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Overview

Rocket Pool is a decentralized Ethereum staking pool that was created with the purpose of supporting small-scale ETH stakers and promoting decentralization at the Ethereum staking level. Launched in late 2016, it underwent several public betas as “ETH2” was being developed. Rocket Pool's ultimate goal is to become the leading staking infrastructure for Ethereum.

The infrastructure of Rocket Pool consists of three core components: Smart Contracts, Smart Nodes, and Minipool Validators. It also utilizes a dual-token model (RPL and rETH) to align network incentives. The project boasts unique features such as low deposit requirements, deposit safety mechanisms, and MEV smoothing. Deposits can be locked for 6, 9, or 12 months, offering the potential for an annual return of up to ~6.4% in ETH and variable RPL rewards for node operators or approximately ~5% A.P.R. for ETH stakers.

Use Case

Rocket Pool is a permissionless Ethereum proof-of-stake (PoS) staking pool emphasizing decentralization and security for long-term sustainability. To do this, Rocket Pool specifically is seeking to lower both investment requirements (the amount of ETH needed upfront to benefit) and hardware requirements for running a node, opening up the staking pool to a larger number of potential users.

In order to participate in staking in the Ethereum network, individuals must operate validator nodes, which necessitates specific hardware and a bit of technical expertise. In addition to the necessary technical skills, a minimum of 32 ETH must be staked. The unique aspect of Ethereum staking up to Q1 2023 is that there is no way to “un-stake” and recover your staked funds until post-Merge withdrawals are initiated via the Shanghai upgrade. The Ethereum Shanghai update is presently expected to occur in March or April 2023. This will permit stake withdrawals for the first time since 2020, when users began staking their ETH.

Only when Shanghai is successfully implemented will users' staked ETH be unlocked and become accessible. Liquid Staking Derivatives (LSDs) provide a solution/alternative. Those lacking either the technical proficiency to self-stake at home, 32 whole ETH, or want liquidity from their staked tokens can still engage in staking through the utilization of liquid staking protocols. These protocols enable individuals to exchange their ETH for a derivative token representing staked ETH. Rocket Pool is one of the leaders in this nascent space.

Rocket Pool was founded in 2016, assuming that Ethereum would eventually switch from Ethereum PoW to PoS. However, the barriers to entry for running a node on Ethereum PoS are relatively high, requiring 32 ETH and a minimum hardware clock speed of 2.8 gigahertz, effectively limiting the number of possible participants. Many models using the staking-as-a-service (SaaS) model often involve centralization and custodial practices, meaning that users would have to trust their ETH with a centralized entity running the nodes on Ethereum. To counter this, Rocket Pool set out to develop a methodology to reduce these barriers to entry, helping to decentralize access to the benefits of Ethereum PoS.

Rocket Pool implements a dual-token infrastructure around two distinct assets: rETH and RPL. rETH represents the value of ETH combined with staking yields. The other, RPL, is the true native token of Rocket Pool and is bonded by node operators wanting to provide additional security guarantees on top of traditional block validation. Together, these two tokens make up the Rocket Pool ecosystem consisting of stakers and node operators that run primarily through smart contracts, Smart Nodes, and Minipool Validators. 

Primary 

The primary utility of Rocket Pool is to offer users a decentralized Ethereum PoS staking pool, allowing users to participate in staking and earn rewards for securing the Ethereum network without having to sacrifice decentralization. Reducing the capital and hardware requirements needed to participate helps to further decentralize the Ethereum network as a whole as more users are participating in increasing network security. This entire concept is based on the liquid staking derivatives (LSDs), which are tokens issued by custodians such as Rocket Pool to allow users to leverage an ETH-equivalent token in a broader ecosystem while the ETH is staked.

Liquid staking is redefining how incentives are earned for holding and staking assets. Conventional staking requires depositors to lock up an asset for a pre-determined amount of time, meaning that the asset cannot be used for any other purposes while staked. With liquid staking, users can still use their staked assets in other DeFi protocols while still earning rewards. This increases the overall yield while also providing stakers with additional flexibility and control. Decentralized solutions like Rocket Pool, Lido, and others, which enable "liquid" staking, are gaining traction as the space matures. 

Technology

The Rocket Pool protocol caters to both ETH stakers and Ethereum network node operators. The protocol itself utilizes smart contracts to accept and assign ETH deposits to achieve the 32 ETH baseline for running nodes and securing the Ethereum network. This is achieved via the Smart Node Network, a decentralized network of specialized nodes that communicate with Rocket Pool smart contracts to provide network consensus.

Source: Messari

Smart Node Operators (SNOs), Staking Mechanics, and MiniPools

Smart Node Operators (SNOs) are entities that hold the responsibility for actually staking ETH and running validator nodes on behalf of depositors (rETH users). SNOs must hold 16 ETH, making them eligible to become Rocket Pool Minipool Validators. This can consist of individuals or a party of individuals. SNOs provide 16 ETH paired with at least 10% of the ETH value in RPL (1.6 ETH worth), Rocket Pool’s governance token, as a security lock-up. This RPL serves as an insurance or bond to protect other stakers in the event that the SNO's actions result in a penalty or "slashing" on the Ethereum network. Then, the protocol aggregates this value and assigns 16 ETH from user deposits to the Minipool Validator. If a node operator ends staking with less than 16 ETH, their RPL collateral is liquidated for ETH to make depositors whole.  However, if the accumulated staking rewards, node operator ETH, and RPL collateral are insufficient to cover the slashing penalty, rETH will incur socialized losses.

Source: Xangle

For their services, SNOs receive three distinct reward types: RPL rewards, commissions, and staking rewards. SNOs earn 100% of the staking yield on their 16 ETH deposit, plus a 15% commission on the staking yield generated by rETH depositors' 16 ETH deposit. The RPL rewards come from locking up the token in exchange for network security and are paid via Rocket Pool's emissions rate. This will be discussed further in the Economics section. The commission rate is fixed at 15%.

Additionally, RPL rewards can be claimed every 28 days and the rewards vary from SNO to SNO, depending on the total amount of RPL staked among all node operators, which determines the RPL APR and the SNO's RPL collateralization at the node level. This is in addition to the traditional ETH rewards from staking and securing the Ethereum mainnet that each SNO has staked themselves.

Validators on the Ethereum network receive priority fees (fees that are paid by users to incentive faster transaction throughput and settlement times) and have also implemented maximum extractable value (MEV) strategies, which SNOs have the ability to leverage through MEV Boost relays. These priorities were implemented in the Redstone upgrade.

A small(er) portion of node operators serves as "oracle nodes" that offer additional services for the protocol and make up the Oracle DAO, also known as oDAO (discussed more in Governance). This group is in charge of reporting information such as ETH balances and validator status/uptime. The oracle nodes act as a connection between the Beacon Chain and the execution layer (EL) and assist in determining the proper exchange rate of rETH. This is to ensure that node operators maintain sufficient RPL collateral. For the accuracy of the data, a majority of oDAO members must reach an agreement for the outcomes to be considered valid. There were 14 original oracle nodes, but new members can be added by being endorsed by existing ones. Original oDAO members included entities like Etherscan, Bankless, and Consensys, with Coinbase Ventures recently being added as an oDAO member in January 2023. 

Why RocketPool?

The decision to utilize Rocket Pool for pooled staking is well-founded due to its open-source nature, strong community support, and the additional staking rewards it offers beyond standard network returns. Pooled staking solutions like Rocket Pool match stakers with validators, simplifying the setup and maintenance process by providing supplementary software. Rocket Pool stands out for its user-friendly approach, reducing the need for extensive Linux knowledge compared to setting up a validator rig independently. By abstracting complexities and offering guidance through comprehensive guides and active Discord support, Rocket Pool streamlines troubleshooting and problem-solving for node operators, addressing up to 95% of common issues effectively.

Moreover, Rocket Pool's pooled staking model can lead to higher staking rates. Through mini-pools, where a portion of the total 32 ETH is contributed by individual stakers and the rest by liquid stakers, users can earn network yields on their stake while also receiving a 14% commission on the liquid stakers' ETH entrusted for staking. This approach not only enhances staking rewards but also provides a balance between customization and ease of operation, making Rocket Pool a highly recommended choice for those seeking efficient and profitable staking solutions in the Ethereum ecosystem.