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RPL Overview

RPL is the native token of the Rocket Pool protocol. The token has multiple use cases within the ecosystem, including serving as a form of collateral for node operators and as a governance token for the protocol. Node operators use RPL to vote on protocol governance. Additionally, RPL acts as insurance for stakers in the event of penalties or slashing by validators, as established above. These features give RPL a unique value add as a license to collect commissions, vote on governance, and serve as collateral in case of severe loss. 

In order to participate in the protocol, node operators are also required to put a minimum of 10% of their ETH stake in RPL tokens to act as secondary insurance. A vote was recently passed, which capped the maximum effective stake at 150% of the node operator's ETH stake, putting a lower bound on the value of RPL tokens. The more rETH that is staked in the protocol, the higher the RPL price is expected to be. This will be discussed further in the rETH section.

The RPL token itself has a ~$750 million market cap as of Q1 2023. This is spread across a fully realized circulating and max supply of 19,113,413 RPL tokens. Thus, the fully diluted valuation equals the market spot price for RPL. The token has been averaging around $15 million in trading volume daily and has fluctuated around a $38 price per token in January 2023. Although most tokens on the market are well below their all-time highs following the 2022 bear market contraction, RPL is ~33% below its all-time high of ~$60 on November 9th, 2021. 

RPL Initial Distribution

The RPL token distribution was primarily conducted between a pre-sale on September 22, 2017, and a crowdsale on January 4, 2018. The tokenomics model is similar to an insurance collateral model, with the value of RPL tokens tied to the usage of the protocol. The exact breakdown of token distribution is seen below via Messari:

Source

The token is also subject to a 5% annual inflation rate (75,000 RPL per month), with 70% of the new tokens distributed to node operators staking RPL, 15% distributed to oDAO members for oracle data, and 15% distributed to the pDAO Treasury. Thus, the maximum supply of 19,113,413 tokens is expected to appreciate to 25.5 million by December 2027. This is demonstrated graphically below:

Source Source

Security/Vulnerabilities

To best understand the potential issues and vulnerabilities associated with Rocket Pool, it is essential to be knowledgeable in the underlying risk within liquid staking derivatives themselves.

Liquid staking derivatives, like Rocket Pool, are protocols that pool capital to increase profits in the staking process. If LSDs exceed critical consensus thresholds, however, they can induce significant risks to Ethereum and the capital allocated. LSD protocols are at risk of cartelization and can lead to centralized control, reduced upgradability, and other protocol risks. This is arguably one of the greatest risks associated with Ethereum PoS as liquid staking providers continue to represent a risky percentage of the total ETH staked.

The question of who becomes a node operator remains a crucial issue subject to debate. The primary risk of LSDs is when the governance token (e.g., RPL) becomes the deciding factor in who is a node operator, which can lead to self-reinforcing centralization and abuse of the Ethereum protocol. Alternatively, an economic and reputation-based node operator selection process may result in an automated cartelization. Kicking out node operators based on profitability may be the only trustless method, but it is not without issues, as profitability comparisons can be skewed by node operators using destructive techniques.

Although more abstract, the issue of potential cartelization leading to high amounts of centralization on Ethereum mainnet cannot be underestimated. This is where Rocket Pool’s value proposition begins to shine through. Governance on Rocket Pool is not perfect, but it offers drastic improvements in decentralization over its competitors, Lido Finance and Coinbase. Specifically for node operators, there is the possibility of seeing their stake slashed should they conduct malicious behavior, resulting in the loss of funds. This is in place to discourage malpractice and collusion, which could result in a higher degree of centralization on the network.

Audits

Rocket Pool has gone through multiple audits, outlined below.

• Consensys Audit released April 2021
• Sigma Prime Audit released May 2021
• Trail Of Bits Audit released September 9 2021
• Sigma Prime Audit released November 2021
• Consensys Audit- Atlas (v1.2) released January 2023

The review was conducted pre-Merge on the smart contract upgrades proposed by Rocket Pool in anticipation of Ethereum PoS. The review focused on the security aspects of the Solidity implementation of the smart contracts and included automated testing with Mythril, Slither, and Surya. A total of 12 issues were identified, with 1 high, 2 medium, 4 low, and 5 informational. The issues include insufficient input validation, improper access control, inaccurate priority fee distribution, and others. The identified vulnerabilities have been resolved or are currently being addressed by the project team.

Technical Risks

Chainlink, utilized by Rocket Pool, employs Volume-Weighted Asset Pricing (VWAP) to generate its aggregated market price. A substantial portion of rETH volume is transacted on Uniswap, despite it being one of the smallest pools by Total Value Locked (TVL). This scenario, where a higher price weighting is placed on a low liquidity exchange, could potentially increase the susceptibility of the Uniswap market to manipulation. Furthermore, rETH's dependence on Chainlink's 2% price deviation trigger for price updates could introduce risks, particularly during periods of extreme market volatility. In such situations, the necessity for immediate price updates may not be met, thereby posing potential challenges.

These factors lead us to consider certain associated vulnerabilities. One such vulnerability is the potential for bad debt. If the price feed were manipulated, it could lead to the creation of bad debt within the protocol. The accuracy of price feeds is crucial to lending protocols to maintain correct collateralization ratios. Any manipulation could result in the accumulation of bad debt.

Another risk is the possibility of faulty liquidation. If an oracle were manipulated to significantly lower the collateral asset price, it could trigger improper liquidations. Such an event could lead to substantial financial losses for users and disrupt the normal functioning of the lending protocol. These vulnerabilities underscore the importance of robust and reliable mechanisms in managing and mitigating risks in the dynamic and complex world of cryptocurrency.

Competitive Disadvantages

• Lido's stETH remains the clear leader in the LSD ecosystem due to its deep liquidity and DeFi integrations (Curve, Aave, and others). First-mover advantages and market entrenchment make it tough for others to compete.
• Frax's sfrxETH delivers the best yield among all ETH LSDs 
• Coinbase's cbETH has the advantage of Coinbase’s millions of users. cbETH is attractive to crypto noobies and institutional investors that prefer to trust Coinbase. 

Rocket Pool is the third largest Liquid Staking Derivative (LSD) protocol, but it faces competition from cbETH (Coinbase's custodial LSD) and stETH (Lido's LSD). Rocket Pool's emphasis on node operator diversification is in stark contrast to Lido's position. Lido controls ~32% of all staked ETH with just 29 node operators, compared to Rocket Pool's <5% of staked ETH operated by 2,000+ individual node operators. 

Rocket Pool’s primary disadvantage, especially when compared to competitors, revolves around capital inefficiency. Because the protocol requires ~8 ETH for node operator collateral, this disadvantages a staker who could otherwise repurpose (stake) that ETH. Capital efficiency has been a primary driver for the substantial growth that stETH and cbETH have both seen in their respective LSDs. This is because these LSDs can be minted 1:1 for the underlying ETH deposit. Rocket Pool is taking steps via LEDB8, to lower capital requirements. Capital inefficiencies have been a major hurdle prohibiting faster growth in attracting new validators to Rocket Pool.

Implementing Scalability Solutions

Node operator deficiencies have kept the deposit pool capped at 5,000 ETH for Mini-pool creations. To improve scalability appropriately, Rocket Pool is looking towards two upcoming solutions: Atlas (LEDB8s) and SaaS. LEDB8s within the Atlas upgrade reduce capital requirements from 16 ETH to 8 ETH, while Staking-as-a-Service (SaaS) introduces reductions in both ETH and RPL custody requirements for node operators to begin with. Together, both of these solutions reduce the barriers to entry for becoming a node operator and starting a Mini-pool drastically on Rocket Pool. This, in theory, should help the protocol scale its node operator growth dramatically and help it gain traction within the LSD market.

Can RPL Serve as Reliable Collateral?

Rocket Pool (RPL) has a value accrual mechanism that is comparatively weaker than that of Lido. The reason behind this is that Rocket Pool distributes 100% of its commissions to its node operators and funds its operations through the emission of its RPL tokens. This strategy, while not being the most fiscally sound, does make Rocket Pool a highly attractive alternative for validators as it offers a higher yield.

However, if the value of RPL were to drop significantly due to high inflationary rewards and insufficient value accrual, it would necessitate node operators to continuously purchase RPL in order to meet their collateral requirements. This could prove to be capital inefficient and the resulting losses in RPL might erode the confidence in the system, deterring potential node operators from participating. The utilization of an unyielding token, RPL, arguably diminishes Rocket Pool's efficiency. Analyzing the potential yields of a Rocket Pool node operator when the protocol stabilizes shows a return of approximately ~1.1x the yield for solo staking. However, a hypothetical competitor, using similar commission structures but opting for rETH as collateral instead of RPL, could offer a yield that's ~1.2x, vastly outperforming Rocket Pool.

Rocket Pool's approach to liquid staking has undeniably introduced an innovative method of creating synergy between depositors and node operators. However, like all decentralized protocols, it isn't devoid of challenges. The future sustainability and success of Rocket Pool will hinge on its adaptability, its ability to address these challenges, and the competitive landscape of the decentralized finance sector.