StaFi: How does ETH2.0 staking mining solve the liquidity problem?

Source: Decentralized Finance Community

The staking mining of ETH2.0 is a major direction that cannot be ignored. The annualized rate of return of anchored ETH can reach 5~20%, and the rate of return can reach 15~20% before the number of staked ETH reaches 1 million. Currently, 99,232 ETH have been deposited in the staking contract. The current price of ETH is $460. If the final number of staked ETH reaches 11 million, this will be a staking market of $5 billion. This is worth looking forward to for both investors and practitioners, and it is also the focus of our ChinaDeFi. We will also consider the possibility of integrating it into UBI.city.
However, individual investors who want to start participating in ETH 2.0 staking mining as soon as possible must be cautious and clearly understand the high risks they may face:

• Possibility of loss : The validator on which the staking is based cannot be suspended, otherwise it will lose rewards or even lose half of the staked ETH.

• Lack of liquidity : The staked ETH needs to wait until the second phase of ETH 2.0 goes online before it can be redeemed, and it may still take several years to reach this stage.

Therefore, we can consider participating through some ETH 2.0 staking mining protocols to minimize the above risks. Currently, several projects have proposed solutions for ETH2.0 staking mining: StaFi Protocol, Rocket Pool, Ankr, Liquidstake . However, even if you participate in ETH2.0 mining through these solutions in the future, you still need to pay attention to the risks!
This article is a relatively complete solution and token mechanism concept released by StaFi:

• For staking users : Users can participate in staking mining through StaFi with any amount of ETH greater than 0.1 ETH. StaFi will give users rETH according to the algorithm in the contract to obtain liquidity or participate in other DeFi protocols. rETH contains the dual value of "ETH mining income + staking ETH" (I personally think the mechanism here is good);

• For validators : introduce third-party validators to support services (it should be noted here that there is a risk of damage to the staked ETH due to the downtime of the third-party validator). Validators need to stake FIS to join the service. The contract will calculate the validator score according to a specific algorithm. Validators with high scores will have priority to obtain the staked ETH amount to provide services and share the benefits. If there is a problem, the staked FIS will be used as compensation for the staking users.

StaFi is still in the proposal stage and has not been officially released.

ETH2.0: Liquidity Dilemma

At 15:00 UTC on November 4, the ETH 2.0 staking contract came into effect, and the countdown to ETH 2.0 Phase 0 has begun - ETH staking has finally reached a turning point. According to the official document released by the Ethereum Foundation, staking requires a fixed amount of 32 ETH, with an expected annualized rate of return between 5% and 20%. Despite the lucrative profits (much higher than the ETH rate of return in DeFi protocols), ETH investment is far from an easy task due to the following facts:

1) For Stakers

• High barriers to entry. Under Ethereum 2.0, delegation is not allowed, and participating stakers must run a validator node to start earning. In this case, stakers must have a lot of knowledge about the node before actually hosting it to the validator client. In addition, validator nodes must maintain high uptime and avoid behaviors such as double signing, both of which require more resources and costs from stakers. If not managed properly, stakers may miss out on their rewards or even face a halving loss of their 32 ETH stake .

• Capital intensive. Any staker interested in participating in staking must prepare at least 32 ETH (about $15,000) to join the staking auction, which makes it difficult for retail investors with less than 32 ETH to participate. Especially considering that there is no clear information about when new assets will be generated, etc., this is important to understand.

2) For Validator

• If all validators were to run Ethereum 2.0 nodes with their own funds, the total number of nodes they could build and maintain would likely be very limited — 100 nodes would require 3,200 ETH, or about $1.5 million!

3) Liquidity risk for stakers and validators

• Both stakers and validators face significant liquidity risk when staking ETH assets, which unfortunately cannot be transferred, pledged, or redeemed until the start of Phase 2 of Ethereum 2.0. The uncertainty is further exacerbated by the fact that the launch of Phase 2 may take several years.

rETH Solution

Overview

The lack of liquidity of staked ETH may prevent users from participating and require an immediate solution. As a project dedicated to solving the liquidity problem of pledged assets, the Stafi team proposed the rETH solution, which can make liquidity pledge of Ethereum 2.0 easier.

1) Staker

• Stakers will be able to participate in ETH staking through the staking contract deployed by StaFi on Ethereum 1.0, and a person only needs 0.01 ETH to participate, and the amount can be determined by oneself, instead of a fixed amount of 32 ETH.

• Stakers do not need to run validator nodes themselves, nor do they need to spend time and cost to maintain them. The StaFi Staking Contract (SC) deployed on Ethereum 1.0 will automatically match the staker's ETH with validators that are in an "available" state and "performing" state.

2) Validator

• StaFi will allocate staked ETH in the SC to a group of well-performing original validators who will establish and maintain an appropriate number of validator nodes to provide staking rewards to stakers.

3) Solve the liquidity dilemma of stakers and validators

• For a specific pledger, every time he pledges ETH to SC, he will automatically receive a certain amount of rETH tokens (ERC20) - anchored to the amount of pledged ETH and the corresponding staking rewards. Then, rETH tokens can be traded on various exchanges and can be used in other DeFi protocols.

• For validators, StaFi will launch a liquidity program through which they can also sell their ETH held in SC back to StaFi. The relevant details are given in the original validator section.

rETH Details

The number of rETH tokens minted and sent to stakers depends on the amount of ETH staked (Qs) and the rETH exchange rate (Ci) at a specific time:

The rETH exchange rate (Ci) is positively correlated with the staking income, which is mainly composed of the total amount of ETH locked in SC (Qstk), the total amount of ETH redeemed (Qred), staking rewards (Qrew), slash amount (Qslh), fines (Qpey) and commission ratio (Rcom), the total number of rETH issued (M) and the total number of rETH destroyed (N). The calculation formula is as follows:

Technical Architecture

StaFi will deploy SC on the Ethereum 1.0 chain and interact with the Ethereum 2.0 pledge deposit contract. At the same time, StaFi will also monitor the pledge information of the Ethereum 2.0 beacon chain. The following figure details the specific workflow:

Figure 1: rETH contract interaction - user-side sequence diagram

Figure 2: Sequence diagram of the rETH contract interaction verifier

The entire backend architecture of rETH consists of 3 layers:

1) The top layer is used for user fund management and settlement . Users participate in staking through the staking contract deployed on Ethereum 1.0. The system will mint and send rETH based on the amount of ETH staked and the current exchange rate. The system will also be responsible for clearing funds deposited and redeemed by users.

2) The middle layer is used to distribute and settle equity funds . StaFi will deploy staking pools based on the amount of funds locked in SC. StaFi will deposit 32 ETH in each staking pool and stake it to the deposit contract of Ethereum 2.0 after matching the validator.

3) The bottom layer is used to manage and monitor ETH 2.0 nodes (original validators) . StaFi will provide a set of standardized tools for original validators. Validators can use this tool to operate ETH 2.0 node clients. At the same time, the tool will also monitor the events of the Ethereum 2.0 beacon chain in real time, including but not limited to the node operation status, the release of the locking process, the time and number of disconnections, the occurrence of slashes, and the decline of validators.

Security of ETH Staking

Security has always been our top priority in our thinking process, and we have been exploring various methods to ensure the security of users' collateral assets. In summary, the following measures will be taken to fully ensure the security of funds in a decentralized manner:

1) The private key of the pledge contract will be fully managed by the special validator (SSV) on the StaFi chain using multi-party secure computation (MPC) and multi-signature. StaFi will adopt the MPC scheme to form 21 fragments of the pledge contract pool private key and distribute these fragments to 21 validators in the SSV group on the StaFi chain. 16 of the 21 SSVs are required to fully recover the private key and then control the operation permissions of the pledge contract deployed on ETH. For how to select and rotate SSVs on the Stafi chain, please refer to the Stafi official website.

2) The pledge contract will not be affected by a single point of failure because it consists of 21 non-designated SSVs that rotate every cycle (6 hours). Although the security of the pledge contract can be greatly improved under this mechanism, we still need to consider the possibility of SSV collusion. Therefore, in order to further prevent potential collusion, SSVs will need to pledge a certain amount of FIS (StaFi native token) in StaFi's vault, and the total amount of FIS pledged by the 21 SSVs will be greater than the value of ETH in the pledge contract pool. If collusion occurs, the system will punish the criminal by confiscating the FIS pledged by the SSVs and use them to repay the users.

3) In addition, before the Ethereum staking contract is released, some processes will be completed, including internal testing, external bug bounty rewards, and contract security audits.

Casting and Burning

As mentioned earlier, every time a user puts ETH into the staking contract, a certain amount of rETH will be minted and returned. In order to avoid friction costs for participants, no minting service fee will be charged.

Since transfers and unstaking are not supported on ETH2.0 before the start of Phase 2, redemption from rETH back to ETH is allowed only when the stake is available. We will closely follow the latest news on ETH 2.0 and open redemption when ready.

Reward Claim

According to the current official document on Ethereum 2.0 released by the Ethereum Foundation, staking rewards are issued on the beacon chain every 6.5 minutes, but cannot be directly claimed or transferred until further notice. Therefore, until more information is available, there will be no reward claiming mechanism on StaFi.

Slashing cuts

When participating in Ethereum 2.0 staking, the slashing issue is also difficult to ignore. Slashing refers to the reduction of staked ETH due to disconnection or malicious behavior of validator nodes. In order to address this challenge and further ensure stakeholder interests, the following measures will be implemented:

1) The original validators who join the rETH program will be required to commit a certain amount of ETH as a deposit, and whenever a slashing occurs, the relevant deposit will be deducted to compensate for stakeholder losses.

2) The staking contract will evaluate the history of the original validators and only choose to match the staked funds to original validators that have not been slashed before.

3) In order to spread the risk and avoid single point failure, the pledged funds will be matched with multiple original validators. Therefore, even if an original validator is slashed (unlikely), it will not have a significant impact on the pledged fund pool.

Original Validator

introduce

Original validators refer to Ethereum 2.0 validators that have joined the StaFi Ethereum 2.0 staking contract program. Ethereum 2.0 node operators can become original validators after completing registration and submitting a deposit through the StaFi Validator Onboard tool. In order to avoid the funds deposited in the StaFi Staking Contract (SC) posing a threat to the verification security of the original chain, StaFi will not become a validator for Ethereum 2.0. Therefore, the funds deposited by users in the SC will only be allocated to the original validators.

ensure

To register as an original validator, in addition to running a node through the Onboarding tool provided by StaFi, a certain amount of ETH needs to be pledged as a deposit. This ETH will be deposited in the Ethereum 2.0 deposit contract together with the staker's funds. Its main purpose is to ensure that user funds are not affected when the node is slashed, and the slashing loss will be compensated by the margin promised by the node.

The total amount of deposit (Pi) that a node operator needs to submit is determined by the N value defined in the current network and the total number of nodes in operation (Mv):

The specific value of N depends on factors such as the operation of the Ethereum 2.0 network, the historical performance (performance) of node operators, the number of nodes, etc. Taking into account the rules of Ethereum 2.0, the value of N is expected to be between 4ETH and 16ETH.

At the same time, StaFi will establish a set of smart scoring system rules to quantify the performance of each original validator. Funds will be distributed by the original validator based on the score automatically calculated by the smart contract. Those with higher scores will be given priority. The scores will be adjusted continuously.

The main scoring criteria are:

1) The background of the node operator;

2) The decay period of the node;

3) Slash records;

4) The number of FIS tokens staked;

In order to realize the “visionary” plan, StaFi will periodically issue different amounts of FIS tokens as additional rewards for validators’ support for rETH businesses.

Validator Liquidity Program

Since the redemption function of ETH 2.0 will not be supported before the launch of Phase 2, validators will not be able to earn commissions to cover operating costs for a long time. In order to incentivize the participation of original validators, we will launch a validator liquidity program.

Assume that node operator Bob runs multiple (X) nodes, and the amount of ETH deposited for each node is N. Since Bob lacks liquidity in the short term, Bob can sell a portion of the commission and/or margin back to Stafi at the current FIS/ETH exchange rate to obtain liquidity for FIS (ERC20 or Stafi mainnet).

The maximum amount of ETH Bob can sell (S) is:

Features of rETH

1) After Stake rewards are generated, the exchange rate of rETH/ETH will gradually increase;

2) The amount of rETH that users can calculate based on the rETH exchange rate;

3) Before the Ethereum 2.0 staking is unlocked, rETH will not be redeemable, but it will represent the staked ETH principal and the corresponding staking rewards. The StaFi chain and multi-signature staking contract will ensure the security of the staked funds;

4) rETH can be circulated in DEX, CEX and used in DeFi protocols. It is expected that rETH will also be used on Ethereum, Polkadot and Cosmos through Stafi’s cross-chain bridge service.

Advantages of StaFi compared to Rocket Pool and Ankr

Compared with other ETH2.0 staking liquidity solutions, StaFi has its own competitive advantages. It is mainly compared with Rocket Pool and Ankr (Stkr platform) to make it easier for the ETH 2.0 staking community, stakeholders, and validators to understand. In short, StaFi's rETH solution will bring higher liquidity to stakers based on reasonable lower staking funds, and most importantly, it has a solution for the security of the funds held by stakers and validators.

Notes:

1) Has Lock-up: According to the Ankr white paper, once the node initiates the processing, the requester cannot withdraw their deposit before the project is completed.

2) Issuing nETH that does not require purchase: According to the white paper, Rocket Pool will issue 1:1 nTokens for validator guarantees and rewards, but there is no specific explanation of how they will achieve this. However, we know that once validators are slashed, their deposits will be pledged to stakeholders, so nETH carries a high risk that they may be slashed to zero, which is something that buyers do not want to see. Therefore, there is no demand to buy nETH tokens, even if they can be transferred according to Rocket Pool.

rETH's Value Proposition

StaFi solves the following problems for users through rETH:

1) Reduced liquidity risk of staking ETH. Users can obtain liquidity by trading rETH;

2) Users can instantly exchange ETH on various trading venues based on the current rETH/ETH exchange rate;

3) Provide ordinary users with a “one-click participation” experience;

4) Risk is significantly reduced as funds are allocated to well-performing validators.

StaFi solves the following problems of Ethereum 2.0 staking mechanism through rETH:

1) The lack of liquidity of pledged ETH greatly reduces the willingness of ordinary users to pledge. However, through rETH, users will be more willing to participate, thereby increasing the investment ratio of the network;

2) StaFi will not be a validator for Ethereum 2.0, so no matter how much ETH is locked in the StaFi staking contract, it will not threaten the security of the Ethereum 2.0 chain.

3) Since StaFi does not participate in the verification process of the Ethereum 2.0 chain, it has established a cooperative relationship with the validators and will not harm their interests.

rETH Secondary Market

StaFi will create a secondary market for rETH in the following ways:

1) When the rETH product is launched, StaFi will establish rETH/ETH trading pairs on DEXs such as Uniswap and Balancer, and will also incentivize liquidity providers through FIS.

2) StaFi has reached cooperation with some centralized exchanges, which will also promote the trading of rETH. This will help the circulation of rETH in multiple centralized exchanges.

3) StaFi will not only support the circulation of rETH on Ethereum, but also apply rETH to the Polkadot and Cosmos ecosystems through our cross-chain bridge service.

4) In addition to trading on CEX and DEX, rETH can also be used in DeFi protocols, either as collateral or lent out to earn additional interest.

Income distribution plan

In the future, revenue from the rETH solution will be distributed as follows:

1) 70% will be returned to FIS holders in the form of buyback or burning tokens;

2) 20% will be deposited into the StaFi Treasury to support the further development and marketing of the StaFi ecosystem;

3) 10% will be allocated to the StaFi team.

FIS and rETH

FIS, the Stafi mainnet token, captures value from the growth and expansion of rETH in the following ways:

1) The amount of ETH in the staking contract needs to be backed proportionally by the FIS tokens staked by SSV, so the token value locked (TVL) from rETH is a direct indicator of the value of FIS.

2) 70% of the revenue from rETH will be returned to FIS token holders;

3) In the future, rETH will be integrated with the Polkadot and Cosmos ecosystems through cross-chain bridging, and the bridging service income will also be returned to FIS token holders.

4) Original validators can also stake FIS tokens to improve their credibility and performance scores, thereby increasing the likelihood of being staked and matched.

StaFi Chain and rETH

rETH is just one of StaFi's many solutions for collateral assets. We will also launch rToken solutions for FIS, DOT, KSM, and ATOM. According to our rETH architecture, users mainly interact with the staking contract deployed on Ethereum, and the security of the staked funds will be guaranteed by special validators on the StaFi chain using MPC and multi-signature mechanisms.

In addition, rETH can also be integrated with the Polkadot or Cosmos ecosystem through the StaFi cross-chain bridge service, which will be launched soon along with a bug bounty for developers. Users can access DeFi applications deployed on chains other than Ethereum.

In summary, StaFi’s vision is to provide liquidity and unlock value for all equity assets through rTokens, and we see rETH as an important component in the widespread adoption of rTokens.

We welcome community feedback and questions on the proposed rETH solution, and hope to have a quality discussion on other possible solutions. If you are interested, please join the Telegram group: https://t.me/stafi_protocol

About StaFi Protocol

StaFi is the first DeFi protocol to unlock liquidity for collateralized assets. Users can stake PoS tokens through StaFi custody and receive rTokens in return (which can be used for trading) while still receiving fixed rewards. FIS is the native token on the StaFi Chain. FIS must be staked to provide security for the network, pay transaction fees on the StaFi chain, and mint and redeem rTokens.