ELI5 How does ether.fan work?

We’ve released lots of documentation on the mechanics of how ether.fan will work. But it’s a new kind of thing — it’s an NFT backed by staked ETH, and it’s a loyalty rewards program, and it’s a PFP. So understandably there are lots of questions about how exactly it’s going to work.

So we figured it would be nice to put together a quick ELI5 guide on the basics of staking, unstaking and using your fan NFT.

First, let’s start with the relationship between ether.fan and ether.fi.

You can think of ether.fan as the membership loyalty program on top of ether.fi. There are 3 layers to the overall system:

1. ether.fi delegated staking — good ol’ fashioned organic free-range non-GMO non-custodial staking where the stakers hold the keys.
2. eETH liquid staking — a liquid staking token (LST) that is build on the solid foundation of delegated staking. This is a pooled model like other LSTs and has similar benefits: allowing users to stake with less than 32 ETH, socializing slashing risks and smoothing out staking rewards.
3. ether.fan membership loyalty program — a loyalty rewards program built on top of eETH, which gamifies staking in a variety of ways. The program rewards users for staking for the long term, and directs all staked ETH to solo-operators to help decentralize Ethereum.

The average retail user will only interact with ether.fi through ether.fan, and frankly they might not even know or care that they’re staking or helping decentralize Ethereum.

That’s how good products should work, in my opinion. The user shouldn’t have to care about the mechanics, they should just have a fun and easy to use product that lets them do what they need. That’s ether.fan.

Minting Your Fan

When you stake ETH via ether.fan, it’s actually a two step process under the hood.

1. First you wrap your ETH into eETH.
2. Second you wrap the eETH in an NFT that also keeps track of your membership loyalty points.

This process is abstracted away from the user. From the user’s perspective they just stake the ETH and mint a fan NFT.

The fan NFT wraps the ETH and keeps track of your membership tier, loyalty points, as well as stores some metadata about the PFP. To reiterate, the fan NFT is your ETH, so if you transfer the NFT you are transferring the staked ETH.

So your fan NFT is just wrapped staked ETH with accruing staking rewards and protocol revenue. The longer you stake the more loyalty points you have, the higher your membership tier and the higher your share of rewards.

You can always withdraw your ETH at any time. If you want to withdraw all of the ETH in the fan NFT then you need to burn your NFT. Practically speaking it will almost always make more sense to just sell your fan NFT rather than withdrawing the ETH.

Selling Your Fan

If one day you decide that you want to get your ETH back the best way to do that would be to sell the NFT. The reason is that the NFT has some value beyond just the staked ETH in it — the membership points and super rare PFP will likely command a premium over the ETH it contains (no guarantees of course.)

So for example let’s say you staked 10 ETH initially, and you are in the Gold tier, and your NFT is a super rare Green Bishop.

After a while the NFT accrues some staking rewards and now has 10.5 ETH in it. Let’s say you list it on OpenSea for 12 ETH and the NFT is sold.

Now you have your ETH back and someone else owns the NFT.

The person who bought the NFT can continue to hold it and to accrue staking rewards and protocol revenue, and at some point they can sell the NFT. Or they can burn the NFT and get the 10.5 ETH out.

Withdrawing ETH From Your Fan

You can withdraw some of your ETH from the NFT at any time.

So for example if you have a 10.5 ETH NFT and you withdraw 1 ETH, your NFT is now worth 9.5 ETH and you have 1 ETH in your wallet.

Any time you withdraw there is a membership tier penalty because withdrawing is disloyal.

If you want to withdraw more than 50% of the ETH in the NFT you have to burn the NFT, and then you get all your ETH back.

As mentioned above it will usually not make sense to burn the NFT because it has the rare PFP and some accrued loyalty points, so it usually makes more sense to sell it — but if you urgently need your ETH you can always burn it.

In these cases you may actually want to borrow against your NFT using various DeFi protocols.

Using Your Fan in DeFi

If you want to keep your PFP, and you don’t want to take the withdrawal penalty, you can deposit your NFT in an NFT lending market and borrow ETH or USDC against it.

So for example you can take your 10 ETH NFT and deposit it in Arcade, and borrow 1000 USD to buy some stuff, and then eventually pay back the loan. Since your fan NFT accrues staking rewards you could potentially use the staking rewards to pay off the loan!

As the NFT accrues more rewards the loan actually becomes more collateralized (although there is risk because the price of ETH is volatile, if your loan is denominated in USD.)

Hopefully this answers some of your questions, feel free to send us a note on twitter if you think there is anything else we should add to this post.