What is osETH? A Deep Dive Into the Overcollateralized Staked Ether Token of StakeWise V3: Part 1

StakeWise
6 min readDec 9, 2022

As we continue with the development of StakeWise V3, it’s time to look at how osETH — the overcollateralized staked ETH token within V3 — will bring liquid staking to anyone that can run Ethereum nodes and provide a slashing-resistant alternative to the current staked ETH token landscape.

In this three-part series, we will explore every aspect of osETH mechanics and cover the liquidity and utility roadmap, to show you how osETH will become the dominant way to access liquid staking and help decentralize the Beacon Chain.

Let’s dive into part one and learn more about the osETH fundamentals!

A token for liquid staking

Early logo of osETH, StakeWise V3’s overcollateralized staked Ether token

First things first: what is osETH?

osETH is a token for liquid ETH staking. It is a representation of all the ETH staked in StakeWise V3 validators, where every osETH is a small share of the total amount staked.

Staking brings rewards, and so over time the value of osETH grows to reflect that rewards are flowing into StakeWise V3 validators. This means that simply holding osETH is enough to earn ETH rewards from supporting the Beacon Chain.

osETH is designed to make staking very simple: get osETH into your wallet to start earning staking rewards and convert it back to ETH to cash out what you deposited & earned.

Here’s what the process looks like:

When the new rewards are earned by StakeWise V3 validators, total ETH in the validators increases, and every osETH share becomes more valuable.

This increase in osETH value over time is proportional to the amount of rewards earned by StakeWise V3 validators, and accurately reflects the earnings from staking for osETH holders.

Such value accrual design is the top choice for ensuring osETH can be integrated deeply into the DeFi ecosystem and bring as much utility to holders as possible.

Decentralized by design

osETH is a reflection of the ETH staked in StakeWise V3, but who is running all the validators that produce a consistent stream of earnings for osETH holders?

One unique feature of StakeWise V3 is a marketplace of Vaults — mini staking pools run by the different node operators (users and companies) where ETH holders can deposit their ETH for staking.

Upon receiving deposits into their Vault, the operators launch validators on behalf of stakers, also offering them the option to mint osETH. It is completely permissionless, so anyone can launch a Vault, stake into Vaults and mint osETH without restrictions.

This design enables access to liquid staking for everyone, for example:

  • Solo stakers can mint osETH against their solo validators
  • Users of staking companies can mint osETH against their validators
  • Groups of Avado / Dappnode owners can run Vaults for others and stake their own ETH to mint osETH for liquid staking
  • DAOs staking their Treasury into the Vaults they own and operate, and minting osETH against their validators for liquidity on-demand, etc.
  • Centralized exchanges can offer liquid staking to their users, out of the box

With so many use cases enabled with the Vault system, decentralization is ensured by design.

Backed by solo stakers and a variety of both individual and commercial operators, osETH is a rare case of DeFi primitive that benefits both its holders (through differentiation of the underlying validators) and the wider network (through providing access to liquid staking no matter the method). However, it does not stop there.

Embedded slashing protection

To ensure that the risks of permissionless Vaults don’t spill over to osETH holders, StakeWise V3 requires >1 ETH for every osETH that stakers in Vaults want to mint. It’s where the name for osETH comes from — it’s an overcollateralized staked ETH token!

Thanks to this requirement, osETH has an excess ETH backing so that if slashing happens, there is always a reserve of ETH that absorbs the slashing losses before osETH holders are affected. This protects osETH holders from losing their principal, making osETH a safer option for staking and DeFi protocol integrations. We call this embedded slashing protection.

Note that the stakers who mint osETH are still exposed to the slashing risk of the Vaults in which they staked ETH, and excess collateralization makes sure that the other osETH holders are not affected.

Mint vs buy osETH

So importantly, there are two ways in which osETH can be obtained: it may either be purchased from the market, or minted by staking into any of the Vaults. There are distinct benefits to each method.

The users who enjoy the full benefits of embedded slashing protection and diversification are those osETH holders who purchase the token from the market. This is akin to purchasing DAI to transact in stables, where instead of locking up collateral to mint DAI in Maker DAO, users simply swap other currencies into DAI to benefit from owning a decentralized stable currency.

Hence, if you are looking for slashing protection and diversification benefits, it will be best to buy osETH from the market (for example, via the StakeWise interface). When you are done staking, simply sell osETH back to the market. When selling, you should expect the sale price to exceed the buy price (in ETH terms) because you accrued ETH staking rewards while holding osETH. Selling higher than you bought (in ETH terms) is how you will realize a profit from staking.

Compared to users who buy osETH on the market, the stakers who mint osETH from various Vaults have a different set of benefits. The main advantage to minting osETH instead of buying is the ability to choose a specific Vault that will stake your ETH, which results in controlled risk exposure and potentially a higher staking yield. Anyone who runs their own validators for staking (like solo stakers , DAOs, CEXs, and staking-as-a-service companies) will want to mint osETH from their Vault instead of buying it.

To mint osETH from a Vault, >1 ETH is required per every osETH minted, and the slashing risk of the particular Vault is assumed. This is similar to users minting DAI in Maker by providing ETH, USDC or another asset as collateral, except there is no price risk in managing the health ratio of your position.Getting rid of osETH in this case simply requires burning it, allowing for ETH to be withdrawn directly from the validators for unstaking.

Hence, if controlling your own nodes while liquid staking and maximizing your yield are the key goals, minting osETH is recommended instead of buying.

Final remarks

The goal of StakeWise V3 is to enable liquid staking access for every user of Ethereum, no matter their method of staking.

Similarly to Maker and DAI, osETH aims to be a decentralized staked ETH token standard built upon a variety of node operators supporting and decentralizing the network. Thanks to overcollateralization, fungibility can be achieved between different nodes, no matter who runs them. The end result is a liquid staking protocol that allows any user and organization to participate in liquid staking and thus helps Ethereum decentralize.

StakeWise V3 is truly a catch-all, and we are excited to be finalizing the preparations to open up the testing of the Vault system to the first batch of users on testnet.

A new era dawns for StakeWise — join the discussion about V3 now: https://discord.gg/JXZJF9WqcP

Join thousands of other stakers in the StakeWise Pool to embark on your ETH & GNO staking journey 🚀

We love chatting on Discord and Telegram — see you there!

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