Ether.fi Explained

Key Takeaways

Ether.fi aims to further engage in the staking ecosystem by building its own AVS.

Ether.fi allows stakers to retain control over their private keys to ensure asset security and autonomy.

Ether.fi employ independent stakers as a means toward a more decentralized Ethereum.

ETHFI serves as the governance token of Ether.fi, with a total supply of 1 billion.

What Is Ether.fi?

Ether.fi is one of the largest liquidity restaking protocols. It only accepts ETH instead of liquid staking tokens (LSTs), and its liquidity restaking token (LRT) is called eETH. Users deposit ETH to receive eETH, which can be used in DeFi to maximize earnings. Their staked ETH will accumulate Ethereum's PoS staking and EigenLayer's restaking rewards (once EigenLayer's restaking rewards become effective). Additionally, users can earn loyalty points from Ether.fi, which will play a role in decentralized governance. Ether.fi aims to further engage in the staking ecosystem by building its own actively validated service (AVS).

How Does Ether.fi Work?

Ether.fi is a decentralized, non-custodial staking protocol that allows stakers to maintain control over their private keys, thereby ensuring the security and autonomy of their assets.

During the staking process, users commit multiples of 32 ETH into Ether.fi's contracts, triggering an auction mechanism where node operators compete for bids. The success bidder becomes responsible for operating the validator for that session. Once the operator is determined, the smart contract mints two NFTs representing the staker's withdrawal rights: T-NFT and B-NFT. T-NFT is tradable and transferable to other users' addresses, symbolizing the withdrawal certificate for 30 ETH, whereas B-NFT is bound to the user's address and cannot be transferred or traded, representing the withdrawal certificate for 2 ETH.

As stakers retains control over their private keys, B-NFT serves as insurance against slashing penalties – stakers can only fully withdraw the 2 ETH after the validator's exit or cessation of operation. Given that T-NFT is tradable, T-NFT and B-NFT holders may not be the same entity, and a T-NFT holder can request ETH withdrawal from the corresponding B-NFT holder. Failure to accept the request leads to a daily reduction of 3% in 1 ETH of the 2 ETH. Additionally, in exchange for the added responsibility, B-NFT holders receive 50% higher ETH staking rewards compared to T-NFT holders. B-NFT holders are also tasked with monitoring the performance of validator nodes. In the event of a slashing incident, B-NFT will provide a deductible for slashing insurance.

Leveraging ECIES technology, Ether.fi enables stakers to manage their withdrawal keys and share validator keys with node operators. Before participating in the auction, node operators must generate ECC private key pairs and register their public keys. Stakers can encrypt the validator key using the public key provided by the winning node operator and submit it to the chain. After decrypting the validator key using the public key, the node operator forwards the information to the auction management contract, which issues the minted NFTs to the staker's wallet and transfers 32 ETH to Ethereum's deposit contract. Once the node operator sets up and activates the validator node, it begins to receive rewards.

Ether.fi has also created a node service market, facilitating independent stakers as a means toward a more decentralized Ethereum. It collaborates with distributed validator technology (DVT) developer Obol Labs to promote independent stakers. Moreover, Ether.fi is operating a related NFT project called Ether.fan, where users can stake ETH and mint NFTs for points. These minted NFTs, representing the staked ETH, automatically accrue rewards and increase rewards based on staking duration. All ETH staked via Ether.fan is allocated to independent node operators employing DVT technology.

Ether.fi's Economic Model and Token Distribution

Within the Ether.fi ecosystem, revenue streams and distribution mechanisms include:

Staking Rewards: Stakers receive 90% of the rewards, while Ether.fi collects a 10% staking fee, which is evenly distributed between node operators and the protocol.

Auction Fee: To qualify for staking, node operators must participate in auctions to pay a small fee each time, such as 0.03 ETH. This fee is distributed among stakers, node operators, and the protocol.

Mint/Burn Fee: Minting and burning eETH incurs a small fee, which is distributed between stakers and node operators.

Service Fee and Infrastructure Costs: Fees for using Ether.fi's PRC nodes, custom APIs, dedicated nodes, etc., are divided among stakers, node operators, and the protocol.

ETHFI serves as the governance token driving Ether.fi. It has a total supply of 1 billion, with an initial circulating supply of 115.2 million. In Season 1, the inaugural phase of airdrops, 6% of the total supply will be released, while 5% of the remaining supply will be distributed in Season 2. According to protocol's tokenomics, the residual tokens will be allocated among investors, partners, core contributors, and the protocol's treasury, with respective proportions of 32.5%, 6%, 23.26%, and 27.24%.

The Bottom Line

Ether.fi stands as a prominent restaking project, empowering stakers with control over their private keys to ensure asset security and autonomy. It has established a node service market, aiming to further engage in the staking ecosystem by building its own AVS.