH

## Technical Integration

### Liquidation
Will have to unstake to use in liquidity.

# LSDs - General Notes

## Market
(credit [here](https://research.thetie.io/shanghai-effects-on-liquid-staking-derivatives/))

> It’s worth noting that the demand for LSDs, in part, can be gauged by the premium or discount on the secondary market compared to Eth.

> We have at least two factors influencing current LSD discount and premium values:
> - Perceived Risk
> - Temporary Liquidity Incentives

## Decentralization
Mainnet can’t read data from the beacon chain. So a smart contract can’t query what’s happening to the validators (yield, slashing) without an external oracle.

LSDs will never be able to be truly decentralized until and unless this information is available to smart contracts.

# Use Cases
- Composable
- Immutable
- Capital efficient