Dappnode's Smooth Initiative

Enhancing Solo Staking Rewards

Introduction

The Ethereum ecosystem faces a challenge in the distribution of Maximal Extractable Value (MEV). MEV refers to the additional value that validators can gain by strategically ordering transactions within a block. This system tends to benefit large staking pools and centralized exchanges more than individual, or solo stakers. Because these large entities operate many validators, they are more likely to capture "lottery blocks," which are rare blocks with higher MEV rewards. Solo stakers, proposing fewer blocks, have fewer opportunities to obtain these high-value blocks.

Dappnode initiated the Smooth project to address the centralizing effect of Maximal Extractable Value (MEV) on solo stakers, ensuring individual blockchain validators can earn fair rewards and compete with larger groups that currently benefit more from MEV.

Challenges for Solo Stakers

MEV tends to favor large pools and centralized exchanges due to their higher chances of capturing "lottery blocks" with substantial rewards. For example, Lido Ecosystem pools ETH from many individual holders to stake collectively on the Ethereum blockchain, allowing users who might not meet the minimum requirements individually to participate in staking.

To address this imbalance, Dappnode created a smoothing pool for solo stakers. This pool allows them to combine rewards, gaining access to lottery blocks similar to large pools. The aim is to elevate solo stakers' rewards from median to higher averages that include lottery rewards, thus promoting a more decentralized network.

Technical Architecture of Smooth

Smooth employs a smart contract system where validators configure their settings to direct earned fees to the Smooth contract. This setup ensures rewards are automatically managed by Smooth without compromising validator control.

Reward Management

Smooth collects rewards, which include transaction fees and MEV-related bribes, from validators when they propose blocks on the Ethereum blockchain. These rewards are earned by the validators from the block builders. To manage these rewards, Smooth utilizes Merkle trees, a method that organizes and summarizes data about validators' activities. An Oracle, a trusted information source, processes this data and generates a concise summary known as a Merkle Root. This Merkle Root contains the summarized rewards and penalties distribution of the smoothing pool and is securely stored on the Ethereum blockchain.

Subscription and Reward Sources

To subscribe to Smooth, validators must have an ETH1 (Ethereum Mainnet) withdrawal address; those with BLS (a cryptographic address used by Ethereum 2.0 validators for secure operations) withdrawal addresses must update to an ETH1 address before subscribing.

Smooth provides two subscription options: automatic subscription and manual subscription, facilitating immediate participation in the reward pooling process.

Smooth's sources of rewards include block proposal rewards, generated by validators within the pool when they successfully propose a block and send the block reward to Smooth's address, and donations, which are rewards sent by supporters and accepted only in ETH.

More detailed information is available on Smooth Docs.

Rules for Reward Withdrawal

Participants, such as validators or miners, must propose a block of transactions to the blockchain network before they can withdraw rewards. Proposing a block involves validating and adding new transactions, which helps secure the network.

When a participant proposes a block, they earn rewards based on the transactions in that block. Participants in the smoothing pool accumulate rewards for every block that each member contributes to the pool. However, they can only withdraw these rewards up to the point of their latest block proposal. This ensures they contribute to the network before accessing their earned rewards.

Penalties are enforced to maintain these rules. This system promotes active participation and prevents participants from withdrawing rewards without contributing to the network's security through block proposals.

ENS DAO x Smooth by Dappnode

The ENS DAO awarded Dappnode's Smooth initiative a 25k USDC grant, which significantly accelerated Smooth's development. This grant enabled Dappnode to collect and present crucial data essential for promoting the liquidity pool. The funding supported two key developments:

1. Smooth Alerts Bot: Notifies users about important blocks, improving pool visibility and user engagement.

2. Stats Dashboard: Offers comprehensive performance data on Smooth, aiding users in making informed decisions.

About ENS DAO Grants

The Large Grants opportunity from the Public Goods Working Group awards up to 50k USDC to applicable Ethereum or Web3 Public Goods. This grant aims to provide significant funding to foundational public goods in the Ethereum or Web3 ecosystems. Foundational public goods are those with exceptional usefulness or a proven record of impact for users or developers.

To learn more, visit the ENS DAO Governance Forum and follow ENS DAO for updates on the next Large Grants opportunity.