Understanding the Staking Ecosystem

A comprehensive overview of the staking ecosystem on Ethereum.

The Resiliency of Ethereum

Our focus is firmly on the resilience of Ethereum (ETH) and its security.
Centralized services have shown their vulnerability to government regulations, which raises questions about the resilience of liquid staking DeFi (LSTfi) protocols. In response to the pressures of SEC filings, Coinbase, one of the leading cryptocurrency platforms, has been the largest withdrawer of staked capital recently. Yet, this presents an exciting opportunity for others to step in, further decentralizing the staking ecosystem.
Despite the negative sentiment, the amount of ETH staked and the number of validators continues to trend upwards, with over 20 million ETH staked and more than 700,000 validators. This growth is enhancing Ethereum's security and resilience.
At Ion Protocol, we are extremely bullish on the future of Ethereum and its staking potential. Our mission is to unlock validator staked capital. By partnering with up-and-coming liquid staking and re-staking providers, we empower anyone who holds these positions to access additional liquidity and capital efficiency.
Our approach deviates from traditional loan underwriting methodologies. Instead, we input our own novel approach to analyzing the risks underlying validator-backed assets. This enables us to circumvent the technical overhead associated with different staking positions by underwriting validator risk profiles. Thus, reducing the risk for users in our system while they utilize their staked assets in an already resilient network.

The Shift from PoW to PoS

Consensus mechanisms serve as the bedrock of any crypto network. They are designed to ensure network safety, provide transaction validity, and facilitate coordination among network participants for state transitions. Ethereum's consensus protocol aims to make the blockchain more expensive to destroy or disrupt than to use or maintain.
Ethereum's transition from PoW to PoS solved three significant problems:
  1. 1.
    PoS offers more security for the same cost than PoW.
  2. 2.
    Malicious actors on the network are easier to disincentivize.
  3. 3.
    It’s easier to encourage decentralization.
We believe in the inherent value of security and are building for the future, making re-staked value composable with on-chain markets. By participating in Ion, holders of any validator-backed asset can participate in DeFi without sacrificing composability.

Deposits and Withdrawals in Ethereum Proof of Stake

As mentioned above, Ethereum has transitioned from PoW to PoS, which provides an effective security mechanism for the blockchain. In PoS, stakers are required to deposit 32 ETH to become a validator, and these validators are randomly assigned as proposers (responsible for producing blocks) or attestors (responsible for submitting attestations).
Validator balances increase due to deposits and rewards and decrease due to withdrawals and penalties. Ethereum has also transitioned from a monolithic blockchain to a modular one, comprising the consensus layer (CL) and the execution layer (EL). These two layers communicate through the Engine API.
Deposits and withdrawals play a crucial role in Ethereum's consensus layer. They ensure that the blockchain operates smoothly and securely. Here's how these mechanisms work:


In Ethereum's PoS, there are two types of deposits:
  1. 1.
    Initial deposits, used to create a validator
  2. 2.
    Top-up deposits, required when a validator balance falls below the maximum effective balance.
A user deposits to the Ethereum Deposit Contract (EDC), and this transaction is verified by the consensus layer. This deposit mechanism is quite straightforward.


Unlike deposits, withdrawals are a more recent development that require a closer look. There are two types of withdrawals:
  1. 1.
    Partial withdrawals: If a validator's balance exceeds 32 ETH, the excess is transferred to the execution layer (EL). This happens automatically and allows the validator to continue their responsibilities.
  2. 2.
    Full withdrawals: If you exit from the validator set, all your ETH is transferred to the EL. This action has to be done manually and it involves unlocking the entire validator balance, effectively causing the validator to stop participating in the beacon chain.
The withdrawal mechanism enhances the resiliency of the Ethereum network while allowing stakers to claim their rewards and exit the network at their own will. The introduction of withdrawals was initially met with skepticism. However, Ethereum has proven its robustness in securing the network and significantly de-risking ETH staking. As a result, the network has seen a significant increase in the number of validators.
By facilitating validator diversity, capital flow, and composability, the withdrawal mechanism enhances Ethereum's security and versatility. These attributes align with Ion's features, particularly the diversity in supported collateral types, integration of reward distribution, and validator risk underwriting.
In essence, this mechanism enables Ion Protocol to unlock the value of validator staked capital.

Liquid Staking x DeFi

Liquid Staking DeFi, also referred to as LSTfi, is a rapidly evolving sector within the broader decentralized finance ecosystem.
LSDeFi protocols build innovative financial instruments on Liquid Staking Tokens (LSTs). This strategy is designed to boost capital efficiency, diversify provider incentives, and expand access to yield strategies. As a result, LSTfi has become a major trendsetter in the cryptocurrency domain.
LSTs have sparked a revolution in the staking landscape by democratizing access to staking, preserving on-chain liquidity, and enabling more interoperability between validator-backed assets. This growth has been amplified by the entrance of new liquid staking providers like Frax Finance, Swell Protocol, and more.
However, the introduction of LSTs and the strategic flexibility they provide for validator collateral are not without risks. These include slashing risks, LST pricing risks, smart contract risks, and validator infrastructure risks.
We are adopting a risk-first approach to support these LSTs and the diverse strategies associated with them as collateral. We have devised a unique method for quantifying risk within our collateral vaults and isolating risk exposure for users on a provider-by-provider basis.
Our approach enables us to build innovative primitives for a new asset class entering the ecosystem: re-staking positions. Protocols like EigenLayer and Blockswap Team are developing platforms for re-staking validator capital, and within Ion, users can utilize these re-staking positions as collateral.

Staking Mechanisms: Rewards, Penalties, and Slashings

To understand slashing, we first have to comprehend the reasons behind the existence of rewards and penalties for validators. Validators stake their claim in Ethereum's security, pledging to follow certain rules. This commitment invites rewards if rules are followed and penalties if violated, serving as the basis for providing security via proof of stake.
The two pillars that underpin the PoS consensus on Ethereum are safety and liveness. Safety ensures no conflicting blocks in the canonical chain, while liveness guarantees the chain grows plausibly and probabilistically without interruption.
These principles led to the creation of Gasper, a fusion of Casper FFG, a finality tool, and LMD GHOST, a fork-choice rule.
Validators are expected to perform certain predetermined actions that allow them to contribute to the network’s consensus:
  • Attesting for a source, target checkpoint, and head block
  • Signing off on blocks in the sync committees
  • Proposing blocks
The most common and rewarding duty is attestation, while sync committee and proposer duties are assigned randomly. Each duty has respective weights reflecting their importance within the protocol.
To measure time in Ethereum's consensus protocol, epochs made of 32 slots are used. Active validators must attest once per epoch. Their rewards are distributed in a weighted manner according to their performance concerning specific duties in the form of newly minted $ETH.
Epochs are made of 32 slots
1 slot = 12 secs
1 epoch = 6 mins 24 secs
Bad behavior doesn't go unpunished. The beacon chain disincentivizes inappropriate behavior through penalties and slashing. Validators can be penalized for missed votes, equal to their potential reward. Slashing, however, is an irreversible punishment for validators who make attestations or proposals that contradict Gasper's consensus rules. It deducts a percentage of the offender's stake, leading to a steady loss of $ETH over time.
Certain conditions can lead to slashing, including:
  • Proposing and signing two different blocks for the same slot
  • Attesting to a block that "surrounds" another one
  • "Double voting" by attesting to two candidates for the same block
A slashing penalty comprises an:
initial slashing penalty upon confirming a slash-able condition and a collusion-based penalty experienced halfway through the withdrawal period.
At Ion, we view the validator's effective balance as the standard of health for a validator. If a validator's balance decreases due to slashing, their health declines too. A slashed validator impacts the health of the entire validator set since they're forcibly exited from the beacon chain.
Although the risk of slashing is generally low, we anticipate the complexity of validator risk profiles to increase as more liquid staking and re-staking providers join the market. At Ion, we're gearing up for this future, striving to create an ecosystem with a variety of providers and re-staking platforms to increase options and decentralization for stakers across the ecosystem.