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Ether.fi, Arthur Hayes’ New Investment: Is it Truly Non-Custodial and Decentralized?

Staking is a way to earn rewards on your cryptocurrency holdings by locking them up to support the security of a blockchain network. However, traditional staking can be illiquid, meaning that you can’t access your funds until the lock-up period is over. Liquid staking solutions solve this problem by allowing you to stake your tokens while still being able to trade them or use them as collateral.

Liquid staking is a process that allows you to stake your cryptocurrency tokens without having to lock them up. This is done by using a third-party service that holds your tokens and stakes them on your behalf. You can then continue to trade or use your tokens as normal, while still earning rewards from staking.

Ether.fi is a non-custodial liquid staking platform which raised $5.3 million in funding in February 2023 from North Island Ventures, Chapter One and Node Capital and the funding round included participation from founder of derivatives exchange BitMEX founder Arthur Hayes. The platform seeks to provide better services than existing liquid staking platforms and is focused on decentralization as its primary objective. 

As per the official documentation of ether.if, the platform claims that it will never compromise on the non-custodial and decentralized nature of the protocol.

Liquid Staking on Ether.fi

Following the transition of the Ethereum Network from proof-of-work to proof-of-stake consensus, an increasing number of crypto holders are interested in liquid staking platforms like Ether.fi. However, every investor needs to carefully assess the situation and invest their money wisely on any platform. 

Backed by Arthur Hayes and additional investors in the crypto sector, Ether.fi raised significant money during a bearish phase in the crypto sector in 2023. Ether.fi is a decentralized and non-custodial delegated staking protocol that offers users the ability to stake their Ethereum (ETH) and earn rewards for validating transactions and securing the Ethereum network. The protocol introduces a Liquid Staking Derivative token, which represents the staked ETH and provides users with the flexibility to maintain control of their assets while still participating in staking and earning rewards.

As an emerging liquid staking platform, Ether.fi aims to provide a sustainable and decentralized solution for staking ETH and earning rewards while maintaining control over their assets. The protocol acknowledges the contributions of other delegated staking solutions like RocketPool, StakeWise, Diva, and Lido, which have inspired and motivated its development. The protocol adheres to principles of decentralization, ethical practices, and transparency, aiming to serve the Ethereum community and offer long-term solutions for stakers.

Features

The features of the Ether.fi liquid staking protocol are as follows:

Decentralized and Non-Custodial: One of the distinguishing characteristics of Ether.fi is that it offers truly decentralized staking. The staker, not the node operator, owns all the keys. Stakers maintain control of their ETH throughout the staking process, and the key generation for staking is performed using the Ether.fi Desktop Application, ensuring a non-custodial approach.

Liquid Staking Derivative Token: Ether.fi introduces a Liquid Staking Derivative token, represented by a pair of NFTs (T-NFT and B-NFT), for every 32 ETH staked. The T-NFT represents a 30 ETH interest in the validator, offering holders a significant interest. This liquid representation allows stakers to have more flexibility in their staked assets and potentially participate in other DeFi activities while earning staking rewards.

Creation of Node Services Marketplace: Ether.fi’s mechanism allows for the creation of a node services marketplace, where stakers and node operators can interact and engage in validator operations. This marketplace aims to foster an ecosystem for staking services and related offerings, contributing to the overall growth and decentralization of the protocol.

Expected High Yields: Ether.fi anticipates staking yields to be greater than those offered by competing protocols, especially in Phase 3 of its rollout, where individually mapped nodes have a programmable surface area for additional service offerings and revenue.

Funding and Backing: The protocol has successfully completed a funding round of $5.3 million co-led by investors North Island Ventures (NIV), Chapter One, and Node Capital, with participation from other notable investors such as Arrington Capital, Maelstrom, Version One Ventures, and Purpose Investments. This funding enables Ether.fi to continue its development and expansion in the decentralized staking market.

Focus on Decentralization and Long-Term Sustainability: Ether.fi is committed to decentralization as a primary objective and has a sustainable revenue model to support the protocol’s long-term growth. The team behind Ether.fi emphasizes ethical practices and accountability to the Ethereum community, aiming to provide a reliable and trustworthy staking solution.

What Makes Ether.fi Unique?

Ether.fi has distinctive features that set it apart from other delegated staking solutions in the Ethereum ecosystem.

Liquid Staking Protocol: Ether.fi is a decentralized and non-custodial liquid staking protocol that allows users to stake their Ethereum (ETH) or ETH-pegged assets. In a liquid staking protocol, users retain control of their staked assets (e.g., ETH) while delegating the staking process to node operators. This delegation enables users to earn staking rewards while still maintaining ownership and control over their assets.

Control of Keys: One of the key features that make Ether.fi unique is that stakers retain control of their private keys throughout the staking process. This eliminates the need to entrust their keys to third-party custodians, which mitigates the security risks associated with centralized custody. By keeping control of their keys, users have more control over who has access to their assets and reduces the risk of unauthorized access or theft.

Node Operator Marketplace: Ether.fi facilitates a node services marketplace where stakers and node operators can participate. Node operators run Ethereum validators on behalf of stakers and, in return, receive a share of the staking rewards. This marketplace enables efficient and decentralized node operation, providing stakers with multiple choices of node operators to delegate their staking to.

Early Adopter Programme and Airdrop: Ether.fi has conducted an Early Adopter Programme where users who staked ETH on the platform earned bonus points. These bonus points could potentially lead to an airdrop of the platform’s native token called “ETHFI” once it is launched. The airdrop eligibility was determined based on users’ participation in the staking process during a specified timeframe.

Ethical Principles: The team behind ether.fi takes their ethics seriously and commits to maintaining decentralization as a primary objective. They prioritize the non-custodial and decentralized nature of the protocol, ensuring that stakers maintain control of their ETH. Additionally, the team emphasizes transparency and accountability, committing to do the right thing for the Ethereum community and promptly addressing any mistakes.

Who is Arthur Hayes?

Arthur Hayes is a former CEO of BitMEX, a prominent cryptocurrency exchange platform. He gained recognition in the crypto space for his role in leading BitMEX, which was known for offering cryptocurrency derivative trading products and for its high trading volumes.

Over the years, Hayes has been known for his predictions and insights into the cryptocurrency market. He has offered various perspectives on Bitcoin’s price trajectory and market movements. In some of his predictions, he anticipated periods of volatility in the cryptocurrency market, and at times, he shared his views on the potential for Bitcoin’s price to reach new highs or experience significant changes.

One of his notable predictions includes his anticipation of Bitcoin’s price not reaching an all-time high of $70,000 in 2023. He suggested that the milestone might be achieved in the following year, 2024, particularly after the upcoming halving event that slashes Bitcoin’s block reward in half. According to his insights, crossing the $70,000 barrier would likely happen in 2024, followed by a potential “blow-off top” in 2025 or 2026, which he referred to as “Armageddon” – a significant societal event or major war. He linked this potential market movement to factors such as rising national debts and geopolitical tensions.

Arthur Hayes’ opinions and predictions have been widely discussed and debated within the crypto community, and his insights have garnered attention from investors, traders, and analysts alike. However, it’s essential to note that the cryptocurrency market is highly volatile and influenced by various factors, making precise predictions challenging and subject to change.

How does liquid staking work?

Liquid staking is a concept that addresses the liquidity and capital utility challenges faced by crypto holders who participate in staking on Proof of Stake (PoS) blockchains. When users stake their cryptocurrencies in PoS networks, they contribute to the network’s security and earn rewards in return. However, the staked tokens become locked up for a certain period, which can vary from days to weeks, making them illiquid and limiting their use in other financial activities.

To address this limitation, liquid staking provides a solution where users can stake their tokens and receive a liquid token in return, representing their staked amount of specific assets on the network. This liquid token is referred to as Liquid Staking Derivatives (LSDs) or Liquid Staking Tokens (LSTs). These tokens are tokenized representations of the staked assets and offer flexibility and liquidity, enabling users to trade, store, or use them in various decentralized finance (DeFi) applications while still earning staking rewards.

The process of liquid staking involves platforms or protocols that facilitate this functionality. Users stake their tokens through these platforms, and in return, they receive the corresponding Liquid Staking Derivatives (LSDs) or Liquid Staking Tokens (LSTs). These derivatives can be traded, sold, or utilized in DeFi protocols similar to regular cryptocurrencies like ETH.

The recent Shapella upgrade on the Ethereum network has further boosted the popularity and adoption of liquid staking. The upgrade allows stakers to withdraw their staked assets and accumulated rewards for the first time, enhancing the appeal of liquid staking by introducing competition between different liquid staking solutions.

What are the benefits of liquid staking?

The benefits of liquid staking are as follows:

Enhanced Liquidity: Liquid staking addresses the liquidity issue associated with traditional staking. Instead of locking up staked tokens, users receive derivative tokens representing their staked assets. These derivative tokens can be freely traded or used in other DeFi protocols while still earning staking rewards, providing increased liquidity for staked assets.

Maximizing Yield Potential: With liquid staking, users can leverage the derivative tokens to participate in other DeFi platforms and potentially earn additional yield on top of the staking rewards. This flexibility allows users to optimize their yield potential and explore various DeFi opportunities.

Participation in DeFi Ecosystem: Liquid staking allows users to actively participate in the decentralized finance ecosystem. The derivative tokens obtained through liquid staking can be used as collateral for borrowing, lending, and liquidity provision in various DeFi protocols, expanding users’ financial opportunities.

Risk Mitigation: Liquid staking can offer risk mitigation benefits. In traditional staking, if the value of the staked asset declines significantly, users may incur losses when they unstake. In contrast, with liquid staking, users can potentially sell or trade the derivative tokens if they anticipate a price drop, providing an avenue for risk management.

Accessible for Smaller Stakers: Liquid staking pools enable smaller stakers to participate collectively in staking and earn rewards as if they were a larger validator. This accessibility makes staking opportunities available to a broader range of users, regardless of their token holdings.

Supporting Network Security: By participating in liquid staking, users contribute to the security and stability of blockchain networks using the proof-of-stake consensus mechanism. This helps maintain a strong and decentralized network while earning rewards for their contributions.

Innovative Financial Instruments: Liquid staking introduces new financial instruments in the form of derivative tokens. These tokens represent ownership of staked assets and can open up new possibilities for financial engineering and product development within the DeFi space.

What are the risks of liquid staking?

There are significant risks associated with liquid staking and this includes any platform like Ether.fi. The risks of liquid staking include:

Impermanent Loss: Similar to liquidity providing in decentralized exchanges (DEXs), liquid staking carries the risk of impermanent loss. If the price of the staked asset increases significantly while it is locked up for staking, users may miss out on potential gains compared to simply holding the asset.

Smart Contract Vulnerabilities: Liquid staking relies on smart contracts to mint derivative tokens. Any vulnerabilities or bugs in these smart contracts could lead to potential security breaches, resulting in loss of funds for users.

Counterparty Risk: Users delegate their tokens to a liquid staking service provider. If the service provider experiences operational issues, becomes insolvent, or engages in malicious activities, users may face losses or lose access to their staked assets.

Network Risks: Liquid staking is dependent on the underlying blockchain network’s security and reliability. If the network experiences technical issues, attacks, or undergoes significant changes, it could impact the performance of the liquid staking service and users’ rewards.

Slashing Risks: In proof-of-stake networks, validators can be penalized or “slashed” for committing malicious actions or being unreliable. Liquid staking service providers may employ multiple validators, and if any of them are slashed, it could affect users’ staking rewards.

Regulatory Risks: The regulatory environment for DeFi and liquid staking is still evolving. Changes in regulations or legal uncertainties could impact the operation of liquid staking platforms and the ability of users to participate.

Centralization: Liquid staking service providers often control the nodes and infrastructure for staking. If a small number of providers dominate the market, it could lead to centralization concerns, reducing the decentralized nature of the underlying blockchain network.

Lack of Governance Rights: Users holding derivative tokens through liquid staking may not have the same governance rights as direct token holders. This could limit their ability to participate in network decisions and have a say in protocol upgrades.

Exit Scams and Fraud: As with any financial service in the crypto space, there is a risk of exit scams or fraudulent schemes where liquid staking service providers may disappear with users’ funds.

Market Risks: The value of derivative tokens obtained through liquid staking can be influenced by market fluctuations, and their prices may not always reflect the exact value of the underlying staked asset.

Alternatives to Ether.fi

Lido Finance: Lido Finance is a well-known liquid staking platform that allows users to stake Ethereum (ETH) and receive stETH (liquid staked ETH) tokens in return. These stETH tokens can be used for other DeFi activities while still earning staking rewards. Lido Finance is one of the popular choices in the liquid staking space.

Rocketpool: Rocketpool is another liquid staking platform for Ethereum that offers decentralized and trustless staking services. It allows users to participate in Ethereum 2.0 staking by depositing any amount of ETH, and they receive rETH (Rocketpool ETH) tokens in return, which can be traded or used in other DeFi protocols.

Benqi: Benqi is a liquid staking platform that provides users with the ability to stake and earn rewards without locking up their assets. They offer users a representative token in return for their staked assets, which can be utilized in various DeFi protocols.

Marinade Finance: Marinade Finance is a liquid staking platform that allows users to stake Ethereum and receive staking derivatives in return. These derivatives represent the staked ETH and can be used in DeFi applications to maximize yield while still earning staking rewards.

Parallel DeFi Super App: Parallel DeFi Super App offers liquid staking services that allow users to stake Ethereum and receive a tokenized representation of their staked assets. This representation can be traded or used in other DeFi platforms, providing users with additional liquidity options.

Stakewise: Stakewise is a liquid staking platform that enables users to stake Ethereum and receive a tradable representation of their staked assets. This representation, called BPT (Stakewise Bonding Pool Tokens), can be used in other DeFi protocols to generate yield while participating in staking.

StaFi: StaFi is a decentralized liquid staking platform that offers a range of liquid staking solutions for various cryptocurrencies, including Ethereum. It allows users to stake their assets while receiving tradable staking derivatives, which can be utilized in DeFi applications.

Conclusion

Liquid staking is a great way to earn rewards on your cryptocurrency holdings without having to lock them up. However, it’s important to be aware of the risks involved before using a liquid staking solution like Ether.fi. The platform offers increased decentralization along with many unique features that gives it an edge over its competitions. 

However, protocols like Lido Finance are currently leading the crypto space in terms of Ether staking and in order for protocols like Ether.fi to compete with the leading liquid staking platform, an additional investment and newer products are required. 

Interestingly, investors in the Ether.fi protocol believe that the ability to allow stakers to retain the control of their keys is a critical aspect of a decentralized protocol, and it helps reduce counterparty risks.

FAQs

What is Ether.fi?

Ether.fi is a non-custodial liquid staking platform which raised $5.3 million in funding in February 2023 from North Island Ventures, Chapter One and Node Capital thefounder of derivatives exchange BitMEX founder Arthur Hayes.

What is liquid staking?

Liquid staking is a concept that addresses the liquidity and capital utility challenges faced by crypto holders who participate in staking on Proof of Stake (PoS) blockchains.

What makes Ether.fi unique?

Ether.fi allows the stakers on the platform to retain the control of their keys which prevents multiple risks that come with other liquid staking protocols.

What are some alternatives to Ether.fi?

Alternatives to Ether.fi include Lido Finance, Rocketpool, Benqi, Marinade Finance, StaFi, and Stakewise.

What are the benefits of liquid staking?

Liquid staking addresses the liquidity issue associated with traditional staking and also offers risk mitigation benefits when compared to traditional staking protocols.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.

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Micah Abiodun

Micah is a crypto enthusiast with a strong understanding of the crypto industry and its potential for shaping the future. A result-driven Chemical Engineer (with a specialization in the field of process engineering and piping design), Micah visualizes and articulates the intricate details of blockchain ecosystems. In his free time, he explores various interests, including sports and music.

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