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ether.fi governance token

Last Updated: April 9, 2024

$ETHFI (ETHFI) is the governance token that drives the ether.fi network, a decentralized, non-custodial delegated staking protocol. $ETHFI will enable community members to manage critical aspects of the protocol and direct the growth strategy of weETH.

There main differentiators for this protocol are:

  • Stakers hold their own staked ETH keys while delegating staking
  • Withdrawals are enabled – you can always redeem eETH for 1 ETH
  • Stakers maintain their token’s composability for use in DeFi

ether.fi’s primary product is eETH, a rebasing ERC-20 liquid restaking token. ERC-20 eETH can be wrapped as weETH, a non-rebasing ERC-20 version of the token. $ETHFI is the governance token for eETH and weETH holders.

Background

ether.fi was founded in 2022 by Mike Silagadze and Rok Kopp to build a non-custodial ETH staking protocol for liquid staking that “allows stakers to retain control of their keys while delegating validator operations to node operators.” The ether.fi Foundation team believes “decentralized, non-custodial staking is an essential and foundational good for Ethereum.”

The primary use case of $ETHFI is to govern the protocol and its activities. In addition, Node Operators may stake $ETHFI as collateral against slashing risks, fundamentally securing the network.

Launch

  • On May 3, 2023, ether.fi launched its mainnet, which included delegated staking of ETH to whitelisted validators.
  • On November 15, 2023, eETH fully launched, allowing anyone to mint eETH for ETH at a 1:1 ratio.
  • $ETHFI launched as the governance token to eETH and weETH holders, along with key community contributors in March 2024. The initial distribution mechanism for $ETHFI was an airdrop that occured at the token generation event (TGE).

How does ether.fi work?

$ETHFI utility

$ETHFI token holders will be able to propose and approve:

  • Major protocol upgrades
  • Changes to key economic parameters, such as fees designated to the protocol
  • Software development contributor permissions
  • Whitelisting of node operators that run ETH nodes on behalf of the protocol
  • Where and how ETH is restaked within the Actively Validated Services (AVS) ecosystem which utilizes the EigenLayer protocol
  • Treasury Diversification activities

 

How Ethereum staking works

Staking offers crypto holders a way to earn passive income by locking up digital assets with a blockchain platform to help run it and maintain its security. It is made possible through the proof-of-stake (PoS) consensus mechanism which is a method used by certain blockchains, including Ethereum to select honest participants and verify new additional data blocks.

Node operators will be required to stake $ETHFI as “skin in the game” in order to ensure the nodes operate with minimal slashing risk. Once a node operator is approved by the community, they will deposit a specific amount of $ETHFI per node before receiving delegated validator keys. This stake needs to be maintained in order to continue operating the node. Rewards are derived from consensus rewards, transaction fees and maximum extractable value (MEV).

 

Liquid versus non-liquid staking

Liquid staking allows users to access their tokens while they are staked. It allows stakers to delegate their Ether to node operators and receive a tokenized representation redeemable for the tokens staked. This new token can also be traded or used as collateral in DeFi protocols, thereby unlocking the liquidity of the staked assets. Traditional staking, on the other hand, requires users to lock up their tokens for a certain period of time to become validators on the network and earn rewards.

 

Liquid staking tokens (LST)

An LST is a utility token issued upon securing a PoS blockchain by depositing native cryptocurrency in a dedicated protocol. There are three main LST types:

  • Rebase tokens: tokens that automatically adjust their balance in response to deposits. For example, eETH is a rebasing ERC-20 token that is a 1:1 representation of ETH. Rather than the price of eETH appreciating against ETH as staking rewards accrue, a user’s balance of eETH rebase daily to reflect the earning of rewards.
  • Reward-bearing tokens: tokens that increase in value over time, with the value and rewards determined by the changing exchange rate between the token and the staked asset.
  • Wrapped tokens: certain LST, such as eETH are available in a wrapped version, weETH and after wrapping, these tokens no longer experience automatic balance adjustments and become reward-bearing tokens. Changes in the balances of wrapped tokens are achieved through minting, burning, or transferring.

 

Liquid staking risks

While liquid staking aims to mitigate risks, there are no guarantees that assets will remain completely secure. Risks include:

  • Exposure to risks in broader DeFi markets – such as from vulnerabilities or bugs in such smart contracts, or attacks on the underlying PoS network.
  • Market volatility which can create negative impact to LST value – not only are LST prices not pegged to underlying assets, but also their trading volumes are typically lower than that of the underlying assets.
  • Slashing due to validators who do not live up to the expected values – loss of assets can trickle down to users with staked assets.

 

ether.fi benefits

With ether.fi, the staker controls their keys and retains custody of their ETH which reduces risk, while delegating staking to a node operator. The ether.fi mechanism also mints an NFT for every validator that is launched via the protocol. weETH is minted from a liquidity pool that contains these NFTs. These NFTs control the ETH staked and store metadata related to the validator. These NFTs can be used to create a programmable layer on top of staking infrastructure.

ether.fi also collaborates with EigenLayer, a native restaking solution that borrow’s Ethereum’s security offerings to validate new applications on the networks and allows stakers to earn additional rewards on ETH.

 

ether.fi staking rewards

Except for solo stakers, the staking minimum is .001 ETH which mints the equivalent amount of eETH. On top of an annual percentage rate (APR) and potential restaking rewards from EigenLayer, for each 0.001 ETH staked via ether.fi, a user earns one ether.fi “Loyalty Point” per day. The ether.fi whitepaper states, “Loyalty Points will play a role in decentralized governance.”

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