Comparison Analysis of Ethereum and Polkadot Staking Mechanisms

Ethereum is about to welcome the Shanghai upgrade, which will enable the staking withdrawal feature, sparking widespread interest in Ethereum staking and related derivatives. Meanwhile, Polkadot has been using the PoS mechanism since its launch in 2019 and has recently introduced several staking-related 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 derivatives track for both.

stake mechanism

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

Polkadot uses a Nominated Proof-of-Stake (NPoS) mechanism, which includes two roles: "validators" who run nodes and "nominators" who nominate validators. Nominators do not need to operate devices personally, but they can still earn system rewards. Nominators can also join a nominator pool, further lowering the participation threshold and simplifying the operational process. NPoS allows for a smaller set of validators required for Polkadot, with about 10 validators needed for each parachain, and only 1000 validators for 100 parachains. Currently, the Polkadot network has 297 validators, and it is expected that 1000 validators will be needed during the network's maturity phase, which is why the "Thousand Validators Program" was launched to increase the number of validators.

Current Staking Data

As of recent data, Ethereum has 16.44 million ETH in a staked state, with a staking rate of 14.3%, a total of 513,000 validators, and a staking yield of 4.32%, with an inflation-adjusted yield of 4.55%. Polkadot, on the other hand, has 592 million DOT in a staked state, with a staking rate of 46.4%, a total of 455,000 nominators, 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, possibly because the staked ETH cannot be withdrawn in 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 significantly increase. The ideal staking rate for Polkadot is 50%, while the actual staking rate mostly maintains between 40% and 60%.

Lock-up Period

Currently, the ETH staked on Ethereum cannot be withdrawn. The withdrawal feature will be enabled after the "Shanghai" upgrade. At that time, the staking lock-up period for ETH will be 27 hours, and the staked ETH can be withdrawn 27 hours after the unbonding.

The staking lock-up period for Polkadot is 28 days, and the staked DOT can be withdrawn 28 days after unlocking. A longer lock-up period helps enhance the protocol's security but may also reduce its attractiveness to stakers due to lower flexibility and higher opportunity costs.

Stake Threshold

Ethereum only supports one native staking method, which is to run your own validator. Each validator must deposit 32 ETH and requires a dedicated computer that runs 24/7, as well as certain technical operating knowledge.

Although the Ethereum protocol itself does not support staking delegation, there are some third-party node hosting services in the market that outsource node operation work to service providers. This method still requires a deposit of 32 ETH and is suitable for users with funds but who do not understand the technology, but it requires a certain level of trust in the custodian.

The Polkadot protocol natively supports four staking methods, ranked from highest to lowest based on capital thresholds: running a validator, direct nomination, running a nomination pool, and joining a nomination pool. A minimum of 1 DOT is required to participate in staking. Polkadot also offers a "staking dashboard" website to facilitate users' staking operations.

1. Running a validator: A dedicated computer that needs to operate around the clock and related technical knowledge are required. Additionally, a higher amount of staked DOT is needed to enter the active validator set. Currently, at least about 1.6 million DOT is required.

2. Direct Nomination: Nominators can choose up to 16 trusted validators to stake. Nominators share equal network rewards with validators and must pay a certain commission to validators (currently averaging 4.04%). If the nominated validators exhibit malicious behavior such as going offline, nominators will also be penalized. Currently, about 264 DOT is required to receive nomination rewards.

3. Running a Nominator Pool: This is a newly launched feature aimed at further lowering the nomination threshold. Multiple small nominators can form a nominator pool, staking DOT into the pool, and then collectively nominating a selected set of validators as a single nominator. Members of the pool share rewards and penalties according to their staking share. Currently, running a nominator pool requires 200 DOT.

4. Join the Nomination Pool: This is the simplest staking method, requiring no choice of validators; you only need 1 DOT to join the nomination pool and receive staking rewards.

From the perspective of staking thresholds, Polkadot offers more native staking options than Ethereum, requiring a minimum of only 1 DOT to participate, and some staking methods do not require technical knowledge. Whether in terms of capital requirements or technical requirements, Polkadot's staking participation threshold is lower, which is beneficial for attracting more people to participate in staking, thereby increasing the decentralization and security of the network.

Liquidity Staking

Due to the lock-up period in staking, 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 fund liquidity, thereby improving capital utilization.

After users stake their tokens into the liquid staking protocol, they can obtain corresponding liquid derivative tokens. These derivatives 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, making the two profit channels of staking and participating in DeFi no longer in conflict, but rather complementary. Therefore, it is a very important track.

Due to the fact that the native staking funds of Ethereum cannot currently be withdrawn, the liquidity staking rate of Ethereum is very high. In the first quarter of 2023, 44% of all staked ETH was done through liquidity staking. The TVL of Ethereum's liquidity staking has reached 10 billion USD, which is a huge market. A certain platform occupies an absolute dominant position in the Ethereum liquidity 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 the Ethereum liquid staking market, the TVL distribution of liquid staking products in the Polkadot ecosystem is relatively even. The TVL of a certain platform on Moonbeam is $16.71 million, the TVL of another platform's liquid staking is $14.14 million, the TVL of another platform is $12.10 million, and the TVL of yet another platform's liquid staking 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 liquid staking adoption rate of Polkadot is quite low, indicating that there is still significant growth potential in the Polkadot ecosystem's liquid staking market. Additionally, liquid staking products developed based on Polkadot parachains have some unique advantages, such as ease of cross-chain integration.

Overall, the popularity of liquid staking in Ethereum is very high, while the popularity of liquid staking in the Polkadot ecosystem is relatively low; the liquid staking market in Ethereum is dominated by one player, while there are no particularly advantageous 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, withdrawal function will be available after 27 hours | 28 days | | Stake Threshold | 32 Ether | Minimum 1 DOT | | Liquidity Staking | Large market size, one dominant player | Small market size, relatively dispersed |

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