StakeWise launching fully trustless & decentralized ETH2 staking derivatives
by Jascha Samadi, Apr. 27
We recently announced that we led StakeWise’s $2m funding round with participation from Collider Ventures, Gumi Cryptos, Lionschain Capital and a network of private liquidity providers.
StakeWise is a liquid ETH2 staking protocol that helps users unlock more profitable and gas-efficient staking — the project reached an important milestone yesterday by launching its governance token $SWISE and kicking-off liquidity mining today.
StakeWise operates permissionless and non-custodial ETH2 staking pools and enables anyone to earn staking rewards, no matter their level of technical proficiency or deposit size. ETH2 staking started on December 1st, 2020 with the launch of the Beacon Chain — currently there is around $8bn worth of ETH staked, roughly 3.3% of the total ETH supply. Unlike Proof-of-Stake (PoS) chains like Polkadot, Cardano, Tezos and others, ETH2 is free of any type of “super-node” structures, that require high CPU or memory, fixed set of participating validators or delegation mechanisms and with that, Ethereum’s design path is clearly differentiated from its competitors at the consensus level who often have fixed or maximum numbers of network validators.
Generally speaking, participation in these PoS protocols involves depositing value for the right to work and providing security to the network in return for recurring rewards, which is why PoS-based staking opportunities are also being referred to as Internet Bonds.
As in conventional bond structures, staking can thus be seen as an agreement between the bond issuer (the protocol) and the bond holder (the validator). The bond holder lends resources in return for recurring reward payments with total PoS rewards expected to double to $18.9bn during 2021. But unlike traditional bonds, in PoS structures the bond holder is the lender of capital, labor, resources as well as partial owner of the network (or bond issuer) at the same time.
With ETH2 PoS all ETH staked during the current Phase 0 (+ any rewards earned) are non-transferable and locked until the current ETH1 chain is migrated to an ETH2 shard, currently estimated 18–24 months from December’s launch. But also beyond this initial migration phase, ETH2 and other PoS designs do not tend to optimize towards capital efficiency, which is where staking derivatives come in. ETH2 staking derivatives (or tokenized internet bonds) allow users to generate staking rewards from locking their ETH and secure the new ETH2 PoS chain while maintaining a liquid (derivative) asset, backed by the underlying ETH as deposit. These derivative assets can thus be further utilized within defi or also for leveraged staking strategies and provide yet another great example for programmability and composability of financial assets through Web3 while maximizing capital efficiency.
A unique dual token model
StakeWise operates a dual token model that captures the deposit and the rewards separately as two different tokens.
sETH2 is StakeWise’s own staking token. It represents the principal ETH frozen on the ETH1 chain, which is now used for staking on the ETH2 chain. sETH2 is minted in a 1:1 ratio upon deposit of ETH and it will be tradeable on the secondary market giving stakers the opportunity to exit from staking early, as they can bypass the mandatory 18–24 month lockup. It can also be used for leveraged staking (borrow more ETH against sETH2 and stake it) or other opportunities in defi.
rETH2 reflects the user’s rewards in the pool in a 1:1 ratio and accrues proportionally to the amount of deposit tokens held in the address.
The separation of both principal and rewards into two tokens is a core proposition of StakeWise. The dual token model promises to provide more flexibility and gas-efficiency over a single token model, in which there is only one token that represents both the principal amount staked and also accrues the rewards, as applied by other tokenized offerings (both decentralized and centralized ones).
Separating principal from reward allows for gradual disposal of the rewards without having to costly unwind LP positions if the principal token is used to provide liquidity in an AMM or for leveraged staking through a lending protocol.
The dual token model then allows for optionality between receiving a payout in rETH2 or re-staking of rETH2 for compounding of rewards in ETH2 thus keeping the optionality between di- vs. reinvestment of rewards by avoiding quasi automatic re-staking as a default, which would be the case in a single token model if the principal token is already staked in another protocol.
Fully non-custodial staking
StakeWise is also the first protocol that provides fully non-custodial ETH2 staking pools. Most recently the protocol added capability to eliminate the need for a multi-sig approval of withdrawal of funds (after ETH2 Phase 1.5) from newly created validators with withdrawals being automatically processed into the pool vault contract bypassing manual execution. The vault contract will store all withdrawn ETH on behalf of its beneficiary until he or she claims it (all of which can be verified here).
StakeWise’s governance token $SWISE
$SWISE is the protocol’s governance token, allowing community members to participate in the StakeWise DAO’s governance, giving them voting power over protocol upgrades and other matters of the community and potentially the ability to insure the protocol against slashing.
$SWISE is allocated pro-rata to stakers of rETH2 and liquidity providers (on Balancer) for both tokens. It earns the pool’s commissions (currently 10% gross) when staked and allows to vote on proposals, but also serves as insurance and is auctioned on the market in case needed to cover the slashing-related losses if they occur. StakeWise also announced the end of it’s early Early Adopters’ Campaign followed by a retroactive community airdrop of $SWISE to early users and stakers who deposited ETH to the pool. This long-awaited event is meant to reward these early adopters of the protocol with an outsized proportion of tokens and protocol ownership to bootstrap the protocol’s governance.
As early backers and LPs in StakeWise we couldn’t be more excited about the opportunity to be able to work with Dimitri and Kirill and the wider StakeWise community.
If you want to learn more about the project, follow them on Twitter, Telegram or stake your ETH here.