Ether.fi: The Largest Liquid Restaking Protocol
By April 2024, Ether.fi's Total Value Locked (TVL) has soared to $3.2 billion, placing it at the forefront of restaking protocols ahead of competitors like Renzo, Puffer Finance, and ten others.
Ether.fi is an Ethereum delegated staking protocol, allowing users to reap rewards for participating in the Ethereum consensus without the need for technical or financial capabilities to run their validator node. This approach expands opportunities within the crypto community and boosts the efficiency of ETH.
*EigenLayer is the pioneering and, as of March 2024, the largest restaking protocol. This innovative model permits the dual use of ETH for enhancing the security of the Ethereum mainnet as well as for engaging in other services.
Such a structure ensures the security of validator keys during ownership transfers within the ether.fi protocol by using two NFTs:
When exiting staking, these NFTs are destroyed, and the staked ETH is returned to the staker.
Moreover, eETH holders can contribute liquidity to DeFi protocols such as Balancer, Maverick, Gravita, Pendle, and Aura. They achieve this by converting eETH to weETH on the ether.fi platform.
Ether.fi innovates on this by directly incorporating LST into the EigenLayer contract, eliminating the 7-day wait for fund withdrawal. If there's sufficient ETH in liquidity pools, the conversion from eETH happens immediately. A shortage of liquidity triggers the unstaking process from the validator node with the oldest T-NFT.
To solve this, your friend provides an open lock (the public key) that locks automatically, keeping the unlocking key (the private key). After locking the letter with the lock, only your friend can access it using their key, ensuring its security from external access.
Users contribute ETH to Ether.fi for initiating validator nodes. A unique validator key is generated for every 32 ETH contributed, essential for engaging in consensus activities like block proposal, voting, and transaction inclusion. Nonetheless, centralization risks emerge if a limited number of operators hold all keys.
To create an Ether.fan NFT, a minimum of 0.1 ETH (around $350) must be staked. Each additional deposit generates a new NFT, with no cap on the number users can hold.
While the Ether.fi Foundation will implement the decisions made by the DAO, it commits to transparency in its operations, subject to the scrutiny of ETHFI holders.
Core contributors and investors will be eligible to use their ETHFI tokens one year following the launch. The entire supply of the asset will be fully available on the market by summer 2028.
A noteworthy future addition to Ether.fi's suite of services is Cash. This innovative product is designed to allow real-world expenditures and loans using one's Ether.fi balance as collateral. Cash is anticipated to introduce a dedicated wallet and a credit card feature.
The project's team proudly acknowledges drawing inspiration from projects like Lido and RocketPool among other liquid staking protocols, expressing gratitude for their invaluable lessons.
Yet, ether.fi sets itself apart from the competition with two key distinctions:
- Ether.fi users maintain control over their validator keys.
- The protocol integrates with EigenLayer* by default.
*EigenLayer is the pioneering and, as of March 2024, the largest restaking protocol. This innovative model permits the dual use of ETH for enhancing the security of the Ethereum mainnet as well as for engaging in other services.
For a deeper understanding of Ether.fi and its unique solutions, we encourage you to read our detailed article on restaking.
Delegated Staking
Ether.fi introduces several staking modalities, with delegated staking being one notable option. This model is accessible for users whose stakes are in multiples of 32 ETH—the minimum required to participate in Ethereum's Proof of Stake (PoS) system, such as 32 ETH, 64 ETH, 96 ETH, and so forth.
In this arrangement, two roles are pivotal: the node operator and the staker. The former applies for the capability to act as a validator, while the latter contributes to the stake, triggering an auction to select the node operator. This process leads to the creation of a vault and two types of NFTs (a transferable T-NFT and a soulbound B-NFT), essential for withdrawing funds from this vault. The T-NFT authorizes the withdrawal of 30 ETH, whereas the B-NFT covers the remaining 2 ETH.
The Ether.fi Delegated Staking Process. Source: etherfi.gitbook.io
The B-NFT acts as a safeguard against slashing (penalties applied to validators for misconduct), mandating its holder to oversee the validator's operations. This added responsibility rewards B-NFT owners with an income 50% higher than that of T-NFT holders.
Ownership of a B-NFT grants the holder control over the validator keys and the responsibility for staking fund withdrawals. While T-NFT owners can initiate an unstaking request, the ultimate decision lies with the B-NFT holder. Disagreement leads to slashing on the B-NFT.
Such a structure ensures the security of validator keys during ownership transfers within the ether.fi protocol by using two NFTs:
- T-NFT, transferable or sellable to another user;
- B-NFT, permanently attached to the stake's owner.
When exiting staking, these NFTs are destroyed, and the staked ETH is returned to the staker.
Liquid (Re)Staking
As of April 2024, acquiring 32 ETH would cost approximately $112,000—a sum not readily available to every staker. To address this, Ether.fi launched liquid staking, enabling staking of any ETH amount.
Liquid Staking Illustrated by Lido. Source: finoa.io
In November 2023, ether.fi introduced liquid staking, reducing the minimum stake to just 0.01 ETH. This move allows users to stake any amount of ETH, receiving in return LST eETH (Ether.fi's synthetic tokens for liquid staking), thereby democratizing access to staking benefits.
eETH holders reap multiple rewards:
- Yields from ETH staking in the Ethereum mainnet;
- Returns from restaking and EigenLayer loyalty points;
- Ether.fi loyalty points.
Moreover, eETH holders can contribute liquidity to DeFi protocols such as Balancer, Maverick, Gravita, Pendle, and Aura. They achieve this by converting eETH to weETH on the ether.fi platform.
In the standard liquid restaking model, participants lock their LST tokens (like stETH, rETH, swETH) in EigenLayer's restaking contracts. This method boosts ETH's use efficiency but comes with limitations:
- Restaked assets are not exchangeable or usable in DeFi protocols;
- Exiting restaking to revert to the original liquid staking tokens (LST) takes 7 days;
- The conversion period from LST back to ETH varies by protocol.
Ether.fi innovates on this by directly incorporating LST into the EigenLayer contract, eliminating the 7-day wait for fund withdrawal. If there's sufficient ETH in liquidity pools, the conversion from eETH happens immediately. A shortage of liquidity triggers the unstaking process from the validator node with the oldest T-NFT.
Your Keys, Your Coins
For node operators to initiate a validator node and engage in Ethereum's consensus, they must securely obtain staker's keys. Compromising these keys could subject the validator node to slashing and financial repercussions.
Ether.fi employs the Elliptic Curve Integrated Encryption Scheme (ECIES) for secure key exchange, using a set of keys—a private and a public key—for encryption processes.
Transferring Keys from the Staker to the Validator Node. Source: etherfi.gitbook.io
Before entering an auction (which assigns the node operator's right to become a validator), operators must generate and register a key pair: one private and one public. Stakers then encrypt the validator key with the operator's public key.
This process turns the validator key into a secured message, only decipherable by the matching private key.
This technical explanation may appear daunting. Let's demystify the interaction between private and public keys using a relatable analogy:
- You need to securely send a letter (the validator key) without third-party access;
- If you place the letter in a mailbox and send it directly, it's accessible to others.
To solve this, your friend provides an open lock (the public key) that locks automatically, keeping the unlocking key (the private key). After locking the letter with the lock, only your friend can access it using their key, ensuring its security from external access.
Operation Solo Staker
As of March 2024, around 5,500 nodes are actively participating in Ethereum's consensus mechanism. Half of these nodes are based in the USA, with a distribution that sees 50% spread across the country and the remaining concentrated in a data center in Virginia, notably close to the White House and CIA headquarters.
Ether.fi critiques this setup for its lack of genuine decentralization. Thus, the project team promotes the initiation of individual stakers, highlighting the benefits such as:
- Decentralization: Ether.fi's staking pool divides stakes among various operators, diminishing the centralization risk.
- No Need for ETH Deposits: Individuals eager to join the Ethereum consensus mechanism can leverage Ether.fi's protocol funds.
- Yield Opportunities: Participants of Operation Solo Staker earn rewards for contributing to the operation of Ethereum.
Users contribute ETH to Ether.fi for initiating validator nodes. A unique validator key is generated for every 32 ETH contributed, essential for engaging in consensus activities like block proposal, voting, and transaction inclusion. Nonetheless, centralization risks emerge if a limited number of operators hold all keys.
To counteract potential centralization, Ether.fi implements Distributed Validator Technology (DVT). This approach divides a single validator key among multiple home stakers—validators with minimal hardware requirements, often just 4–8 GB RAM and 2 TB SSD—thereby lowering operational costs and decentralization risks.
Solo Node vs. Distributed Validator Technology. Source: substack.com
Ether.fi supplies the ETH, software, and technical support, with participants only needing to provide the hardware and internet connectivity for Operation Solo Staker.
Ether.fan NFTs
Ether.fan allows participants to stake ETH and, in return, receive a unique fan NFT. These NFT owners gain loyalty points and are likely poised for higher rewards in upcoming airdrops. In the first airdrop, participants were awarded 430 ETHFI each.
Distinguishing itself from standard ether.fi staking, Ether.fan rewards users with points, while traditional staking awards the LST token, eETH.
Each Ether.fan NFT is distinct, characterized by:
- Traits: Including physical attributes like eyes, hair, and skin, alongside intangible qualities such as charisma, strength, and agility. The rarity and traits are randomly assigned at the NFT's minting.
- Flair: Correlates with the staked ETH amount.
- Membership Tier: Tied to how long ETH is staked; the longer the staking period, the higher the NFT's membership level and the rewards. Membership levels begin at bronze and can ascend to platinum.
To create an Ether.fan NFT, a minimum of 0.1 ETH (around $350) must be staked. Each additional deposit generates a new NFT, with no cap on the number users can hold.
Example of an Ether.fan NFT. Source: ether.fan
Ether.fan NFTs can be upgraded by staking additional ETH (at least 0.01 ETH). The staking amount can be increased by up to 20% monthly. Surpassing this threshold results in a downgrade of the NFT's membership level.
This cap prevents potential exploitation where an individual might stake 0.01 ETH, wait to achieve the platinum level, and increase their stake by 100,000 ETH. Such a scenario could unfairly monopolize loyalty program rewards.
ETHFI: Ether.fi's Governance Token
On March 18, 2024, the Ether.fi Foundation introduced its governance token, ETHFI, with its price ranging between $2.8 and $3 at the time of listing. By April, the maximum price of ETHFI reached $8.66, tripling its initial value.
ETHFI Price Dynamics. Source: dropstab.com
The introduction of ETHFI aims to decentralize the protocol further. The Ether.fi team envisions the platform operating under DAO governance, where the ETHFI token facilitates decisions on:
- The management of Ether.fi's grant program to foster long-term ecosystem growth;
- The determination of economic parameters such as fees, rewards, and profit allocation;
- The selection of software developers for node operation;
- The allocation of treasury funds.
While the Ether.fi Foundation will implement the decisions made by the DAO, it commits to transparency in its operations, subject to the scrutiny of ETHFI holders.
The total ETHFI supply is set at 1 billion tokens, allocated across five main categories:
- 23.26% to Core Contributors: Individuals working on the development of the Ether.fi protocol and its community, with a vesting period of 3 years.
- 27.24% to the DAO Treasury: For ecosystem development initiatives.
- 11% for Airdrops: The first airdrop occurred on March 18 (6% of tokens), with a second anticipated in the summer of 2024 (5% of tokens).
- 6% for Partnerships: Funds allocated for collaboration with other projects, including exchanges and liquidity providers.
- 32.5% to Investors: With significant contributions of $32 million from entities like ConsenSys, OKX Ventures, Maelstrom, among others, with a 2-year vesting schedule.
Core contributors and investors will be eligible to use their ETHFI tokens one year following the launch. The entire supply of the asset will be fully available on the market by summer 2028.
ETHFI Release Schedule. Source: binance.com
ETHFI tokens allocated for the initial airdrop were distributed among stakers, Ether.fan NFT holders, participants in Operation Solo-Staker, and referrers (those who bring in new users). The average distribution was 575 ETHFI, with a median of 175 ETHFI.
What Comes Next for Ether.fi?
Ether.fi, initially established as a liquid staking protocol, has rapidly expanded into an extensive product ecosystem. The project's ambitious goal is to "help onboard the next billion users onto crypto." Therefore, it's plausible to suggest that the current public offerings of Ether.fi represent merely the initial phase of a much larger scheme.
Ether.fi's flagship initiatives include:
- Stake: A solution for Ethereum's liquid restaking using EigenLayer technology;
- Liquid: A dynamic vault that reallocates users' ETH, eETH, or weETH within DeFi protocols to maximize yield.
A noteworthy future addition to Ether.fi's suite of services is Cash. This innovative product is designed to allow real-world expenditures and loans using one's Ether.fi balance as collateral. Cash is anticipated to introduce a dedicated wallet and a credit card feature.
Ether.fi is presently in the midst of its second StakeRank airdrop season, which kicked off in late March and is scheduled to conclude on June 30, 2024. The potential impact of this event on the protocol's popularity and the profitability of subsequent airdrops remains speculative. As such, it's advisable to carefully assess the risks before investing in ETHFI or engaging in staking activities on Ether.fi.
What makes Ether.fi the largest liquid restaking protocol?
Ether.fi stands out as the largest liquid restaking protocol due to its innovative approach and robust infrastructure. It allows users to participate in staking without locking up their assets, providing greater liquidity and flexibility. The protocol’s high security standards and user-friendly interface make it accessible to a broader audience. Furthermore, Ether.fi’s integration with various DeFi platforms enhances its utility and reach. With a significant user base and substantial total value locked (TVL), Ether.fi has solidified its position as a leader in the liquid staking space. Keywords: Ether.fi, largest liquid restaking protocol, staking without locking, DeFi integration, high security standards, user-friendly interface, total value locked (TVL), liquid staking space.
