Ethereum

Time factors

Lifecycle

  • The waiting and unbonding periods include an activation and exit queue. The queues throttle the number of validators that can enter and exit each epoch using max(4,active validators/65536)max(4, \text{active validators}/65536). For example, if there are 400,000 active validators, 6 validators can be activated and 6 validators can exit each epoch.

  • When a staker submits a staking transaction, ETH moves from the EL to the CL. When unstaked, ETH moves back from the CL to the EL.

  • EL rewards are distributed to the fee recipient address (on EL) and CL rewards are distributed to the withdrawal address (on EL).

Must know before staking

  • Ethereum has two layers that work together.

    • Execution layer (EL): This is where smart contracts are deployed and everyday transactions occur.

    • Consensus layer (CL): This is where validators propose and vote on new blocks.

  • When a staker submits a staking transaction, ETH moves from the EL to the CL. When unstaked, ETH moves back from the CL to the EL.

  • The protocol requires a 32 ETH stake to begin. Liquid staking protocols bypass this requirement by using smart contracts to pool smaller amounts.

  • EL rewards are distributed to the fee recipient address and CL rewards are distributed to the withdrawal address.

Advanced topics

General

  • Key partition. Staking on Ethereum involves two keys.

    • Withdrawal key: This key to this address will be set to whatever address that a staker wants their rewards to be distributed to. Stakers must safely keep this key at all times.

    • Signing key: This key performs all the responsibilities of a validator such as proposing blocks and voting on blocks. It can initiate unstaking transactions and also designate the fee recipient address, which is where EL rewards are distributed to.

Rewards

  • A portion of the rewards come from new token issuance, and the other portion comes from network users.

    1. CL rewards: New ETH is issued on the CL for validators performing proposer, attester, and sync committee responsibilities correctly.

      1. Proposer: proposing a new block to the chain

      2. Attester: voting on the canonical blocks

      3. Sync committee: helping light clients sync with the protocol

    2. EL rewards, priority transaction fees: Base fees paid by all transactions get burned. However, some transactions may include a priority fee which goes directly to block proposers, incentivizing quicker inclusion. To learn more about transaction fees, please read EIP-1559.

    3. EL rewards, MEV share: MEV searchers pay a portion of the extracted MEV to block proposing validators.

  • EL rewards are distributed to the fee recipient address and CL rewards are distributed to the withdrawal address.

  • Factors that impact realized rewards.

    • Validators performance.

      • Proposing blocks entitles validators to MEV share and priority fees. The opportunity to propose a new block is 1/N1/N where NN is the total number of active validators. Missing out on proposing a block means missing out on earning EL rewards.

      • There are three types of attestations that help finalize Ethereum blocks. Each validator is allotted a slot each epoch within which they must submit their attestations. Delayed attestations or missing attestations entirely will result in decreased CL rewards.

    • Network conditions. Depending on the available MEV opportunity and overall gas fees, EL rewards could vary drastically for each block.

    • Commissions. Third party operators (validator-as-a-service) will have their separate fee schedules that are enforced off chain. Liquid staking protocols will enforce fee schedules through smart contracts.

Risks

  • Slashing. A validator will be considered malicious if it proposes two blocks for the same slot or attests on two blocks at the same height. The offending validator will be automatically forced to exit the active validator set. Unlike the typical exit queue, the offending validator will go through an unbonding period of 8,192 epochs (36 days), throughout which their stake will be deducted. The stake amount slashed will increase depending on how many other validators were also slashed in a similar time frame. Theoretically, all 32 ETH can be taken away in a slashing event.

  • Penalties. A validator that misses any of its attestation duties will incur a small penalty. While the penalty amount is small, theoretically, 16 ETH is the maximum number of stake that could be penalized. Validators are forced to exit if their stake drops below 16 ETH.

  • Inactivity leak. If the network cannot finalize for 4 consecutive epochs due to offline validators, the protocol will enter into an inactivity leak. In this scenario, the protocol will start decreasing offline validators’ stake until either 1) offline validators come back online and epochs start finalizing again or 2) offline validators’ stake drop below 33% of active stake, letting the network to start finalizing again.

  • Signing key. The signing key has the authority to exit a validator and to set the destination of EL rewards.

Validators

  • One validator requires a 32 ETH stake.

  • If a validator’s stake drops below 16 ETH, the protocol will forcefully exit the validator.

  • Additional ETH can be staked to a validator if it has a stake balance below 32 ETH.

Resources

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