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Okay, now let’s dive into today's topics. This is what we have for you today:

• 💡Staking Deep-Dive: A Comparative Analysis of Cardano, Ethereum, and Tezos

• 💎 Gem of the Week

TL;DR

• Cardano offers risk-free staking rewards without slashing, while Ethereum and Tezos have slashing mechanisms to penalize non-compliant validators.

• Cardano and Tezos support native liquid staking, offering greater accessibility and flexibility for users, while Ethereum requires third-party solutions which provide derivatives for staking ETH to create something similar to liquid staking.

• Minimum token requirements for validator nodes: No minimum for Cardano, 32 ETH for Ethereum, 6,000 XTZ for Tezos;

• Cardano has a far better MAV (27) than both Ethereum (4) and tezos (7)

Staking Deep-Dive: A Comparative Analysis of Cardano, Ethereum, and Tezos

In this issue, we'll explore staking on Cardano, Ethereum, and Tezos, comparing their processes, rewards, and risks. We'll touch on native liquid staking and how it benefits users, as well as look into Ethereum's Distributed Validator Technology for improved staking and decentralization.

Get ready for an exciting and insightful read into the world of staking!

Let’s dive in👇

What is PoS?

Proof-of-Stake (PoS) is a component of a consensus mechanism designed to protect decentralized networks from Sybil attacks, where a single entity attempts to control a blockchain network by creating multiple accounts or nodes.

For example, Cardano utilizes the Ouroboros consensus algorithm based on the longest-chain rule and PoS Sybil resistance mechanism, while Tezos uses the Tenderbake BFT consensus algorithm and PoS Sybil resistance mechanism.

In contrast, Bitcoin employs the Nakamoto consensus algorithm, which relies on the longest chain rule and the Proof-of-Work (PoW) Sybil resistance mechanism.

Due to the limitations and high energy consumption of PoW, Ethereum has transitioned from PoW to PoS.

What is Staking?

The core purpose of staking is to synchronize the financial incentives of individuals with the requirements of decentralized networks. By offering monetary rewards to participants who contribute positively to the network, staking promotes network security and decentralization.

A key component of ensuring security in a decentralized network is achieving a high degree of decentralization, as greater decentralization results in enhanced network security. This entails distributing decision-making authority across a large number of participants to maintain a robust network.

Optimally, a network should feature numerous block producers, and the methods by which each blockchain facilitates staking or stake delegation significantly influence the decentralization these platforms achieve.

We are attempting to examine the distinct characteristics of staking on these various platforms and put that into perspective. With this context, let us delve deeper into the staking processes of Ethereum, Cardano, and Tezos.

1. Minimum token requirements to run validator nodes:

Cardano:

• There is no minimum token requirement for running a stake pool. However, a stake pool operator needs to have a refundable deposit of 500 ADA to register the pool, which was around 196 USD at the time of writing this article.

Ethereum:

• To become a validator node, one needs to stake a minimum of 32 ETH. That is around 60000 USD at the time of writing this article.

Tezos:

• A minimum of 6,000 XTZ (known as a roll) is required to become a validator node (baker) in Tezos. That is around 6000 USD at the time of writing this article

2. Delegation at a protocol level and minimum requirements for delegation:

Cardano:

• Delegation is supported at the protocol level.

• A minimum of 2 ADA is required as a refundable deposit, along with a 0.17 ADA transaction fee.

Ethereum:

• Delegation is not supported at the protocol level.

• Running a validator node with a minimum of 32 ETH is the only way to participate in the network directly.

Tezos:

• Delegation is supported at the protocol level.

• There is no minimum requirement for delegation. But this is at the discretion of the Bakers/Validators.

• Bakers have the discretion to establish a minimum delegation amount for their services, which can potentially limit the range of customers they cater to. Some bakers may accept delegations as low as 1 XTZ, while others may require a minimum of 1,000 XTZ.

3. Risk of slashing

Slashing is a security mechanism employed in some PoS blockchain networks to penalize validators for misbehavior or non-compliance with the protocol rules.

Slashing involves confiscating or reducing a validator's staked assets if they are found to be acting maliciously, attempting to attack the network, or failing to validate transactions correctly.

This punitive measure should ensure the security and stability of a network. But slashing is a point of contention among blockchain researchers as there is not yet a mathematical model that proves the need of slashing.

Cardano:

Unlike other blockchains, such as Ethereum or Tezos, there is no risk of slashing on Cardano.

The staking reward you get is a “risk-free rate” other than the risk of holding a volatile crypto asset.

Ethereum:

Ethereum employs slashing. Slashing on Ethereum can indeed occur due to two types of violations: attestation violations and proposal violations. Attestation violations involve validators signing conflicting attestations, while proposal violations occur when a validator proposes multiple blocks for the same slot.

Since the launch of the Beacon Chain on December 1, 2020, there have been 226 validators slashed, which represents just 0.04% of the total validator set.

Tezos:

Tezos also enforces slashing penalties for non-compliant validators. If a validator fails to reveal its nonce by cycle end, it forfeits endorsing rewards. Validators engaging in double signing, such as double baking or double endorsing, face slashing of a portion of their frozen deposit.

4. Minimum Tokens delegated/staked to produce consistent rewards

This is not a straightforward metric. But it’s important to calculate the number of tokens required to produce consistent rewards for the validators and delegators.

Because participation in PoS blockchains is all about incentives. Especially for blockchains that enable delegations, consistent rewards for delegators

Cardano:

The Cardano staking reward is approximately 3.5% for a delegator. From what we have seen, getting consistent rewards has played a role in the delegation choices of Cardano delegators.

A stake pool requires a delegation of around 1.5 million to 2 million ADA to guarantee involvement in block production for each epoch.

The current price of 1 ADA at $0.39 USD amounts to approximately $585,000 to $780,000 USD to secure consistent block production and rewards.

Ethereum:

Ethereum validators, who stake 32 ETH (equivalent to $60,000), earn daily rewards of approximately 0.003 ETH through attestations alone. Assuming these numbers are accurate, validators can expect an annual percentage return (APR) of 3.6% without considering block rewards.

However, it's important to note that there is a risk of slashing, which could lead to penalties for validators if they behave maliciously or fail to follow the protocol correctly.

Tezos:

The Tezos staking reward is approximately 6.3%. Tezos bakers are also paid for voting on blocks, similar to Ethereum validators. Therefore, once a validator/baker has at least one roll (6,000 tez), they can earn some income from that in addition to any rewards from blocks they manage to create.

Like Ethereum, Tezos also has a risk of slashing. But this is a very rare event.

Note:

Attestations in Ethereum are comparable to voting in Tezos. As a validator/baker, these activities provide a basic regular income. Additional income sources include block creation, transaction fees, and tips. This income is related to the validator's role in the BFT consensus model.

In the longest chain consensus model, such as Ouroboros, income depends solely on block production since there's no voting involved. However, a notable advantage of this model is the absence of slashing penalties.

5. Locking period for delegation:

Cardano:

• No locking period for delegation.

Ethereum:

• No delegation allowed. Withdrawal functionality was enabled as part of the Shanghai/Capella upgrade on April 12, 2023.

• When a validator is scheduled to propose the next block, it is required to build a withdrawal queue of up to 16 eligible withdrawals. So depending upon the queue, you will have a very variable time for ETH withdrawal.

Tezos:

• No locking period for delegation.

6. Native liquid staking/protocol-based liquid staking:

Cardano:

• Native liquid staking is supported, allowing users to stake ADA without lockup periods or minimum coin requirements.

Ethereum:

• Native liquid staking is not supported. Third-party solutions like Lido Finance facilitate liquid staking by providing stETH tokens to users.

Tezos:

• Native liquid staking is supported, as users can delegate XTZ without lockup periods or minimum requirements.

Frequency of reward distribution and reward compounding

Cardano:

Every five days and Cardano staking rewards are compounded automatically.

Ethereum:

Rewards are distributed for Ethereum stakers every 24 hours.

Ethereum staking rewards are not compounded automatically.

Tezos:

Every 2.8 days. Tezos staking rewards are compounded automatically.

7. 3rd party derivative staking:

Cardano:

• Third-party derivative staking is not required due to native liquid staking support, but users can opt for it to receive additional rewards from DeFi services.

Ethereum:

• Third-party derivative staking is necessary for users who want to stake less than 32 ETH or access their staked funds in a liquid form.

• This particular restriction has created a level of centralization for Ethereum.

Tezos:

• Third-party derivative staking is not required due to native liquid staking support. However, users can opt for it to receive additional rewards from DeFi services.

The Status Quo of Staking

1. Staking Ratio: The staking ratio refers to the proportion of actively staked tokens in a proof-of-stake network. It indicates the level of participation and network security.

2. Staking market cap: Staking market cap refers to the total value of cryptocurrency tokens that are currently being staked in a proof-of-stake network.

3. Minimum attack vector (MAV): The minimum attack vector refers to the smallest group of participants required to gain control and manipulate the network. One can significantly disrupt the network by controlling more than 51% of the generated blocks.

Cardano:

• Staking ratio: 63.54%

• Staking market cap: $8,322,370,214

• MAV: 27

Ethereum:

• Staking ratio: 15.04%

• Staking market cap: $33,115,985,559

• MAV: 4 (LIDO, Coinbase, Kraken, and Binance control more than 51% of the staked ETH)

Tezos:

• Staking ratio: 72.56%

• Staking market cap: $614,636,794

• MAV: 7 (Tezos Foundation: 14.84%, Coinbase Custody 14.03%, Everstake: 6.16%, Binance: 4.89%, Stakefish: 4.67%, POS Dog: 3.88%, and Kraken: 2.88%, control more than 51% of the staked XTZ)

The Status quo of decentralization based on staking metrics

Cardano:

• High.

• Why? Due to the relatively high staking ratio (63.54) and MAV (27)

Ethereum:

• Low.

• Why? Due to the relatively low staking ratio (15%) and MAV (4)

Tezos:

• Moderate.

• Why? Very high staking ratio (72.56%) but relatively low MAV (7), where Tezos foundation bakers hold the biggest amount of stake

That's it for this week. See you next Sunday!

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