What Is Rocket Pool?

Staking is an integral component of proof-of-stake (PoS) blockchain, as the name suggests. The process guarantees security to the PoS networks while incentivizing individuals to ensure it runs. 

Using the world's largest PoS blockchain, Ethereum, as an illustration, the peer-to-peer network depends upon the input of some participants who act as its validators. The validators run blockchain nodes along with verifying new blocks for their addition to the Ethereum blockchain. The process necessitates preventing bad actors from camouflaging among the Ethereum validators by obligating would-be participants to lock a portion of Ether (ETH) for their eligibility. 

Ethereum obligates such participants to have a financial stake within the network as proof of their trustworthiness.  In return for locking up Ether and operating nodes, the validators earn staking rewards. Undertaking ETH staking involves a complex process for an individual that, besides technical know-how, requires round-the-clock dedication to an internet-connected computer. Also, the network mandates a locking 32 ETH that translates to a hefty $95,420.16 at the current price, thus becoming a privilege for a few. 

The challenges encountered in navigating the complexity of the Ethereum staking process present ground for the Rocket Pool involvement. As such, Rocket Pool offers an alternative platform for users to independently navigate the technical and cost barriers hindering participation in the Ethereum staking. 

But what is Rocket Pool? This section aims to provide a comprehensive answer to the question by explaining the Rocket Pool ecosystem, mechanism, risks, and unique roles in Ethereum staking. 

Rocket Pool Explained

Rocket Pool involves an open-source, trustless, and yet decentralized platform that enables users to stake Ether (ETH). Since its unveiling in October 2021, Rocket Pool is among the leading liquid staking platform that allows users to preserve their liquidity. 

Rocket Pool mirrors the liquid staking platforms that preserve liquidity by offering the participants liquid staking tokens (LSTs) identified as liquid staking derivatives. The LSTs have their value pegged to the primary asset staked by users. 

Users can utilize the LSTs on the decentralized finance (DeFi) platforms and decentralized apps (dApps) in a similar manner to other tokens. As such, Rocket Pool grants users rETH as its liquid staking token.

Rocket Pool is among the leading staking pools in the Ethereum ecosystem, with 3,714 node operators in 145 regions and over 762,944 ETH staked.

What is The Purpose of Rocket Pool?

Rocket Pool involves a leading open-source protocol yet decentralized and trustless for liquid staking that closely aligns with the Ethereum ethos. The Rocket Pool is now a popular ETH solution for liquid and node staking for several reasons outlined below. 

• Facilitates Staking with Less ETH

Rocket Pool protocol relieves participants from native staking requirements to hold and lock a minimum of 32 Ether (ETH) and run the validating node. Conversely, Rocket Pool lowers the entry barriers as the protocol facilitates staking from a low of 0.01ETH.

Rocket Pool facilitates liquid staking, allowing participants to earn rewards whenever they delegate their ETH to the protocol as the service provider. 

In exchange, the protocol grants the stakers a receipt token (rETH) representing one’s stake whose value accrues over time. Doing so allows Rocket Pool to simplify the staking process to guarantee greater flexibility and control for the stakeholders. 

• Staking Without Running Hardware

Undertaking native staking on Ethereum mandates one to run the node autonomously. The process subjects stakeholders to a resource- and time-intensive process, in addition to the technical challenges. Rocket Pool bridges such requirements by enabling you to stake ETH by purchasing the ERC-20 token, rETH. 

• Eliminates the Need to Lock Up Liquidity

The Rocket Pool guarantees users liquidity by facilitating their utilization of the locked funds. The protocol’s liquid staking mechanism grants users rETH for their staked ETH. The rETH are usable, similar to other ERC-20 tokens within the vast decentralized finance (DeFi) ecosystem.

Rocket Pool yields opportunities for individuals desiring to earn more rewards by becoming the protocol’s node operator by meeting the 8 ETH minimum requirement. Users have tapped the possibility of increased liquidity as the Rocket Pool’s network now has over 3,000 node operators.

Understanding Rocket Pool Mechanism

The Rocket Pool protocol features three main constituents, namely, smart contracts, Smart Node Networks, and Minipool Validators. Each element has critical input towards the Rocket Pool mechanism, as outlined in the below section.

• Smart Contracts

Smart contracts are key constituents of Rocket Pool that undertake a pair of roles within the staking platform. Initially, the smart contracts facilitate acceptance of ETH deposits from participants and later assign them to the node operators. The second role of smart contracts involves issuance and tracking tokens within the Rocket Pool protocol. 

• Smart Node Network

The element involves a decentralized network of Ethereum-based nodes that run the Smart Node software within the Rocket Pool. The nodes specialize in running tailored processes to facilitate communication with the smart contracts and offer network consensus. 

The smart nodes accept individuals to run them autonomously while staking ETH without attracting fees when they satisfy the 8 ETH requirement. The node providers realize additional earnings in Rocket Pool tokens besides the staking rewards.

• Minipool Validators 

The minipool validators involve special smart contracts that perform a specialized role within the Rocket Pool Network. Their function is evident when a node operator initially deposits 8 ETH or 16 ETH on individual nodes. Such occurrence allows the minipool validators to receive a deposit of 24 ETH or 16 ETH from other participants staking on the protocol though not running individual nodes. 

The minipool validator presence guarantees the completeness of the smart contract and accumulates 32 ETH from the node operator and other users. This allows the creation of a new validator on the node involved in performing consensus duties to guarantee staking rewards on the 32 ETH.

Understanding the Rocket Pool Ecosystem

• RPL Token Explained

Rocket Pool Token (RPL) involves a governance token for the protocol, allowing the community to convey their say in the platform’s future and functioning. 

Node operators utilize RPL as the collateral to insure the node. Node operators creating a minipool validator must stake a minimum of 10% of the ETH’s value in the RPL token as insurance. 

Poor performance and misbehavior translate to ETH loss in the network, which can be recoverable by disposing of the RPL collateral. 

The Rocket protocol distributes the RPL governance token as a reward to the node operators on the network. The platform incentivizes RPL staking to 150 times to optimize rewards earned. The Rocket Pool assigns a 5% annual inflation rate on RPL for the protocol to mint. 

• rETH Explained

The Rocket Pool ecosystem utilizes rETH liquid staking tokens granted to users for depositing and staking ETH. The node validators receive rewards accumulated relative to their stake. As earlier indicated, rETH mirrors other blockchain tokens in their usage on decentralized applications. 

• Oracle DAO

Rocket pool features special node operators identified as Oracle DAO that undertake critical administrative duties. Oracle DAO performs roles beyond the smart contracts, particularly creating minipool-oriented validator public keys. 

• Protocol DAO

Protocol DAO facilitates data transfer from the Beacon chain to the execution layer. Besides, they propose, vote for, and implement adjustments to the Rocket Pool. Protocol DAO members earn compensation through a 14% share allocation to the RPL inflation created within the reward period. 

Understanding Risks in Rocket Pool

Rocket Pool's rise to a leading decentralized protocol for ETH staking makes it integral to the Ethereum scene. Nonetheless, the Rocket Pool is vulnerable to several risks outlined below. 

• Smart Contract Risks

Rocket Pool is vulnerable to the risks of smart contracts similar to other protocols that utilize them. As such, the protocol is susceptible to the bugs attributed to aiding breaches and exploits. Despite the Rocket Pool utilizing open-source code, undergoing audits offers no foolproof means. However, the protocol runs a bug bounty program to lower such risks.

• Vulnerability to 51% Attacks 

The lower staking costs in the Rocket Pools mechanism allow users to run nodes using a quarter of ETH required in native staking. The mechanism could incentivize malicious actors to launch a 51% attack in the process, forcing users to incur substantial costs. 

The low staking costs in Rocket Pool water down the security mechanism possible by the 32 ETH minimum requirement for native staking. The Rocket Pool protocol lacks a higher cost than Ethereum users, making it expensive for would-be attackers to control over half of the network’s nodes.  

The lower staking costs ease the pathway for a malicious user or entity staging a 51% attack in their attempts to exercise control over the network for their benefit. 

• Liquidity and Ethereum Network Risk

Rocket Pool’s performance faces market volatility and uncertain demand risks that affect its liquid staking token (rETH) value. Beyond the rETH, Rocket Pool’s performance is vulnerable to the Ethereum native network. 

The occurrence of congestion and gas fee issues within the native network could hamper the Rocket Pool's performance.  

• Governance Risk

Rocket Pool relies upon the OracleDAO members to undertake administrative duties. The reliance on OracleDAO could result in governance risk when such members are compromised to negatively impact the staking protocol or support the implementation of malicious changes. 

• Taxation Risks

Rocket Pool's geographical presence is accessible to users across the globe. The rETH is subject to multiple taxation policies that vary relative to the financial jurisdiction. 

Users are vulnerable to regulatory uncertainty and ambiguity in crypto taxation towards staking rewards. Users should consult with a tax advisor to avoid incurring penalties imposed on unfulfilled tax obligations. 

End Thoughts

Rocket Pool offers an improved user-friendly approach to liquid staking. It delivers an easy-to-use platform to stake your ETH, earn dynamic rewards while helping secure Ethereum. 

The Rocket Pool offers no minimum period to lock up ETH, thus grants the opportunity to unstake at any time. This dynamism makes it a popular choice for users seeking to stake ETH while avoiding the hassle of executing it independently without loss of liquidity.