An overview to Ethereum staking rewards

The Merge was one of the most anticipated events last year. The main purpose of The Merge is to transition Ethereum from its proof-of-work (PoW) consensus mechanism to proof-of-stake (PoS).

In the PoS model, the network is secured by validators who have to stake ETH in order to validate the network.

The transition to PoS was done gradually with Ethereum first launching the Beacon Chain in December 2020. The Beacon Chain ran in parallel with the Ethereum mainnet and both chains were unified during the Merge, transforming the Ethereum mainnet into the Execution Layer (EL), and the Beacon chain into the Consensus layer (CL).

The PoW network ceased to exist after the Merge, transferring responsibilities of block proposing and consensus reaching from miners to validators.

The transition to PoS has lowered the barrier to secure the Ethereum network and partake as a Consensus participant. However, despite making it easier for people to partake in securing Ethereum, staking Ethereum can still be capital-intensive as stakers are required to stake 32 ETH. This has led to the emergence of a compelling and lasting concept known as liquid staking. Liquid staking allows users to stake ETH while maintaining accessibility and liquidity. In return for providing these services, liquid staking providers charge a commission for their services.

In this blog post, we aim to shed light on the reward structure in both the CL and EL layers of Ethereum. We will dive into the details to gain a better understanding of the underlying yield associated with staking ETH.

     A. Consensus Layer Rewards:

The CL is responsible for achieving agreement among network participants. On Ethereum, this means that at least 66% of participants must agree on the global state of the network. Rewards are distributed to validators for their participation in the Ethereum Proof-of-Stake consensus protocol, which involves proposing and validating blocks, voting for their view of the chain's head, and participating in sync committees.

Let's break down the types of rewards in the consensus layer:

1. Block Proposal Reward:Validators receive rewards for proposing a block. In each slot, a single validator is randomly selected as the "block proposer." Rewards can potentially include whistleblowing rewards.

2. Attestation Reward:Validators are rewarded for submitting attestations. The reward depends on the base reward and the inclusion delay. Attestations represent a validator's vote on the chain's state. Every epoch (approximately 6.4 minutes), a validator proposes an attestation that includes the most recent justified block and the first block of the current epoch. By compiling this information from participating validators, the network reaches consensus on the Ethereum blockchain's state.

3. Sync Committee Reward:A sync committee consists of 512 validators. Every 27 hours (256 epochs), the Ethereum network randomly assigns 512 validators to a sync committee. Validators in the committee receive significantly higher rewards for serving light clients.

An important characteristic of consensus layer rewards is that they decrease as more validators join and increase when validators exit. These rewards remain constant regardless of network traffic volume.

     B. Execution Layer Rewards:

Ethereum's EL handles transaction processing, smart contract execution, and the maintenance of the blockchain's state.
Execution layer rewards are generated through transaction processing and smart contract execution. These rewards consist of transaction priority fees paid by users, who initiate transactions or interact with smart contracts, as well as Maximal Extractable Value (MEV) searchers.

Let's break down the types of execution layer rewards:

1. Transaction Priority Tips:These rewards are payments made by users to incentivize validators to process their transactions faster and include them in a block.

2. MEV (Maximal Extractable Value):Validators have the option to build blocks locally or utilize software known as MEV-Boost to sell block space to block builders. Block builders optimize rewards by including, excluding, and changing the order of transactions in a block.

Unlike consensus layer rewards, execution layer rewards fluctuate based on network traffic volume. During periods of high network activity, more priority tips are included, and additional MEV opportunities arise.

In the coming days we will have a look at how the fees are structured across the different LSTs issuer and the yield associated with each protocol.