ETH Staking: Withdrawal Rights Define the Structure

The criteria for comparing Ethereum (ETH) staking products are shifting from annual percentage rate (APR) to withdrawal rights and asset control structures. Analysis indicates that who operates the validator and who holds the withdrawal rights has become the key difference in product selection.

In a contribution to ODaily, imToken explained the difference between non-custodial ETH staking and liquidity staking like Lido as being related to the entity holding the 'withdrawal eligibility proof.' The article pointed out that in a situation where staking yield rates have dropped below 3%, the structure of fund control has become a more important comparison criterion than the accounting yield differences between products.

Ethereum's official documentation distinguishes between validator keys and withdrawal keys. The validator key is an online authority used for block proposals and validation tasks, while the withdrawal key is linked to the fund control authority for withdrawing staked ETH and rewards.

To participate directly as a validator, typically 32 ETH is required. Even if users delegate node operation to external providers, in a non-custodial structure, the provider manages the signing keys necessary for validation tasks, while users retain the withdrawal-related rights.

In this case, the provider's failure or operational issues could lead to reduced rewards or slashing risks. However, this is distinct from a structure where the provider can arbitrarily take the principal. The term non-custodial does not imply that there are no service risks; rather, it means that the focus of risk is on the quality of validator operations rather than on fund theft.

EIP-7002 clarifies this distinction further. The Ethereum Improvement Proposal document describes a mechanism that can trigger validator termination and partial withdrawals through the 0x01 withdrawal eligibility proof of the execution layer. If the operator holding the validator signing key is different from the holder of the withdrawal rights, it allows the fund owner to initiate termination procedures without relying on a third party.

In this structure, the wallet is more of a portal for managing user rights rather than the owner of the staked assets. The wallet assists with deposit execution, address management, signing, and verifying validator status and rewards, but if the non-custodial design is maintained, the wallet service does not immediately hold the user's withdrawal rights.

The Ethereum protocol also plays a separate role. Once ETH is deposited with a validator, it cannot be freely transferred like a regular wallet balance, and activation, termination, queuing, penalties, and final withdrawals follow protocol rules. The documentation states that after Pectra, the 0x02 compound validator can raise the valid balance limit from the existing 32 ETH to a maximum of 2048 ETH, but withdrawals and terminations still adhere to protocol procedures.

Liquidity staking offers a different structure. Lido users deposit ETH and receive stETH in return. stETH can be transferred or utilized in DeFi, providing the advantage of reusing liquidity tied to validators.

However, individual users do not directly hold the withdrawal eligibility proof for specific validators. Lido aggregates ETH from multiple users and allocates it to node operators, and the withdrawal flow of the underlying ETH goes through various components such as the protocol's smart contracts, oracles, and node operators.

Lido's official documentation explains that stETH withdrawal requests are managed in a first-in-first-out queue. When a user requests a withdrawal, an unstETH NFT is issued, and ETH can be claimed after the request is finalized. Users hold the staking share represented by stETH, but they do not directly possess the withdrawal eligibility proof for a specific validator.

Therefore, non-custodial staking and liquidity staking are not simply comparable based on yield rates. The former sacrifices some liquidity to keep withdrawal control at the validator level closer to the user, while the latter offers lower entry barriers and usability but requires withdrawals to go through protocol procedures and queues.

This difference is also significant for domestic ETH holders. Previously, it was reported that the amount of Ethereum staking had increased to 41,723,003 ETH, accounting for 33% of the total supply. In a situation where the staking ratio has increased, not only the simple deposit yield rates but also withdrawal rights, queues, smart contract structures, and node operation risks are mentioned as comparison items.

Liquidity staking promotes the ability to deposit small amounts and utilize DeFi, but the withdrawal queue and smart contract structure must also be considered. stETH holders secure liquidity but go through protocol procedures during the withdrawal process of the underlying ETH.

The non-custodial structure is identified as the key difference in the management of withdrawal rights and participation in validator units of 32 ETH. However, liquidity constraints and validator operation risks remain, meaning that risks do not disappear solely due to the asset control method.

Ultimately, the differences in ETH staking products depend on how rights are divided within the same deposit action. As APR figures become more similar, the starting point for comparison is shifting from 'how much do you receive' to 'who holds the withdrawal rights.'

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