What is ether.fi

Project Background

Conventional staking protocols often delegate the withdrawal keys to the project team via multi-signature wallets, while the validation keys are wholly in the hands of the node operators, creating centralization issues. Ether.fi ingeniously integrates key management technology to separately handle withdrawal and validation keys in the staking delegation process, bolstering the security of ETH staking services.

On February 2, 2023, ether.fi secured $5.3 million in funding led by North Island Ventures, Chapter One, and Node Capital, with participation from BitMex co-founder Arthur Hayes. Ether.fi’s official documentation reveals a team of five, including founder Mike Silagadze, who is also the CEO of DeFi investment firm Gadze Finance and founder of Canadian ed-tech platform Top Hat, which raised $130 million in Series E funding in 2021.

The platform’s partners have been officially announced.

Source: https://ether.fi/

Ether.fi is slated to launch in three phases:

• Phase 1: Mainnet launch and ETH delegation staking in April, following an upgrade in Shanghai.
• Phase 2: Launch of eETH liquidity pool in Q2 or Q3 of 2023.
• Phase 3: Launch of permissionless node marketplace in Q4 of 2023 or Q1 of 2024.

Mechanism and Principles

Delegated Staking

Users can directly stake multiples of 32 ETH in ether.fi contracts, triggering an auction mechanism for node operators to bid. The winning operator becomes responsible for the validator’s operation. Once an operator is chosen, the smart contract mints two NFTs representing the staker’s withdrawal rights: T-NFT and B-NFT.

T-NFT is transferable and represents a claim of 30 ETH, while B-NFT is non-transferable and bound to the user’s address, representing a claim of 2 ETH. Since stakers retain control of the validation keys, B-NFT serves as insurance against slashing penalties. Stakers can withdraw the 2 ETH represented by B-NFT only after the validator has exited or ceased operations.

Since T-NFT is tradeable, the holders of T-NFT and B-NFT might not be the same entity. T-NFT holders can send ETH exit requests to corresponding B-NFT holders. If a B-NFT holder declines the exit request, 3% of the 2 ETH is reduced daily. In exchange for additional responsibilities, B-NFT holders receive 50% higher ETH staking reward distribution than T-NFT holders. B-NFT holders are also tasked with monitoring validator node performance and providing deductibles for slashing insurance.

Source: https://ether.fi/

For key management, ether.fi employs ECIES technology, allowing stakers to manage their withdrawal keys and share validation keys with node operators. Node operators must generate ECC key pairs and register their public keys before participating in auctions.

Stakers encrypt the validation keys using the winning node operator’s public key before submitting them to the blockchain. Node operators decrypt the obtained validation keys using their public keys and send the information to the auction management contract, which mints NFTs to the staker’s wallet and transfers the 32 ETH to Ethereum’s official deposit contract. Once the node operator has set up and activated the validation node, the node starts earning rewards.

For cost-efficiency, ether.fi uses off-chain IPFS storage for key exchange. Node operators store their public keys on IPFS, and stakers store their encrypted validation keys there. In the future, ether.fi plans to enhance security and improve user experience through EIP-5630 or shard keys from Distributed Validator Technology (DVT).

Liquidity Pool Staking

At ether.fi, users can stake with less than 32ETH. The liquidity staking pool of ether.fi comprises ETH and T-NFT, where users receive eETH (staking certificates) after staking their ETH. Similarly, T-NFT stakeholders can stake their T-NFTs in the liquidity pool and receive an equal amount of eETH. If liquidity is abundant, holders of eETH can exchange it for ETH in the liquidity pool on a 1:1 basis. If liquidity is insufficient, it will trigger validators to exit the network, thus unlocking more ETH to enter the liquidity pool.

eETH is the liquidity staking derivative token of ether.fi. eETH represents a claim to an equal amount of ETH held in ether.fi’s liquidity pool, or rewards earned in the Ethereum Proof of Stake system. Staking rewards are distributed to eETH holders through the Rebase mechanism, and balances are automatically updated across all addresses. The Rebase mechanism is achieved through shares, where ‘share’ represents an eETH holder’s proportion of the total Ethereum controlled by the ether.fi protocol.

Definitions include:

• TotalPooledEth: Total amount of ETH controlled by the protocol
• Shares[account]: The eETH shares a user’s address
• TotalShares: The total shares of eETH

eETH differs from T-NFT in that T-NFT represents a withdrawal certificate for 30ETH, whereas eETH is a tradable staking certificate that users receive after staking any amount of ETH. Moreover, eETH uses the Rebase mechanism to distribute Ethereum staking profits, meaning that an increase in the number of eETH at a holder’s address represents the profits from Ethereum staking. This setup is similar to stETH; when integrated into DeFi protocols, an encapsulated version of stETH (wstETH) often needs to be used to maintain a constant token number, making stETH more easily integrated into DeFi protocols. However, ether.fi has not yet announced a similar setup, which may make integrating eETH with other DeFi protocols challenging.

In conclusion, the setup of T-NFT and B-NFT allows users to convert staked T-NFTs into eETH and then exchange them for ETH, enjoying immediate liquidity services. B-NFT, on the other hand, carries the slashing risk of validators, enabling them to continue operating. Consequently, B-NFTs receive a higher proportion of profits. Ordinary users can also participate in staking with any amount of ETH and receive staking reward dividends by holding eETH, much like the typical LSD protocol.

Revenue Distribution

At present, founder Mike Silagadze has disclosed the distribution method for ETH staking rewards: 90% of the returns go to the stakers, and ether.fi takes 10% of the staking income, which is then distributed amongst the node operators.

In addition, the platform collects a certain amount of auction fees: node operators must pay a small fee each time they participate in an auction to win staking qualifications, such as 0.03 ETH. This fee is allocated to the stakers, node operators, and the protocol.

Fees are also collected from the liquidity pool; during the minting and burning of the liquidity token eETH, the platform collects a small fee, which is then distributed to the stakers and node operators.

Platform service and infrastructure fees are also taken into account: for instance, for using ether.fi’s RPC nodes, custom APIs, dedicated nodes, etc. This fee is distributed amongst the stakers, node operators, and the protocol.

Current State of the Product

As of now, ether.fi’s staking service is only open to whitelist users. Ordinary users can stake ETH, wstETH, rETH, sfrxETH, and cbETH on the platform to earn reward points. The minimum deposit is 0.1 ETH and the maximum is 100 ETH, to receive these reward points. These points could potentially serve as a weighting factor for early platform testers in the future, as part of an early adopter program.

The points earned depend on the deposit amount, the length of time held, and an escalation coefficient. This coefficient gradually increases from 1.0 to 2.0 over a span of 30 days. Users are free to withdraw at any time, but withdrawal comes with forfeiture of reward points.

Source: https://ether.fi/

The snapshot date announced by the officials is in mid-April 2023. At present, ether.fi’s Total Value Locked (TVL) is approximately $32 million (down from April), with 38 million points created.

Conclusion

At present, there are protocol products addressing the centralization issues of the LSD track, including SSV and Obol network from the DVT (Distributed Verification Technology) category. These technologies aim to mitigate risks like single-point failures and fork penalties for node operators, enabling any user or community group to participate in Ethereum’s validator network.

DVT aims for the distributed existence of verification keys, while ether.fi takes a different approach. Its pivot is to give staking participants control of their withdrawal keys, taking them out of protocol control to reduce potential malicious risks. In addition, it has created a node service market, allowing stakers and validators to connect freely. For users holding large amounts of ETH, this allows them to participate in ETH staking without operating a validator while maintaining key security, which certainly fulfills a product demand.

Ether.fi designs key management methods to establish decentralized connections between stakers and validators. Validators can serve purely as hardware providers and earn a portion of the ETH staking rewards as dividends. Stakers control key management, making the operation more decentralized. Ether.fi plans to introduce DVT technology in the next phase to minimize validator risk further.

For the platform, the design of eETH’s DeFi application scenarios is one of the main challenges. eETH, with more DeFi application directions and upper-layer yield stacking mechanisms, is expected to expand better and attract users to ether.fi. Simultaneously, if the platform evolves into an infrastructure provider, undertaking ETH staking services for other LSD protocols or DAO organizations, it will further benefit the platform’s development.

Overall, as a derivative product in the LSD track, ether.fi shows an innovative design in key management. Having achieved commendable early TVL accumulation and capital institution support, its future development is worth looking forward to.