As an active staking ecosystem participant, StakeWise has observed first-hand the detrimental effect that stake centralization has on competition and the risk it poses for Ethereum’s security and health. So our team set out to do something about it.
We are pleased to announce the development of StakeWise V3, a major upgrade to the StakeWise protocol aiming to help decentralize Ethereum.
StakeWise V3 allows anyone who is capable of running Ethereum validators to participate in liquid staking and receive staking delegations from others. Whether you are a solo staker, a DeFi community, or a telekom operator, you can use StakeWise V3 to stake your own ETH, run validators for others, or both.
No permission is required to join — StakeWise V3 is completely permissionless to enable a variety of individuals and organizations to support the Beacon Chain at scale. This is the only way we can achieve our mission: to maximise the health of the Ethereum ecosystem.
StakeWise V3 will make the following use cases possible:
- anyone can join as a node operator without permission or collateral, including solo stakers;
- solo stakers can mint liquid osETH tokens against their own node;
- ordinary stakers can freely allocate ETH to specific node operators of their liking, including solo nodes;
- DeFi users can stake by holding a liquid osETH token protected against penalties and slashing; and
- institutions & crypto exchanges can create private mini-pools with access controls and the ability to tap into a decentralized network of nodes with a liquid osETH token ecosystem.
The release of the StakeWise V3 upgrade is scheduled for late 2022.
Below we will explore the various components of StakeWise V3, discuss the market dynamic that led to its ideation, and explore the use-cases powered by this new system.
Ethereum staking today
As a community, we became accustomed to thinking of Ethereum as a decentralized network, but the Beacon Chain deposit data clearly shows a worrying centralization trend. At most, 18% of the network — some 2.5 million Ether — is controlled by solo stakers running nodes at home. In comparison, the share of the network controlled by the four major players — Coinbase, Kraken, Binance and Lido — is around 60%, and growing. As individuals outsource increasingly more Proof-of-Stake consensus work to just a few companies, one can’t help but wonder if this is the start of an identity crisis for the Ethereum network.
It is clear that this centralization trend is driven by the popularity of liquid staking services and delegated staking in general. Solo participation appears subdued because of the benefits afforded by liquid staking, like the absence of technical overhead, access to immediate liquidity for your stake, and improvements in capital utility. This has led to steadily high inflows into delegated services like Staked and stakefish, liquid staking tokens like stETH from Lido and recently cbETH from Coinbase. The demand has been so high that just a dozen of the node operators behind these services ended up controlling over 60% of the network.
The risks this entails is their ability to censor the majority of transactions in the network and to cause amplified capital losses for stETH / cbETH holders in the event of slashing, likely leading to contagion in the broader DeFi market. The rise in inflows into (liquid) delegated staking that is expected post-withdrawals will likely exacerbate these risks thanks to the network effect such large services enjoy. In the absence of credible alternatives that leverage solo participation & community ownership to fix this, we are on course to cement centralization as a feature of Ethereum.
Unfortunately, the few solutions that encourage solo participation, like Rocket Pool, have so far had a hard time solving this problem. This is seemingly due to high collateral requirements for solo operators and limited additional benefit offered to them besides higher profitability. We feel that more can be done to encourage solo participation and help decentralize the network.
Introducing StakeWise V3
StakeWise V3 is a permissionless and decentralized staking protocol. Its goal is to reduce the degree of stake centralization on Ethereum by:
i) making solo staking more appealing,
ii) putting the choice of node operator(s) into the user’s hands, and
iii) offering a new, less risky staked Ether token standard as an alternative to prevailing models.
Let’s take a brief look at the different components of StakeWise V3 to understand how it works.
At the heart of the protocol lies a network of Vaults — individual staking “shops” that anyone can set up to accept Ether delegations in return for a staking fee. Vaults can be formed by either a single party running the nodes or multiple parties working together. For example, there can be Vaults formed by:
- The existing StakeWise node operators — Finoa, T-Systems, and others.
- A group of solo stakers, using Distributed Validator Technology (DVT) from Obol or SSV
- A single solo staker
- A mix between solo stakers, communities, and organizations of any kind.
Whoever they are, the individuals and companies that are capable of hosting validators for themselves and for others can open permissionless Vaults in StakeWise V3.
Once an operator sets up their Vault, StakeWise users can choose to deposit Ether in it and stake on that Vault’s node. The network of Vaults becomes an open marketplace for StakeWise users to shop around and choose the best Vaults for them, be it one Vault or many different Vaults.
As always, there is no minimum or maximum staking amount. Instead, there is complete freedom to choose who will run validators with your Ether, which puts StakeWise users into a position to influence the degree of decentralization on Ethereum through their allocation choices.
Vault Scoring Model
How should stakers decide which Vaults to deposit their Ether in?
The safety of capital should be the main priority for stakers. To help users choose the best options between different Vaults, StakeWise V3 will produce a unique score for every Vault, a score that will reflect the relative safety of staking in it. This will make it easy to decide which Vaults to choose and which to avoid.
The Score is produced by StakeWise’s automated scoring system, the final components of which will be decided (and updated, if needed) by the StakeWise DAO. It will take into account the data about Vault’s profitability and the operational performance of the operators in the Vault. It does not matter if they are individuals running nodes from home or companies — they will be assessed equally. Metrics like the frequency of producing timely attestations and successful block proposals, and the share of the Beacon Chain they control will play an important role in the Score. For example, better profitability and performance will lead to a higher score because they signal stability.
In contrast, controlling a large share of the Beacon Chain will have a negative impact on the Score because of the risks associated with centralization. This means Vaults with smaller, independent operators will have a higher score all other things equal. This is one of the levers StakeWise DAO can use to improve decentralization of the network.
The Score will also consider Vault’s adherence to client and geographical diversity, and the availability of collateral or on-chain slashing insurance to cover for potential slashing losses. What is more, it will check for usage of Distributed Validator Technology like Obol or SSV to make the staking setup safer, improving the Score.
While these and other parameters will be decided and weighted by the StakeWise DAO, we encourage the wider Ethereum community to contribute to the development of the Scoring Model. Join the discussion of StakeWise V3 in our Discord: https://discord.gg/W8ddVNw7hw
osETH Token for Liquid Staking
The Vaults network is the foundation for decentralised staking in StakeWise V3, but it’s not the only innovation. Another cool feature is the ability to generate an overcollateralized staked Ether token, osETH, to access DeFi and have instant liquidity for staked capital. The token accrues staking rewards when held, which is reflected in the changing redemption value over time, like wstETH from Lido or rETH from Rocket Pool. As usual, the StakeWise DAO fee is deducted from the rewards osETH holders accumulate.
Anyone who stakes into the Vault can generate osETH and use DeFi with it. This means we can finally have liquid staking for solo stakers — all it takes is creating their own Vault and staking Ether into it to mint osETH. With more flexibility to exit from staking instantaneously and earn more via lending / borrowing, liquidity mining programs, and hosting validators for others, we hope to see more solo participation on Ethereum. Solo equipment providers, like Avado and Dappnode will play an important role in reducing technical overhead, too.
For users buying osETH from the market instead of generating new osETH through Vaults, StakeWise V3 removes the risk of slashing in using a liquid staking service. This is thanks to the excess collateral buffer provided when minting osETH. Any slashing losses are absorbed by the buffer before they reach osETH holders, turning liquid staking with StakeWise V3 into slashing-free service for the buyers of osETH. The amount of buffer is calculated using the expected slashing loss formula, with some extra Ether on top for good measure.
In turn, this means that stakers in Vaults provide excess backing for osETH when they mint it. They bear the slashing risk related to their choices of Vaults. This incentivizes them to be more diligent in choosing Vaults to minimize the risk for themselves, preferring to go with Vaults that offer the most safety and decentralization. We believe this can make osETH the most resilient liquid staked Ether token in existence, backed by a decentralized network of Vaults of top quality.
Similarly to sETH2, StakeWise DAO will focus on developing liquidity & utility for the osETH token.
For more information on osETH & collateralization mechanism, we invite you to read the StakeWise V3 Litepaper: https://stakewise.io/stakewise-v3.pdf.
The goal of StakeWise V3 is to enable liquid staking for a permissionless set of participants and create a staked Ether token resilient to slashing. The system is designed to be sufficiently flexible to accommodate for the needs of all sorts of users — liquid staking protocol depositors, solo node operators, DeFi degens, commercial node operators, exchanges, funds and other organizations.
Below we illustrate how StakeWise V3 can handle the different use cases that such users have for a staking platform.
Individuals staking from home value the non-custodial nature of running a node independently and often attach high significance to keeping Ethereum decentralized. However, the lack of tokenization opportunities to access DeFi with their stake means that liquid staking users increasingly rely on just a dozen of staking companies to earn yield in DeFi, leading to centralization. In addition, solo stakers often underutilize their infrastructure investment by running fewer validators than their machine is capable of hosting, because of the high capital requirement to start a validator. StakeWise V3 aims to fix these issues.
StakeWise V3 allows solo stakers to mint osETH tokens against their node(s) to access DeFi even as they continue running in a non-custodial setting. Solo stakers not interested in accepting external capital can set up a private Vault and whitelist their own address to deposit Ether onto their node. They then have the ability to mint osETH based on the Ether they staked.
It also allows solo operators to host validators for other stakers and earn additional revenues. Solo stakers willing to accept delegations can set up a public Vault and look to maximise their Score by developing a history of strong operational performance, depositing Ether collateral, buying slashing insurance for their nodes, and/or teaming up with other operators using Distributed Validator Technology (DVT) which reduces the slashing risk. They then have the ability to mint osETH based on the Ether they added to the Vault.
Liquid Staking & DeFi Power Users
The users of liquid staking protocols seek out stable yields from holding a staked Ether token that they can instantaneously sell back into Ether or apply in DeFi for additional revenue.
The benefit that StakeWise V3 can offer to such stakers is the osETH token that can be bought and sold from the market, or minted by allocating Ether in the Vaults. In contrast to most existing alternatives, osETH has slashing protection embedded in its design, making liquid staking safer for both users and protocols that build products on top of it. Its goal is to protect the Ether principal that users commit to staking, which is a good fit for those who cannot afford to lose capital due to possible slashing losses.
Beyond simply avoiding the slashing risk, StakeWise V3 gives stakers the opportunity to influence the degree of network decentralization by offering them a marketplace of staking providers. Stakers that are more discerning and risk-averse finally have the means to choose the specific operators that they consider less risky than the large staking providers, and in doing so can help the network decentralize.
Commercial Node Operators
Dozens of commercial node operators offer non-liquid Ethereum staking to their customers by simply running nodes on their behalf. Most of these services are custodial in nature and lack the ability to offer liquid staking to users based on the heightened capital and coordination requirements. They are also subject to a permissioned process to join a liquid staking protocol, which often requires waiting until the protocol’s DAO starts accepting new operators into its validator set.
In StakeWise V3, such operators can open new Vaults, both independently and/or in partnership with other staking companies and solo node operators, to start accepting delegations that depositors can tokenize into osETH. Operators can decide to keep the Vault private or public, choose their desired DVT technology, demonstrate strong operational performance, post collateral or buy slashing insurance to reduce the risk and improve their Vault Score. They can also migrate the existing users into their Vault in StakeWise V3 once changing validator credentials becomes possible.
In any instance, staking with their previously custodial service becomes liquid and non-custodial, reducing the risk for both the customer and the operator.
Institutions & Exchanges
Financial organizations like fintechs, crypto exchanges and investment funds prefer to work directly with staking service providers, choosing just a handful that have successfully passed the due diligence process and offered the best terms. Whenever they also enable staking to customers downstream, they prefer to limit service access to only the clients they know, abiding by the Anti-Money Laundering (AML) regulations. Liquid staking is usually not available outside of such organizations’ own ecosystems, limiting users’ access to liquidity and the additional utility for staked capital that is available in DeFi.
StakeWise V3 allows institutions & exchanges to work only with the node operators and staking clients of their choice by creating their own private Vaults. In this case, the Vault tokens produced by staking into the Vault act as representations of staked Ether for which the organization can itself enable liquidity & utility within its ecosystem. In case the organization wants to access the wider DeFi market and enjoy more liquidity & utility for staked capital, it can mint, or allow its customers to mint, osETH tokens to do so.
The only way to reverse the centralization trend that liquid staking services bring to Ethereum is by proactively encouraging the reallocation of new Ether inflows towards smaller but quality operators, and increasing the participation of solo operators in the network. StakeWise V3 aims to achieve both. With the V3 concept, we enable liquid staking for solo operators, and create a node operator marketplace to help discerning and mission-driven users to choose their own staking providers. The new architecture introduced by StakeWise allows individuals and organizations to mint osETH, a liquid staked Ether token, based on their own nodes. They can do so without jeopardizing the safety of the DeFi ecosystem, thanks to the overcollateralized nature of osETH.
We hope to see the Ethereum community rally behind the new concept and assist StakeWise DAO with finalizing the core components of the new product.