Over the past few weeks, we have been hard at work bringing improvements to StakeWise, both in terms of stability and in terms of functionality. We have been saving this announcement for a while, but the time has finally come to reveal our latest feature.
With the next update, your custodial stakes on StakeWise will get tokenized and will eventually become tradable on Uniswap/Balancer etc. This represents a major shift in our thinking and brings a whole set of new opportunities to StakeWise users, including the ability to earn compound return, exit from staking whenever you like it and eventually even borrow against your stake while continuing to earn rewards.
The new contracts, API and operator are ready and are waiting for changes to UI before being deployed. Thus, we expect to introduce new functionality into beta in the next few weeks.
Tokenization is a very big topic and therefore we attached an FAQ to this post. Please read below to understand what will change with tokenization and how you can make the best use of it.
Stay tuned for more updates!
Note: like most of the announcements, this one originally appeared on our Discord first. Join now to never miss an update: https://discord.gg/2BSdr2g
Q: What does a “tokenized stake” mean?
A: A tokenized stake means that we will issue tokens that represent your stake on the Beacon Chain.
The easiest way to think about it is to imagine that your stake is a company and each token is a share in that company. Like shares represent your ownership of the company which can be traded on the exchange, each token will represent ownership of an equal amount of ETH in your stake and will be tradable for ETH and other currencies via liquidity pools on platforms like Uniswap and Balancer.
The owner of the token will also have the right to exchange it into an equal amount of ETH on StakeWise upon Phase 2.
Please note that tokenized deposits are available only with custodial staking. All deposits will be handled via one large Pool, and thus custodial solo staking will no longer be needed nor available.
Q: Why are you introducing a tokenized stake?
A: We believe tokenized staking is a more elegant solution for ensuring liquidity of your stake before phase 2, and it also allows you to 1) compound your return, 2) earn additional return from becoming a liquidity provider in protocols like Uniswap or Balancer, 3) use your stake as collateral for borrowing in protocols like Aave.
Q: How does tokenized staking work?
A: It is a remarkably simple solution. When you make an ETH deposit into StakeWise, we will issue you a StakeWise Deposit Token (SWD) that represents your deposited ETH always 1:1. And whenever StakeWise validators gain new rewards, you will receive StakeWise Reward Tokens (SWR) that represent your ETH2 rewards also 1:1. Both tokens are built on the ERC20 standard, which means that SWR and SWD can be sent, exchanged and transacted with like ETH itself or any other ERC20 token.
At all times the total amount of tokens that have been issued is SWD + SWR = ETH deposits + ETH rewards * (100% — 10%) where 10% is StakeWise commission. As a reminder, all your StakeWise tokens will be exchangeable 1:1 into ETH upon phase 2.
Q: Can you bring an example of how it works?
A: Absolutely. Imagine you deposit 10 ETH into StakeWise at the beginning of Year 1. You will immediately receive 10 SWD that represent the 10 ETH you deposited. In around 1 hour an SWR token will be minted for you. Over time, the balance of SWR will grow to represent the growth of your stake in ETH 1:1.
Assuming annual gross yield in Eth2 network is 22%, your stake in the Beacon Chain will grow to 11.98 ETH (where 10 ETH is your initial deposit and 1.98 ETH is reward after deducting 0.22 ETH of StakeWise commission) by the end of Year 1. In tokens, you will have 10 SWD and 1.98 SWR, ie exactly 1:1 reflection of your staking balance.
Upon arrival of phase 2, your stake will have grown to 13.96 ETH (after deducting StakeWise commission). In tokens, you will have 10 SWD and 3.96 SWR. In phase 2, the tokens can be exchanged on StakeWise directly for ETH at 1:1 ratio.
Here is a graphic to demonstrate what we mean:
Q: How is a tokenized stake better than Validator Transfer as a liquidity mechanism?
A: Currently, we have a liquidity mechanism called Validator Transfers that allows users who want to quit staking to transfer their validator to people entering the platform in exchange for 32 ETH. This enables the exiting users to withdraw their deposits before phase 2, but the drawback of this approach is that it requires new users to continue making deposits. Thus, the stake’s liquidity is only tied to StakeWise’s popularity as a staking platform.
By introducing a tokenized deposit, we will rely on the billions of liquidity (and some incentivization) provided to protocols like Uniswap, Balancer, etc. to offer exits from staking before phase 2 — as you can imagine, this will make your stake much more liquid.
Q: By staking with StakeWise, will I be earning rewards in StakeWise Reward Tokens?
A: No. You will always be earning ETH when staking with us — the record of these rewards is always kept in the Beacon Chain. Our tokens merely represent ownership of ETH deposit and rewards you earned, so that you can trade them, earn additional return from them or borrow against them.
You will always be able to exchange StakeWise tokens for ETH in 1:1 ratio once Phase 2 is live. Before then, you can exchange your tokens for ETH in the marketplace at market prices.
Q: What happens if I sell/exchange my SWD token?
A: Since SWD token represents your earning deposit in StakeWise, exchanging your whole SWD balance for ETH will mean that you transferred your entire deposit to someone else. Thus, your SWR balance will stop growing.
If you sell only a part of your total SWD balance, you will continue earning SWR at the same percentage rate as before. However, the balance of your SWR will grow slower than before because your deposit (SWD) would have been reduced.
To illustrate, if the staking return is 20%, then on 10 SWD your rewards balance will grow to 2 SWR, and on 5 SWD your rewards balance will grow to 1 SWR. Thus, return is the same, but the total amount of accrued SWR is smaller.
Q: What happens if I sell/exchange my SWR token?
A: Nothing bad happens! In fact, we want to encourage exchanging SWR tokens into ETH when you’re staking, because it allows you to increase your deposit and achieve compound return.
Q: You mention that earning compound interest is possible with tokenized staking. How can I achieve this?
A: In order to earn compound returns from staking, you must be able to reinvest the rewards you earned back into staking. Unfortunately, with the current Eth2 specs that’s not possible until phase 2 because of inability to withdraw your stake from the Beacon Chain.
Tokenized staking from StakeWise solves this problem. To achieve compound returns, you can exchange SWR that you earned into ETH (via protocols like Uniswap and Balancer) and redeposit this ETH back into staking. This means that you will have more SWD and therefore your SWR token balance will grow faster.
Q: Can I provide liquidity for SWD and SWR tokens in protocols like Uniswap or Balancer?
A: You absolutely can!
Q: Can I ask you more questions about how tokenized staking will work?
A: Of course! You can always ask us about anything related to StakeWise or Eth2 staking — we are here to answer any of our questions.
