Transitioning to StakeWise V3: The Migration Plan
Development of StakeWise V3 is well underway, so it’s time to talk about the migration plans! Lots of changes are coming up, but don’t worry — this post will address any uncertainties around the transition to StakeWise V3 to make it as smooth as possible. If you’d rather listen than read, we invite you to the StakeWise Community Call on Thursday, October 27th to go over the plans together and answer any outstanding questions. With that, let’s begin!
The Big Picture
StakeWise V3 is a wholly different system from the current iteration of StakeWise. To understand the scope of the upcoming changes, here’s a quick recap of the V3 system:
- At the heart of StakeWise V3 is a network of Vaults — mini staking pools that can be launched by individuals, communities, and companies to stake Ether on behalf of StakeWise users. No permission is required to launch Vaults, and users are free to choose which Vaults to stake into.
- Every Vault has its own Vault token, or VLT, just like every liquidity pool has its own LP token. VLTs are minted to users when they deposit ETH into the Vault to represent their stake in the Vault. As a user’s stake accumulates staking rewards over time, their VLT tokens grow in value, allowing them to redeem every VLT token for more Ether than was required to mint it. Vault commission is automatically deducted from the rewards.
- Holders of VLTs can make their stake liquid by locking VLTs to mint osETH, the liquid staked Ether token of StakeWise V3. osETH stands for overcollateralized staked ETH because minting osETH always requires locking extra VLTs as a buffer against potential slashing losses in the Vault. For example, locking 100 ETH worth of VLTs from some Vault will allow a user to mint at most 95 ETH worth of osETH, leaving 5 ETH worth of VLTs as collateral against potential slashing losses.
- Similarly to VLTs, osETH appreciates in value over time to reflect the accrual of staking rewards. It can always be redeemed for VLTs or for ETH at the ETH value it represents. This means that osETH can be bought on exchanges to be held for staking rewards, or sold to quickly exit from staking. In that, it is similar to DAI or LUSD. StakeWise DAO commission is automatically deducted from the rewards.
Summarizing V3, it requires changes to i) the staking process, ii) the tokenomics of staked ETH, iii) the fee structure, and iv) the ecosystem around staked ETH. Let’s explore how these changes will be implemented.
The staking process
To simplify the transition from the existing StakeWise Pool to an open marketplace of Vaults, we foresee the current Pool becoming the first Vault in StakeWise V3, codenamed “Genesis”. Upon transition, it will maintain the same operator set (Cryptomanufaktur, Finoa, StakeWise Labs, T-Systems, Verihash) and commission (5% of rewards for operators), leaving no impact to how users’ Ether is being staked.
The team will execute the transformation of the StakeWise Pool into one of the StakeWise V3 Vaults, while users will need to perform the actions described in the following sections.
The tokenomics of staked ETH
This part of the StakeWise Pool will need to undergo the most change. With the current version of StakeWise turning into a Vault, the sETH2 and rETH2 tokens will need to be replaced by the Vault tokens. The extent of the impact is dramatic: it signifies a transition away from the dual token model in favour of a single token approach. This is a drastic change that requires some explanation.
The dual token model of StakeWise is known to produce the highest yield and give users the most flexibility for handling their earnings. The reason it can produce higher yields than the single token model is two-fold:
i) it allows stakers to swap rETH2 (rewards) into sETH2 (principal) for a compounding effect;
ii) it helps avoid 5–10% dilution of profitability for new stakers in pools with a single token where the token they receive does not represent 100% principal but rather the composition of principal and rewards in the pool (often somewhere between 90%/10% or 95%/5%).
These benefits are currently impossible to achieve with a single token, so why switch?
The main reason we are comfortable with this change is that Ethereum will soon undergo a spec change that will allow us to skim ETH rewards from the validators without exiting them. Skimming the rewards allows compounding of the rewards on the validator level, removing the need to offer compounding on the token level. It also removes the issue of profitability dilution, since rewards can be periodically skimmed to maintain the share of principal in the pool as close to 100% as possible. So whilst the dual token model has its advantages today, the spec change will unfortunately render it much less useful, easing the path towards a replacement.
The transition from sETH2 and rETH2 towards a VLT token will require users to manually convert their existing tokens into the new one. The conversion of sETH2 and rETH2 into VLTs will happen at a rate of 1:1 or lower, depending on the date of conversion. Here’s an example:
- On Day 1, the first VLTs can be minted to facilitate conversion to V3. The total supply of tokens (sETH2 + rETH2) will be equal to the total validator balances at this point, i.e. the usual 1:1 backing. To simplify calculations, VLTs will also be minted at 1:1 backing with ETH in the validators. Hence, the conversion rate between sETH2 or rETH2 and VLTs will be exactly 1 on Day 1. Since VLTs do not differentiate between the rewards and principal, both sETH2 and rETH2 can get converted into VLTs at a 1:1 ratio.
- On Day 2, ETH will have accrued to the validators as reward for staking. rETH2 token balances will grow for stakers who haven’t converted their tokens yet. Meanwhile VLTs will rise in value to reflect accrued rewards, to e.g. 1.0001 ETH per 1 VLT. This means that stakers looking to convert sETH2 / rETH2 into VLTs on Day 2 will convert at a different rate than on Day 1, i.e. 1 VLT per 1.0001 sETH2/rETH2.
- On Day 3, ETH will have accrued to the validators as reward for staking. rETH2 token balances will grow for stakers who still haven’t converted their tokens. Meanwhile VLTs will rise in value once again to reflect accrued rewards, to e.g. 1.0002 ETH per 1 VLT. This means that stakers looking to convert sETH2 / rETH2 into VLTs on Day 2 will convert at a different rate than on Day 1, i.e. 1 VLT per 1.0002 sETH2/rETH2.
The dynamic described above will continue indefinitely, with the conversion rate increasing by the day. There will be a grace period for migrating from the dual token model to VLTs to ease the transition, but we recommend that users convert as soon as they can.
The fee structure
All current StakeWise users pay a flat fee of 10% on rewards today. The fee is then split between the DAO and the node operators. Operators receive up to 50% of the staking fee, proportionately to the share of validators they are hosting. The remaining 50% goes to the StakeWise DAO Treasury.
When converting their existing tokens into VLTs, stakers will continue paying the operator share of the fee, now called the Vault fee. As it stands, it will remain the same as before (5% of the rewards). However, they will be paying the DAO fee only once they mint osETH to make their stake liquid.
The StakeWise DAO fee in StakeWise V3 could be subject to change. The team will publish its thoughts on the topic in due course.
There are no actions required on the StakeWise users’ end — the fee deduction will happen automatically as it has before.
The ecosystem around staked ETH
sETH2 and rETH2 have several liquidity pools & means to apply the tokens for farming or other rewards, including StakeWise’s own liquidity mining programs. After the migration to StakeWise V3, some of these pools will no longer be required and new liquidity & utility will need to be set up for osETH and SWISE. The team is already in active discussions with DeFi protocols regarding osETH integrations and is drawing up plans for liquidity migration from the current sETH2/rETH2 pools into the osETH pool. The decision for how long to continue incentivising sETH2 and rETH2 liquidity after V3 launch ultimately lies with the DAO. However, we will recommend removing these incentives upon the launch of V3 and diverting SWISE incentives towards osETH liquidity. It is in everyone’s best interest to encourage a mass transition to increase the supply and liquidity for the new staked ETH token as soon as possible.
For a quick transition to VLTs & osETH, current liquidity providers will need to remove their Uniswap positions to regain access to their sETH2 and rETH2 ahead of converting the tokens into VLTs. Similarly, users of Opium Vaults will need to remove sETH2 from the contract. All users will need to claim any rETH2 they have accrued in the Merkle Distributor — this can be done on the Farms page. After that, stakers can convert sETH2 and rETH2 into VLTs. Those who want to provide liquidity for the new token and enjoy the benefits of liquid staking must then mint osETH. There is no single AMM that has been chosen for osETH trading yet, but the team will provide its thoughts on the matter closer to V3 launch.
A smooth transition for stakers is of paramount importance. Our energies are focused on ensuring that the migration process is as simple as possible. A formal step-by-step guide for the conversion will be provided ahead of launch to guide all users through the process.
We do not want our existing stakers to have any concerns regarding the transition to a new token model. This means that the team will be on hand throughout the entire period leading up to V3 release & during the actual migration process to answer any questions.
A recap of the migration progress, as well as the updates on the development of StakeWise V3, the SWAT and Treasury Management initiatives will be covered in the StakeWise Community Call on Thursday, October 27th at 7pm CET. Make sure you tune in!
A new era dawns for StakeWise — join the discussion about V3 now: https://discord.gg/JXZJF9WqcP