Hotcoin Research | Who is the King of Staking Returns? A Review and Comparison of ETH and BTC Staking Protocols and Their Returns

ETH and BTC, as the two giants of the cryptocurrency market, play a crucial role in the blockchain space with their staking and restaking mechanisms. Staking and restaking not only provide holders with additional income avenues but also actively promote the security and decentralization of blockchain networks.

I. Background of Staking and Restaking

Ethereum PoS Mechanism and Staking

Ethereum 2.0 introduces the Proof of Stake (PoS) mechanism, replacing the original Proof of Work (PoW) mechanism. PoS selects validators by staking ETH, enabling block validation and production.

• Staking Requirement: To become a validator, one must stake at least 32 ETH.
• Validator Responsibilities: Validators are responsible for verifying transactions, proposing new blocks, participating in the consensus mechanism, and ensuring the network operates smoothly.
• Staking Rewards: Validators earn rewards based on the amount of ETH staked and the completion of their validation work.
• Penalty Mechanism: If a validator behaves improperly or goes offline, they will be penalized, and their staked ETH may be partially or fully deducted.

The Rise of Restaking

Although ETH staking brings numerous benefits to network security and participants, its single income model limits the maximization of capital utilization. Against this backdrop, the concept of restaking emerged. Restaking allows already staked ETH or liquid staking tokens (LST) to maintain their original staking status while participating in staking activities of other PoS networks or public chains to earn additional income. This innovative model not only improves capital utilization efficiency but also promotes interoperability between different blockchain networks.

II. LSD Track and ETH Staking Returns

ETH staking refers to the act of depositing 32 ETH to activate validator software. Validators are responsible for storing data, processing transactions, and adding new blocks to the blockchain to maintain node operation and protect network security. Validators earn additional income through staking ETH, with rewards coming from transaction fees paid by users on the execution layer network and the issuance of native tokens on the consensus layer network. According to data from the Ethereum official website, the current annualized return for direct ETH staking is 3.3%.

To meet market demand for ETH liquidity and lower the staking threshold, the LSD track emerged. LSD protocols issue tokens pegged to staked ETH (such as Lido's stETH), allowing users to enjoy staking rewards while using the tokens for other DeFi applications, greatly enhancing asset utilization efficiency.

Characteristics of the LSD Track

• High Liquidity: LSD projects allow users to participate in various DeFi activities such as lending and trading without unlocking the original ETH.
• Security Assurance: The value of the tokens is closely pegged to the original ETH, ensuring the safety of user assets.
• Additional Income: By participating in LSD projects, users can earn additional income from the liquidity process of the tokens, in addition to staking rewards.

Representative Projects: Lido and Rocket Pool

Lido: As a leading project in the LSD field, Lido provides users with convenient and efficient staking services through its innovative staking mechanism. Lido ETH stakers will receive 90% of the staking rewards, with 10% distributed between operators and the DAO treasury managed by LDO token holders. Users simply deposit ETH into the Lido smart contract to receive an equivalent amount of stETH tokens and participate in various DeFi activities. Lido's success lies not only in its efficient staking services but also in introducing new liquidity solutions to the entire Ethereum ecosystem. According to DefiLlama data, as of June 27, the stETH APY is 2.97%.

Rocket Pool: Similar to Lido, Rocket Pool is also a popular LSD project. This project employs a unique decentralized validation node network, allowing users to participate in network validation by staking ETH and earning corresponding rewards. Rocket Pool emphasizes decentralization and security, providing users with a trustworthy staking platform. According to DefiLlama data, as of June 27, the rETH APY is 3.11%.

III. LRD Track and ETH Restaking Returns

Restaking refers to the process of re-staking already staked tokens to earn more rewards. In the Ethereum ecosystem, restaking is particularly active, driven by users' pursuit of maximizing asset returns. Traditional staking mechanisms only allow users to earn rewards from the main node validation activities of the network, while restaking provides users with an additional income source by re-staking their staked tokens to other blockchain projects that require extra security, allowing them to earn additional rewards.

EigenLayer: Pioneer of Restaking Protocols

EigenLayer, as the proposer and leader of the restaking concept, provides secure and efficient node validation services for other blockchain protocols and applications through its node service solution (AVS) and liquidity restaking services. EigenLayer's innovation lies in commodifying the staking security of Ethereum and achieving flexible circulation and efficient utilization of staked assets through smart contract mechanisms.

Around the EigenLayer platform, a series of restaking protocols based on liquid staking tokens (LST) have emerged, such as Renzo and Ether.fi. When users deposit ETH or LST into projects that support LRT, these projects will deposit these assets into EigenLayer, allowing them to earn corresponding points and token airdrops from EigenLayer, as well as their own points and airdrop rewards from these projects. In short, this is a dual mining strategy: investors earn points from EigenLayer while also gaining additional airdrop rewards from the participating projects.

Overview of EigenLayer and Its Ecosystem Projects

As a leading project in the restaking track, EigenLayer attracts a large number of users by providing an innovative restaking mechanism. In the EigenLayer ecosystem, projects such as Etherfi, Renzo, Puffer, KelpDAO, Swell Network, and Pendle are all built on the restaking services of EigenLayer.

Etherfi: Etherfi is a protocol that integrates staking and automatic restaking functions, allowing users to participate in restaking and earn additional income by depositing eETH. Etherfi also offers a variety of DeFi integration options, enabling users to manage their assets more flexibly. According to DefiLlama data, as of June 27, the weETH APY is 2.42%.

Renzo: Renzo is a comprehensive restaking protocol that supports the restaking of various tokens, including ETH and stETH, to earn ezETH tokens. Through Renzo, users can easily restake their assets to EigenLayer or other supported blockchain projects to earn additional rewards.

Puffer: Puffer is a protocol specifically designed for liquidity restaking, accepting mainstream large-cap liquid staking tokens (LST) and restaking them on EigenLayer to earn more rewards. Puffer also offers a unique points system to incentivize users to actively participate in restaking activities.

KelpDAO: KelpDAO is a liquidity restaking protocol based on EigenLayer, built by members of the multi-chain liquid staking platform Stader Labs. Users can stake ETH and various LST assets on the KelpDAO platform to earn LRT tokens and enjoy additional rewards. According to DefiLlama data, as of June 27, the rsETH APY is 1.67%.

Swell Network: Swell Network is an innovative restaking platform that introduces the LRT token rswETH, allowing users to participate in DeFi activities on the Swell L2 network while maintaining their staking status, further increasing returns. According to DefiLlama data, as of June 27, the swETH APY is 3.22%.

Pendle: Pendle is a DeFi platform focused on yield maximization and liquidity optimization, which collaborates with restaking protocols like EigenLayer to provide users with a new investment strategy. Users can utilize LRT tokens on the Pendle platform to participate in various high-yield investment portfolios, maximizing asset utilization.

IV. New Opportunities for BTC Staking Returns

In the past, Bitcoin holders wanting to participate in DeFi or other new financial protocols typically needed to enter the Ethereum ecosystem through bridging tokens like wBTC. However, as the BTC ecosystem receives unprecedented attention, more and more teams are beginning to develop and stake related services, providing new income opportunities for BTC holders.

In recent years, some innovative projects, such as Babylon and BounceBit, have implemented Bitcoin staking mechanisms through special designs. These designs primarily utilize Bitcoin scripts and cryptographic games to ensure the safety of honest stakers' assets. For example, Babylon introduces "extractable one-time signatures" technology, ensuring that the same private key can only sign once, preventing double-spending and other attacks, thus ensuring the safety of staked assets.

In the BTC staking ecosystem, stakers can earn returns through various methods. First, participating in PoS validation of projects can yield security rewards. Additionally, some projects like BounceBit offer opportunities to participate in centralized exchange trading activities through on-chain asset mirroring technology, thereby earning CeFi rewards. In the future, with the development of on-chain DeFi, stakers are expected to receive more DeFi rewards.

In addition to the aforementioned projects, others like B² Network, Merlin Chain, and StakeStone are also exploring BTC staking return models. These projects typically employ layer two technologies like ZK-Rollup to enhance transaction efficiency and scalability. By staking BTC on these platforms, users can receive future tokens from the projects as rewards, making this staking method more akin to a "airdrop mining" strategy for token generation and distribution.

V. Comparison of ETH and BTC Staking Return Methods

ETH staking typically involves participating in network validation and earning block rewards and transaction fees, with return methods including:

• Direct Staking Returns: ETH holders can choose to stake their assets to support the secure operation of the Ethereum network. In return, stakers can earn a certain percentage of annualized returns, usually between 3% and 6%, depending on the amount staked and the duration.
• Restaking Returns: Restaking allows ETH stakers to re-stake their earned rewards, further enhancing capital efficiency and returns. For example, through platforms like EigenLayer, users can restake their staked stETH to earn additional token rewards and points.
• DeFi Building Blocks: This strategy involves performing multiple operations within the DeFi ecosystem to obtain more returns. For instance, users can stake ETH through Lido to obtain stETH, then provide liquidity with stETH and ETH together, or reinvest on other DEX platforms or restake on lending protocols to earn lending returns.

In contrast to ETH staking, BTC staking relies more on the reward mechanisms of specific platforms or projects. Additionally, since Bitcoin itself does not support smart contracts, its staking mechanism may need to be implemented through specific technical means.

• Cross-Chain Staking Returns: With the development of cross-chain technology, Bitcoin can be staked on other chains through cross-chain bridging technology, thus participating in the staking returns of those chains.
• Additional Tokens and Airdrop Rewards: Some projects offer additional staking rewards to attract Bitcoin holders to participate. These rewards may include project points or native token airdrop rewards.
• Transaction Fee Sharing: Some staking protocols distribute a portion of the transaction fees in the network to stakers based on a certain ratio. For example, on Merlin Chain, users can receive part of the transaction fees as staking rewards.

Ethereum's staking provides diverse income avenues, including direct returns from ETH staking, additional token rewards and points from ETH restaking, mining rewards from DeFi protocols, transaction fees, and yield stacking; whereas Bitcoin primarily relies on project reward returns.

VI. Opportunities, Risks, and Recommendations for ETH and BTC Staking

Opportunities in Participating in ETH and BTC Staking

1. Stable Returns: Staking has become a new, relatively low-risk way to profit, allowing users to earn stable annualized returns by staking ETH and BTC.
2. Value Storage and Appreciation: As leaders in the cryptocurrency market, BTC and ETH have high potential for value storage and appreciation. Through staking, users can earn additional income while continuing to hold their tokens.
3. Network Security Maintenance: Staking ETH and BTC not only aims to earn returns but also helps maintain the security and stability of the network, thus earning corresponding rewards.
4. Ecosystem Participation: The tokens generated from staking and restaking create more DeFi application opportunities, contributing to the development of more network ecosystem applications.

Risks in Participating in ETH and BTC Staking

1. Node Malfeasance Risk: Although the PoS mechanism employs penalty measures, the possibility of node malfeasance still exists, which may threaten network security and stakers' returns.
2. Smart Contract Risk: Staking and DeFi participation involve smart contracts, which may have vulnerabilities that could lead to fund losses or other security issues.
3. Liquidity Risk: Staked ETH and BTC cannot be freely moved during the contract period. If the market experiences severe fluctuations, stakers may be unable to withdraw ETH and BTC in time to mitigate risks.
4. Credit Risk: The IOUs involved in restaking may be restaked across multiple projects, triggering a chain reaction of credit risks.

Staking Strategy Recommendations

In light of the numerous ETH staking protocols and the emerging concept of restaking, investors should consider multiple factors when making decisions. Here are some suggested investment strategies:

1. Diversified Investment: Investors can choose to invest in multiple staking protocols to spread risk. By investing across different protocols, they can balance returns and risks.
2. Understand Project Background: When selecting staking protocols, it is essential to understand the project's background, team strength, and market reputation. Choosing projects with strong teams can help reduce investment risks.
3. Carefully Assess Returns and Risks: Investors should carefully evaluate the returns and risks of each staking protocol before investing. Making informed investment decisions by comparing the APY, sources of returns, and risk factors of different protocols is crucial.
4. Stay Informed on Market Dynamics: The cryptocurrency market changes rapidly, and investors should closely monitor market dynamics to adjust their investment strategies in a timely manner.

Whether it is ETH staking or BTC staking, there are certain opportunities and risks involved. Users should fully understand the relevant knowledge and market dynamics when participating in these activities, carefully assess risks, and make decisions based on their risk tolerance and investment goals. Additionally, to mitigate risks, users should continuously monitor market dynamics and project developments, adjusting strategies promptly to address potential risks and challenges.