With the Ethereum merge just around the corner a lot of people are wondering what is Rocket Pool and how can I use it to earn a staking yield?
Rocket Pool is Ethereum’s most decentralized staking service and it’s an easy way for ETH investors to earn yield even if they don’t know how to set up their own staking node.
In this article we’ll explain how Rocket Pool works, whether using an Ethereum staking pool is worth the risk, how to buy rETH, and compare Rocket Pool vs Lido to see which is one of the best staking pools in the Ethereum ecosystem.
What is Rocket Pool?
Rocket Pool is a decentralized Ethereum staking pool. Most other staking services, like Coinbase, Lido, Binance, etc. use a small number of centralized validators to stake client deposits. Rocket Pool takes a different approach. Here’s how the protocol works.
- A node operator (the person or business running the staking node) commits 16 ETH to the Rocket Pool protocol. The node operator must also deposit a predetermined amount of the RPL token as collateral. If the node operator makes a mistake that leads to slashing, the RPL is sold to pay off losses.
- Individuals deposit their ETH into the Rocket Pool deposit pool. Anyone can deposit their ETH into the pool (Rocket Pool is permissionless), and there are no size limits. Deposits can be just 0.1 ETH, 16 ETH or anywhere in-between.
- Once there is sufficient ETH in the deposit pool, 16 ETH is taken from the pool and paired with the node operator’s 16 ETH. The combined 32 ETH is then staked to the beacon chain by the node operator.
Charlie Munger is famous for having said, “show me the incentive and I’ll show you the outcome.” Well in this case, the node operator is incentivized to do a good job staking because they have 16 of their own ETH on the line.
Why would a node operator use Rocket Pool instead of just running their own node? There are several good reasons why this Ethereum staking pool is better than solo staking.
- An investor might have the technical expertise to run a node, but lack the 32 ETH necessary to stake on their own. With Rocket Pool, an investor “only” needs 16 ETH to run a staking node.
- Rocket Pool node operators earn additional income as compensation for running the node. That revenue varies from 5 to 20% and can be calculated on Rocket Pool’s website.
- Access to a smoothing pool is also highly desirable for many small-time node operators. The technicalities of smoothing pools are beyond the scope of this article, except to say that they provide more predictable returns.
Interested in using Rocket Pool? Here are three ways to participate in the best ETH staking pool.
How rETH works
One common problem in the Ethereum ecosystem is that people don’t understand how rETH works, and thus don’t know how to buy rETH. Here’s a 101 primer for anyone new to using Rocket Pool’s Ethereum staking pool.
The Rocket Pool staking pool consists of all the Ethereum locked up on the beacon chain, and all the accrued staking rewards. The rewards earned by node operators get deposited into the staking pool. rETH, which is minted whenever someone deposits ETH into Rocket Pool, is simply a claim on those assets (the deposited ETH combined with staking rewards).
On the day that Rocket Pool launched, 1 rETH was equal to exactly 1 ETH. Imagine that Rocket Pool started with 10 validators each staking 32 ETH (a total of 320 ETH). Each validator received 32 rETH, which is equal in value to 10% of the pool. Over time, as the staking rewards accumulate, the value of the pool grows.
Once withdrawals go live, sometime in 2023, investors will be able to redeem rETH for ETH. For now, the only way for rETH holders to redeem their tokens is to trade rETH for ETH on an exchange like Uniswap.
At a 5% staking yield, after one year the pool will be worth 336 ETH. Meanwhile, the 32 rETH that each validator is holding is still a claim on 10% of the pool, and is now worth 33.6 ETH.
Due to staking yields, the value of rETH/ETH grows over time. The only thing an investor needs to do to earn staking yields is to hold rETH. Whether they mint the rETH via the Rocket Pool application, or they buy rETH from a decentralized exchange, it’s all the same.
The rETH tax advantage
One of rETH’s key advantages is that in some jurisdictions it’s taxed preferentially. This is not tax advice and every country is different, please do your own research. That being said, in many countries a long-term asset is taxed at a lower rate. If that’s the case where you live, you may be able to hold rETH for a year so that your staking rewards are taxed as capital gains rather than income.
This is different from a protocol like Lido, which distributes rewards on a daily basis.
Option 1: Learn how to buy rETH
The fastest way to get rETH is to buy it on a decentralized exchange. Here’s how to buy rETH on Uniswap.
2) Click on MetaMask
3) Click on “Select a token” and then find rETH using the search box. You may need to import rETH onto Uniswap if you’ve never traded the token before. Simply click the “Import” button and follow the directions
4) Enter the amount of ETH you want to trade for rETH and click “Swap”
5) Approve the transaction in MetaMask or the Exodus browser wallet and the rETH should show up in your account as soon as the transaction confirms
rETH is not pegged to ETH so it’s always best to check the price on multiple exchanges, and to check the price against minting new rETH on Rocket Pool. Depending on market conditions, rETH might trade at a premium or a discount on a decentralized exchange.
Option 2: Stake your ETH with a node operator
If you don’t want to buy rETH on a decentralized exchange you can deposit your ETH into the Rocket Pool protocol and mint your own rETH. The process is quite simple.
Make sure you’re logged into Ethereum-ready browser extension wallet and then navigate to: https://stake.rocketpool.net. Click on “Connect Wallet” at the bottom of the page and give your Web3 wallet permission to access the protocol.
Once you have your wallet connected you can choose how much ETH you want to stake, and then click “Stake.” Approve the transaction and that’s it! If rETH does not instantly show up in your wallet, don’t worry. Sometimes there may be a delay.
A full guide to staking with Rocket Pool is available here, including information on how to manually add the rETH token contract to your wallet before you can see your balance.
Option 3: Run your own node
Technically proficient ETH investors can run their own Rocket Pool node. A great guide to setting up a node is available here.
Rocket Pool provides its own proprietary software which makes it easier to run a node versus solo staking. However, node operators still need to have a high level of technical proficiency, the correct hardware and an excellent internet connection to manage an Ethereum staking pool.
Rocket Pool vs Lido - which is best?
Rocket Pool is currently Ethereum’s best decentralized staking service. Lido is more popular than Rocket Pool, however, all deposits are validated by a few dozen validators and there is a lot of concern about centralization.
Although there are always risks when you use a blockchain protocol, Rocket Pool has been audited numerous times and is one of Ethereum’s most secure projects.
According to RocketScan there are already more than 1,300 validators on Rocket Pool and that number is growing fast. If you care about decentralization, rETH is a great way to earn a staking yield on Ethereum while supporting the core principles that blockchains are built on.
For those reasons it seems that Rocket Pool is currently a better bet than Lido for Ethereum staking.
How to buy Ethereum
You can buy Ethereum (ETH) in Exodus using a credit / debit card, bank account, or Apple Pay. For a simple, step-by-step guide on how to buy cryptocurrency in Exodus using Ramp network, head to our knowledge base.
Exodus hosts over 200 different crypto assets, and you can buy Ethereum (ETH) with Bitcoin and other cryptocurrencies within Exodus by either using the built-in exchange app, or by linking your Exodus wallet with the FTX exchange.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.