ether.fi (ETHFI) represents a significant innovation in the decentralized finance (DeFi) space, offering a unique approach to Ethereum staking and restaking. This guide delves into its core mechanics, benefits, and how it functions within the broader ecosystem.
What is ether.fi?
ether.fi is a decentralized, non-custodial delegated staking protocol that introduces a Liquid Stake Token (LST) model. Its native token, ETHFI, powers a system where users can stake ETH to earn rewards while maintaining control of their private keys. Launched on November 15, 2023, ether.fi allows users to mint eETH—a native restaked liquid staking token—by simply depositing ETH. This eETH automatically restakes through EigenLayer, amplifying rewards without requiring additional user action. Additionally, weETH serves as a wrapped, non-rebasing version of eETH, enhancing its compatibility across various DeFi applications.
The protocol collaborates with numerous DeFi partners like Balancer, Gravita, Pendle, Aura, and Maverick to expand weETH’s utility, including integration with Layer 2 protocols. Unlike traditional liquid restaking methods, which lock assets and impose withdrawal delays, ether.fi’s native restaking occurs at the protocol level, enabling seamless DeFi participation.
How ether.fi Works
ether.fi’s architecture involves multiple stakeholders, including stakers (who may also be bondholders), node operators, and node service users. Its roadmap unfolds across three phases: Delegated Staking, Liquidity Pool, and Node Services, each evolving to enhance functionality and decentralization.
Delegated Staking
For stakers depositing multiples of 32 ETH, the process is straightforward:
- Node operators bid to run validator nodes, with trusted operators submitting nominal bids and non-trusted ones participating in auctions.
- Stakers deposit ETH into ether.fi’s contract, triggering an auction that assigns a node operator and mints two NFTs: a transferable T-NFT (representing 30 ETH) and a soul-bound B-NFT (representing 2 ETH). The B-NFT provides slashing insurance and higher yields due to added risk.
- Stakers encrypt validator keys with the node operator’s public key, submitted via an on-chain transaction (future versions will use Distributed Validator Technology).
- Node operators decrypt and use these keys to initiate validators.
- Exits can be requested by stakers or operators, with ETH returned to a withdrawal vault after deducting fees. B-NFT holders must monitor validator performance, with ether.fi offering alerts to simplify this.
Liquidity Pool and eETH
Smaller stakers or those avoiding validator responsibilities can participate via a liquidity pool. This pool holds ETH and T-NFTs, allowing users to mint eETH by depositing ETH or T-NFTs (valued via an oracle). eETH can be redeemed for ETH at a 1:1 ratio if liquidity is sufficient; otherwise, it triggers validator exits.
Bondholders and NFT Minting
Stakers seeking higher yields via B-NFTs deposit ETH into the pool, entering a queue for allocation. When pool ETH exceeds a threshold, the next bondholder generates a private key, stakes 32 ETH, and receives a B-NFT while the T-NFT goes to the pool.
Exiting Validators
If pool ETH drops below a threshold, the oldest T-NFT triggers an exit request. B-NFT holders must respond within a timeframe to avoid gradual slashing. Node operators are incentivized to exit validators if bondholders fail to act. Upon exit, NFTs are burned, and ETH (minus fees) returns to the pool.
Node Services
This future phase involves registering nodes to provide additional services via NFT metadata parameters. It requires agreement from node operators, B-NFT holders, and ether.fi, with billing handled through smart contracts and service tracking via centralized systems initially.
Benefits of ether.fi
- Maximized Rewards: Earn staking and restaking yields simultaneously without locking assets or dealing with withdrawal periods.
- DeFi Composability: Use eETH/weETH across DeFi platforms for lending, trading, or yield farming, thanks to its liquid nature.
- Key Control: Stakers retain control of their keys, enhancing security and decentralization.
- No Withdrawal Delays: Redeem eETH/weETH for ETH instantly when liquidity is available, avoiding EigenLayer’s 7-day unlock period.
- Risk Management: B-NFTs offer slashing protection with higher returns, while node operator incentives ensure network reliability.
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Frequently Asked Questions
What is the difference between eETH and weETH?
eETH is a rebasing token that reflects staking rewards directly in its balance, while weETH is a wrapped, non-rebasing version designed for better compatibility with DeFi protocols that prefer static balances.
How does ether.fi compare to traditional liquid staking?
Traditional methods like EigenLayer’s require locking LSTs (e.g., stETH), making them illiquid and subject to withdrawal delays. ether.fi enables native restaking at the protocol level, maintaining liquidity and avoiding unlock periods.
What risks are involved with B-NFTs?
B-NFT holders bear the responsibility of monitoring validator performance and risk slashing if they fail to act on exit requests. However, they receive higher yields to compensate for this added risk.
Can I use eETH in other DeFi applications?
Yes, eETH and weETH are designed for broad DeFi use, including lending pools, DEXs, and yield optimizers, thanks to partnerships with platforms like Balancer and Pendle.
How does ether.fi ensure decentralization?
By allowing stakers to control their keys and using a distributed node operator market, ether.fi reduces centralization risks compared to custodial staking services.
Is ether.fi suitable for small stakers?
Absolutely. The liquidity pool mechanism allows stakers with less than 32 ETH to participate by minting eETH, making it accessible to a wider audience.