ETHFI: A Market-Undervalued Leader in Restaking Projects
Introduction
ether.fi is dedicated to Ethereum staking and liquidity restaking. The biggest pain point in the current Ethereum staking and restaking sector is that users lose control over their Ethereum once they stake it. Therefore, ether.fi aims to develop non-custodial staking solutions, allowing users to enjoy the benefits of staking and restaking while retaining control over their Ethereum.
Project Overview
Core Team
- Mike Silagadze: Founder & CEO. A graduate of the University of Waterloo, Mike Silagadze, has been involved in cryptocurrency investment since 2010. He previously founded Gadze Finance, was CEO, and founded Top Hat.
- Chuck Morris: Chief Engineer. He holds a graduate degree from the University of Chicago, specializing in computer science. He has extensive experience leading cryptocurrency development engineering teams.
Partners
- Kiln: Provides infrastructure services for Ethereum.
- DSRV: A company offering blockchain infrastructure support, including node services and other technical support.
- Chainnodes: A blockchain service provider focused on node operations and management.
- Obol: A company specializing in distributed trust protocols or decentralized technologies related to blockchain.
From the team and partner information disclosed by ether.fi, it is evident that the development team has extensive experience in cryptocurrency investment and development. ether.fi has also established partnerships with several cryptocurrency infrastructure companies, providing strong support in infrastructure development.
Financing Overview
ether.fi has raised approximately $32.3 million through two rounds of financing.
- Seed Round: In February 2023, led by Version One Ventures, with participation from Purpose Investments, North Island Ventures, Node Capital, Maelstrom, Kommune.one, Chapter One Ventures, and Arrington XRP Capital. The amount raised was $5.3 million.
- Series A: In February 2024, led by Version One Ventures and OKX Ventures, with participation from White Star Capital, White Loop Capital, Stani Kulechov, Selini Capital, Sandeep Nailwal, North Island Ventures, Node Capital, and Matthew Howells-Barby. The amount raised was $27 million.
Among these, Version One Ventures and OKX Ventures are top-tier investment institutions in the crypto industry. The participation of Stani Kulechov, founder of AAVE, Sandeep Nailwal, founder of Polygon, and Matthew Howells-Barby, founder of Kraken, in ether.fi’s financing indicates a high level of recognition from leading figures in the industry.
Operation Mode
Based on the amount of ETH and its corresponding LST tokens deposited by users, there are two categories: multiples of 32 ETH and its LST tokens, and other amounts of ETH and its LST tokens.
When the Amount of ETH and Its LST Tokens is a Multiple of 32
Node operators submit bids to be allocated validator nodes for operation. Trusted node operators can submit a nominal bid to be marked as available. Untrusted node operators participate in an auction mechanism and are allocated validators based on the winning bid price. Depositors will place 32 ETH into the ether.fi deposit contract. This triggers the auction mechanism, and a node operator is assigned to run the validator. This process also mints a withdrawal vault and two NFTs (T-NFT and B-NFT), granting ownership of the withdrawal vault. T-NFT represents 30 ETH, which is transferable at any time. B-NFT represents 2 ETH, which is mandatorily bonded. The only way to recover the 2 ETH is by exiting the validator or a full withdrawal. The validator encrypts the validator key with the public key of the winning node operator and submits it as an on-chain transaction. The node operator then uses the decrypted validator key to start the validator. The subscriber (or node operator) can submit an exit command to exit the validator, and the subscribed ETH will be deposited into the withdrawal vault. Subsequently, the subscriber can burn the NFT and reclaim the ETH after deducting fees.
The B-NFT is used to provide a deductible for slashing insurance (in the event of a slashing incident) and represents the responsibility of monitoring the performance of the validator node. Due to the added risk and responsibility, the yield on B-NFT is higher than that of T-NFT.
When the Amount of ETH and Its LST Tokens is Another Amount
When the amount of ETH and its LST tokens deposited by users is not a multiple of 32, or if users do not want to take on the responsibility of monitoring validator nodes, they can participate in ether.fi staking by minting eETH in the NFT liquidity pool. The liquidity pool contract consists of a mixed asset pool of ETH and T-NFTs. When users deposit ETH into the pool, the pool mints eETH tokens and transfers them to the users. Holders of T-NFTs can deposit T-NFTs into the liquidity pool and mint eETH equivalent to the value of T-NFTs. Market makers holding eETH can convert them into ETH from the liquidity pool at a 1:1 ratio, provided there is sufficient liquidity. If liquidity is insufficient, the conversion will trigger a validator exit. Users staking with B-NFT deposit their ETH into the pool and enter the queue for B-NFT allocation. When the amount of ETH in the liquidity pool exceeds the threshold, the next holder in the queue will be allocated. During this process, a private key is generated, and the staking process is triggered. The 32 ETH will be staked in the pool, minting two NFTs: T-NFT goes into the pool, and B-NFT is given to the bond holder. When the ETH amount in the pool falls below the threshold, the earliest minted T-NFT will trigger an exit request. This exit request records a timestamp and starts a timer. If the timer expires and the validator has not exited, the value of the B-NFT holder will gradually reduce. Node operators are rewarded for exiting expired validators. Upon validator exit, both T-NFT and B-NFT are burned, and the ETH (minus fees) is deposited into the liquidity pool.
Additional Staking Rewards and Services
To enhance staker rewards, ether.fi’s project design includes not only staking rewards but also a node service marketplace, allowing stakers and node operators to register nodes, provide infrastructure services, and share service revenue. When users deposit funds into ether.fi and receive staking rewards, ether.fi will automatically restake the users’ deposits to Eigenlayer for additional returns. Eigenlayer utilizes staked Ethereum to support various AVS, increasing stakers’ returns by establishing an economic security layer. The total staking rewards are distributed among stakers, node operators, and the protocol at 90%, 5%, and 5%, respectively. Users can earn Ethereum staking rewards, ether.fi loyalty points, restaking rewards (including Eigenlayer points), and rewards for providing liquidity to DeFi protocols.
Distributed Validator Technology (DVT)
In the ether.fi whitepaper, Distributed Validator Technology (DVT) is introduced, which we will refer to as DVT. DVT primarily addresses the issue of centralization in Ethereum staking. In traditional Ethereum staking, a validator is typically managed by a single node operator. This model presents two significant issues:
- If the node fails, it impacts the security and returns of the ETH staked in that validator.
- If the node is unreliable or attacked, it may compromise the performance and security of the validator. DVT addresses these issues by allowing multiple independent entities to jointly manage a single validator, thus distributing the risk of a single point of failure.
The implementation of DVT involves upgrades and improvements in two key areas:
- First, DVT implements key splitting. Instead of a single key being managed by one entity, the validator’s key is divided into multiple parts. Each entity managing the validator holds only a portion of the key. Any operation requires the consensus of the majority of entities, effectively reducing the risk associated with a single entity controlling the key.
- Second, there must be clear contracts and agreements among DVT participants to define the responsibilities and rights of each entity, ensuring fairness and transparency in the system.
In summary, by introducing DVT technology, ether.fi significantly reduces the centralization risk associated with traditional node operation, enhancing the security and fairness for stakers and participants.
NFT-based Validator Management
In ether.fi’s design, each validator creation involves generating two NFTs: T-NFT and B-NFT. T-NFT represents 30 ETH and is transferable at any time. B-NFT represents 2 ETH and is mandatorily bonded, only refundable upon full exit, returning the 2 ETH. The minted NFTs not only represent ownership of the funds staked on the validator but also contain all the critical data necessary for managing and operating the validator. The contents of the NFTs include detailed information about the created validator, such as the node running the validator, its physical location, the node operator, and specific node service details. The NFT holder has control over the validator.
ether.fi’s NFT design is an upgraded version of the LSTs used in previous LSD projects. This approach allows stakers to manage their validators more flexibly and in a decentralized manner through NFT ownership. It also mitigates the trust issue where stakers previously had to transfer their ETH to a third party.
Innovations Compared to Other Projects in the Same Field
Comparing ether.fi with other projects in the restaking sector:
- Security: The most significant advantage of ether.fi over traditional staking projects is security. In traditional staking projects, users stake their ETH directly to the node via the project, losing control over their keys. If the node acts maliciously or is attacked, the stakers incur corresponding losses. Ether.fi aims to develop a non-custodial staking solution by incorporating DVT technology and NFT-based validator management, enabling stakers to control their keys and retain custody of their ETH while delegating staking to node operators. This setup involves multiple independent entities jointly managing a single validator, thus dispersing the risk of a single point of failure. Ether.fi minimizes the risks for users participating in Ethereum staking.
- Exit Mechanism: In other restaking projects, users typically have to wait 7 days to redeem their staked ETH or LST from the protocol. However, ether.fi offers a unique exit mechanism where users can unstake eETH back to ETH. This means users can not only swap back to ETH via DEX but also choose to unstake and redeem ETH at a 1:1 ratio with a shorter waiting period. Additionally, ether.fi is the only protocol that supports direct LRT exits. Other protocols, such as Curve and Balancer, facilitate exits through LP pools, where withdrawal times can vary based on liquidity reserves.
In the crypto industry, particularly for active on-chain users, the primary concern is asset security, followed by returns. By utilizing DVT technology and NFT-based validator management, ether.fi significantly reduces asset security risks for users. Moreover, ether.fi provides a user-friendly unstaking mechanism, reducing user concerns when participating in the project.
Project Model
Business Model
The economic model of ether.fi consists of three roles: node operators, staking users, and active verification service providers (AVS).
Node Operators: Node operators in ether.fi are entities that can leverage ether.fi’s infrastructure to provide high-quality services to stakers and other network participants. Node operators play a crucial role in ether.fi’s economic model. Users must stake their ETH or LST through node operators, who then mint NFTs for the stakers. ether.fi charges a fee for minting or burning these NFTs, which is one of ether.fi’s revenue sources. Node operators can restake the staked ETH to Eigenlayer for additional returns or provide services to AVS integrated with ether.fi to generate revenue.
Staking Users: Staking users in ether.fi stake their ETH in ether.fi and, in addition to receiving Ethereum staking rewards, primarily earn returns by restaking to Eigenlayer and providing services to AVS. Of the returns earned by staking users, 5% is allocated to the nodes, and 5% goes to the ether.fi project, which is another source of revenue for ether.fi.
Active Verification Service Providers (AVS): As a project in the restaking sector, ether.fi inevitably involves AVS. While most restaking projects connect their staked ETH to Eigenlayer to handle AVS integration for additional rewards, ether.fi plans to establish its own AVS ecosystem as a next step. AVS is a source of extra returns for staking users provided by the ether.fi project.
From the above analysis, ether.fi’s revenue comes from:
- Charging a percentage fee for minting or burning NFTs.
- Receiving 5% of the returns earned by staking users.
Token Model
According to the whitepaper, the total supply of ETHFI is 1 billion tokens. The initial supply of tokens is 115.2 million, with a current circulation rate of 11.52%.
The distribution of ETHFI is as follows:
Token Utility
The utility of ETHFI within ether.fi, as indicated in the whitepaper, includes:
- Payment of Protocol Fees: Users need to use ETHFI for conducting operations and transactions within the ether.fi platform.
- Project Incentives: Rewarding users who engage in staking and operate nodes within the network with ETHFI tokens.
- Participation in Governance: Holding ETHFI tokens enables participation in the governance of the project.
Evaluation of ETHFI’s Value
The evaluation of ETHFI’s value, as described in the whitepaper, indicates that in the ether.fi project, there are no scenarios of centralized or periodic token burning.
A notable drawback of the ether.fi project is the limited empowerment of ETHFI. The design does not incorporate a staking mechanism, thereby reducing a crucial aspect of locking ETHFI tokens to increase project value. However, based on the token allocation outlined in the whitepaper, the most significant portion influencing the market consists of investors and advisors, as well as the core team contributors. These two segments account for 55.76% of the total token allocation. Although the percentage is relatively high, judging by their lockup periods, the majority of tokens will not be released until after March 2026, thus temporarily not affecting the token’s circulation rate.
The future trajectory of ETHFI largely depends on whether the price of ETH can sustainably rise after the introduction of spot ETFs and whether ether.fi can onboard more AVS in the future to provide stakers with additional ETH staking rewards.
TVL
From the chart, it is evident that the TVL (Total Value Locked) of ether.fi has reached $5.88 billion, making it the top-ranking project in the Restaking sector. Additionally, it’s observable that ether.fi’s TVL has been consistently rising rapidly since 2024.
APY
We can see from the official website of ether.fi that the APY (Annual Percentage Yield) offered to staking users is also very attractive.
The Top Ten Holders.
In the top ten holders, including ether.fi’s DAO Treasury, Binance, and OKEX’s official addresses, the remaining holders account for 7.07% of the total. The amount of ETHFI held by these top ten holders is 77.07 million tokens, while the current circulating supply is 115.2 million tokens, representing 66.91% of the circulating supply. This indicates that the majority of tokens are concentrated in the hands of whales.
Project Risks:
- Lack of Deflationary Mechanism for ETHFI: Besides serving as the governance token for ether.fi, the primary role of ETHFI is for users to pay fees and distribute rewards to validators and node operators. Although the current unlock volume of ETHFI tokens is not significant, and the locking periods for the largest proportion of investors, advisors, and core contributors are relatively reasonable, there won’t be significant unlocking during this bullish market cycle. However, the lack of buyback and staking mechanisms for ETHFI leads to a continuous increase in its circulation, without any mechanism achieving deflationary effects. This, to some extent, affects the upward movement of the token price.
- Dependency on External Service Providers: While ether.fi addresses the concerns of stakeholders regarding asset ownership and timely unstaking compared to other Restaking projects, the primary challenge lies in increasing additional real income for stakers. Presently, ether.fi, like other Restaking projects, relies on Eigenlayer to provide Active Validator Services (AVS) by integrating staked tokens with Eigenlayer. Although ether.fi plans to launch its own AVS in the current year, uncertainty remains about its ability to attract other projects to use its services. Failure to achieve this could significantly impact the token price.
Summary:
ether.fi’s development direction is focused on Ethereum staking and liquidity restaking. By implementing DVT technology and tokenizing validator management, it addresses the common issue in the Ethereum staking and liquidity restaking space where users lose control of their Ethereum after staking. This approach ensures that stakers retain control over their keys and enables multiple independent entities to manage a single validator, effectively mitigating centralization risks for stakers. Additionally, ether.fi is the only protocol in the Restaking space that allows for LRT direct withdrawals, providing a significant advantage, evidenced by its current position as the leader in Total Value Locked (TVL) in the Restaking space.
However, ether.fi’s token economics are relatively straightforward, lacking a robust staking and burning mechanism, resulting in a continuous increase in token circulation, indirectly impacting price appreciation. While ether.fi plans to launch its own Active Validator Services (AVS) in the future, uncertainties remain about its adoption by other projects. Failure to achieve this could significantly impact token prices. Its actual impact remains to be seen.
In conclusion, ether.fi addresses users’ concerns and industry-wide challenges by leveraging its unique DVT technology and tokenized validator management mechanism. Its reasonable LRT withdrawal mechanism has gained user acceptance. By addressing two critical aspects of user concerns — security and control over assets — ether.fi stands out in the industry. With Ethereum’s spot ETF approval underway and potential future bullish market cycles, ether.fi, being Ethereum-based, is poised for significant performance.
