Magnus Capital Research: Blockswap Network — Enabling Ethereum Liquid Staking and Restaking

Research Report

Date: August 25, 2023

Subject: Blockswap Network

Project Details

Token Symbol: $BSN

Exchange: Uniswap V3 BSN-WETH; $125k liquidity

Token Type & Use Case: Governance & Utility

Sectors: Ethereum Liquid Staking, Restaking, Relay, Cloud Services

Blockswap Labs CEO: Matt Shams

Maximum Supply: 5,000,000,000

FDV: $25M

Resources

Website: https://www.blockswap.network/

Twitter: https://twitter.com/blockswap_team

Discord: https://discord.gg/s8N9ekQuuj

Youtube: https://www.youtube.com/@blockswapnetwork

CoinGecko: $BSN

Dexscreener: $BSN Chart

Protocol Description

Blockswap Network is a permissionless infrastructure layer that enables multichain composable ETH that is interoperable across blockchains and layer-2s without using bridges. Blockswap Network offers several products built on top of Blockswap’s infrastructure, including the following.

Blockswap Network Products

Stakehouse — An Ethereum liquid staking protocol for solo stakers

dETH — Stakehouse Protocol’s multichain liquid staked derivative ETH

SLOT — Stakehouse Protocol’s liquid validator token for MEV rewards

LSD Networks — A network that connects Stakehouse validators with ETH delegators

Stakehouse Monitoring — Stakehouse Protocol’s validator performance monitoring system

Bribe Marketplace — A marketplace where validators can bribe users with ERC-20 tokens to attract ETH with the goal of achieving a 32 ETH stake via Fren Delegation

dETH Gateway — A protocol that provides access to native staked ETH yield on any chain

kETH — A dETH and LST wrapper that provides consistent and uniform yield for holders

Blockswap Cloud — A validator marketplace that connects service providers with a decentralized network of nodes enabling validators to earn additional ETH yield through staking

Common Interest Protocol — A Multichain governance protocol

This report will explore how these products fit under the Blockswap Network umbrella to revolutionize Ethereum LSDs. This report will also examine the tokenomics of Blockswap’s governance and utility token BSN and discuss the impact Blockswap Cloud will have on the demand for the BSN token.

The Stakehouse Protocol is infrastructure built on top of the Ethereum Deposit Contract (EDC) that enables solo stakers to mint derivative ETH (dETH) while still receiving the unique validator rewards their validator generates, unlike other LSD protocols, which pool deposited ETH and share rewards universally with all stakers. Stakehouse does not collect a commission, require a particular node, or use an oracle. Anyone can join Stakehouse as a validator by registering with the protocol and setting up their node with 32 ETH. The minimum self-delegation in Stakehouse Protocol is 4 ETH, made possible through Blockswap’s Liquid Staking Derivatives (LSD) Networks product.

Stakehouse introduces derivative ETH (dETH) and liquid validator tokens known as SLOT. dETH and SLOT are minted in 24 dETH and 8 SLOT quantities per validator. When a validator mints dETH and SLOT, they create what is known in the Blockswap ecosystem as a KNOT, effectively connecting the consensus layer and the execution layer. In addition to dETH and SLOT, Stakehouse also introduces sETH and savETH, which are part of an accounting system used to track dETH and SLOT. Details on each of these assets are included below.

dETH — Derivative Ether tokens (dETH) are multichain ERC-20 tokens that can be sent cross-chain without a bridge and used throughout defi. As of August 11, 2023, dETH is only compatible with Ethereum and Optimism, but more networks are being added.

dETH Features

• Represents underlying staked ETH
• Redeemable for underlying staked ETH
• Yield-bearing — receives gasless staking rewards
• Slash-proof

SLOT — Liquid Validator Tokens, or SLOT, are ERC-20 tokens minted by Stakehouse validators and represent management rights over how a validator is operated. Validators can mint 8 SLOT tokens, 4 of which are sent to the validator’s Stakehouse Vault in case of a slashing event. The other 4 SLOT go to the validator’s wallet. SLOT tokens are slashable but do not have yield limits. As a Stakehouse grows, it will have a positive network effect on yield opportunities for those holding SLOT tokens.

SLOT Features

• Collects network fees such as gas fees
• Collects MEV rewards
• Collateralized in Blockswap Cloud without additional kETH
• No yield limit
• Slashable

sETH — sETH is the liquid representation of SLOT tokens. sETH is required because there will always only be 8 SLOT tokens per validator, but the amount of dETH will increase as staking rewards are earned. As the amount of dETH increases, the value of SLOT increases. sETH is used to track the increase of dETH in association with SLOT tokens.

savETH — Blockswap uses savETH to account for dETH both within and outside of Blockswap’s Stakehouse protocol. When a Stakehouse user chooses to move dETH outside of the Stakehouse Protocol to a user’s wallet, the corresponding savETH is moved from an index associated with a specific wallet or LSD Network to the Stakehouse Open Index. savETH in the Stakehouse Open Index accounts for dETH outside of the Stakehouse Protocol. This accounting system is necessary to enable the curation of validators to obtain optimal yield, such as in kwETH, another Blockswap product discussed later in this report.

Staking with Blockswap through Stakehouse — Easy Mode

Stakehouse users can stake ETH by either operating a validator or delegating ETH to a validator. Blockswap simplifies operating a validator through Easy Mode, allowing users to start staking in as little as 60 seconds. To begin operating a validator in easy mode, users must:

1. Connect a wallet to the Ethereum network.
2. Create a validator on the Stakehouse “My Profile” page.
3. Create a password associated with the validator’s keystore file.
4. Register the validator with Stakehouse by uploading the validator’s credentials and storing the encrypted validator keys on Ethereum.
5. Stake 32 ETH
6. Setup a node

A complete guide to staking a Stakehouse validator in Easy Mode can be found here.

Staking with Blockswap through Stakehouse — Expert Mode

Stakehouse also enables advanced users to stake through Expert Mode. Expert Mode is designed for users with technical abilities, as it requires the use of command line interface (CLI). A complete guide to staking a Stakehouse validator in Expert mode can be found here.

Once a user has set up a node, their validator has been recognized on the Ethereum blockchain, and joined or created a Stakehouse, a validator collective in the Stakehouse Protocol; the user can mint 24 dETH and 8 SLOT tokens on the Stakehouse “My Profile” page enabling solo stakers to mint their own LSTs while maintaining their validator’s unique yield.

Joining or Creating a Stakehouse

As mentioned above, Stakehouse Protocol labels validator collectives Stakehouses. Stakehouses can be created by individual validators that want to create a collective of validators with the same parameters. Stakehouses are fully customizable and can require parameters such as KYC to join a particular Stakehouse. Stakehouse creators can use a variety of parameters to gatekeep other validators from joining their Stakehouse, but why? Well, for example, gatekeeping could be used to prevent parties from commingling Stakehouse assets with unknown parties or to verify a validator set for another LSD network.

Joining a Stakehouse is a simpler process than creating a Stakehouse as it avoids the managerial responsibilities of creating a Stakehouse and is best for passive solo stakers. All it takes to join a Stakehouse is:

1. Register a validator with Stakehouse Protocol
2. Select the Stakehouse you would like to join and meet the requirements set by the Stakehouse operator.
3. Mint dETH and SLOT tokens

Blockswap’s LSD Networks builds on top of Stakehouse to enable anyone participating in the Stakehouse Protocol to deploy their own liquid staking network where all stakers hold fractional ownership of an Ethereum validator. Similar to how RocketPool allows users to operate a node with only 8 ETH, Stakehouse’s LSD Network cuts RocketPool’s 8 ETH requirement in half, enabling users to run validators with a self-delegation of only 4 ETH. The Ethereum deposit contract still requires 32 ETH to operate a validator, but with Stakehouse LSD Network, stakers can contribute as little as 0.001 to validators to achieve 32 ETH.

Of the 32 ETH, 4 must be sourced from the operator. The other 28 ETH can be crowdsourced from stakers wishing to participate in a Stakehouse LSD Network. These 28 ETH are divided into two pools: the protected deposits pool of 24 ETH and the MEV staking pool of 4 ETH. The protected staking pool is free from any slashing or leaking risk and will earn validator rewards for 32 ETH, while the MEV staking pool will earn a 50% share of network revenue from MEV and tips. The other half of the network revenue from MEV and tips goes to the validators operator that staked 4 ETH.

Stakers

As mentioned above, users that wish to stake their ETH as part of a Stakehouse LSD Network can contribute as little as 0.001 ETH. In return, stakers receive a unique, validator-specific LP token redeemable for either ETH or dETH. These LP tokens also earn dETH rewards when the validator is staked. Before a validator is staked, LP tokens can be burned to redeem the underlying ETH. As of August 12, 2023, there is no way for stakers to exit without withdrawing dETH and swapping on the open market. However, Blockswap is working on enabling partial withdrawals where stakers can redeem their underlying ETH with dETH.

Giant Pools

Another way validators can source ETH liquidity for their validators is through Giant Pools. Validators deployed from the official LSDN Factory can source ETH for their validators from the Giant MEV Staking Pool or the Giant Protected Staking Pool. When a user stakes their ETH in one of the Giant Pools, they receive an LP token representing their stake in the pool, which earns Ethereum staking rewards. The ETH in the Giant Pools can then be distributed to validators deployed from the LSDN Factory and in need of ETH to reach the 32 ETH requirement for Ethereum validators.

This is the easiest way for ETH holders who do not care about the specifics of each Stakehouse validator to participate in ETH staking through Stakehouse’s LSD Networks. All they need to do is deposit to the Giant Pool of their choice and hold LP tokens to earn ETH staking rewards. However, suppose an ETH holder wishes to delegate their ETH to a friend’s validator. Stakehouse LSD Networks have tooling specifically designed for this purpose too.

Fren Delegation

Fren Delegation is infrastructure for Stakehouse LSD Networks that allows users to stake their ETH directly to specific validators instead of to a random validator through the Giant Pools. Fren Delegation allows stakers to stake with a specific Stakehouse validator of their choice. Fren Delegation enables validators to source ETH for protected staking and MEV staking directly to their validators.

The Benefits of Using Stakehouse LSD Networks

Ultimately Stakehouse LSD Networks enable users to operate validators with as little as 4 self-delegated ETH, significantly reducing the barriers to becoming an Ethereum validator. Stakehouse LSD Networks also enable individual stakers to contribute to a specific validator through Fren Delegation or to a random validator if they do not care about which validator they are staking to through the Giant Pools. This system provides more optionality for validators and stakers than existing competitors and helps enable further decentralization of the Ethereum network.

Stakehouse Monitoring builds on top of Stakehouse and Stakehouse LSD Networks by tracking performance information for each validator within a Stakehouse LSD Network. Stakehouse Monitoring tracks validator performance in indexes allowing Stakehouse to attribute a rank to each index based on the amount of dETH minted by the validators within each network. Stakehouse Monitoring also displays the APR and the amount of dETH earned by each LSD Index. Stakehouse Monitoring is useful for validators to understand their performance within Stakehouse which helps validators weigh potential growth and performance improvement opportunities. Stakers should also find Stakehouse Monitoring an effective tool to help them decide which Stakehouse LSD Network and validator is worthy of their ETH delegation.

To help validators attract ETH delegations, the Blockswap community developed a Bribe Marketplace where validators can bribe users with ERC-20 tokens as a reward for staking with them through Fren Delegation. The Stakehouse Bribe Marketplace began as a community grant application to create an ERC-20 bribe marketplace for Stakehouse LSD Node Operators to incentivize ETH deposits through Fren Delegation. Validators want to incentivize ETH delegations specifically to their validators, and they are able to do just that through the Stakehouse Bribe Marketplace. This incentivization mechanism enables validators to quickly attract the ETH required to begin operating the validator and earning staking rewards.

Prior to this proposal, there was no benefit to delegating through Fren Delegation as opposed to the Giant Pool. Any ERC-20 token is supported as a bribe reward, but the bribe vault whitelists ERC-20 tokens to prevent bribes of malicious tokens. The Stakehouse Bribe Marketplace will create arbitrage opportunities for users seeking to accumulate these bribes. However, this benefits the Stakehouse Protocol as these arbitrageurs will fill validators with ETH in the process.

dETH is a multichain composable primitive to Ethereum, its rollups, and EVM ecosystems made possible by the Stakehouse registry. Not only does dETH give holders a claim to the underlying staked ETH, but it can be moved across EVM chains natively without bridges through Blockswap’s dETH Gateway Protocol. The dETH Gateway Protocol currently enables the use of native dETH on Optimism by locking dETH on Ethereum and making it spendable on Optimism. Other networks plan to be integrated in the future, such as Arbitrum, Polygon, Gnosis, Avalanche, Starknet, zkSync, Cosmos, Base, and other ZK Rollups. The dETH Gateway Protocol will grant users access to native staked ETH yields on any supported chain without third-party bridge risk.

kETH and kwETH are two Blockswap products that wrap LSTs and dETH to provide holders with stable and consistent yield in the case of kETH and optimized yield in the case of kwETH. kETH is backed by a basket of Stakehouse supported LSTs and dETH, while kwETH is only backed by dETH, which it uses in validator curation. More details on each of these unique products are included below.

kETH

kETH is a wrapper for dETH and LSTs designed to provide a stable yield for holders. kETH exists as an ERC-20 token backed by an algorithmically maintained basket of dETH and LSTs, including stETH, and rETH. kETH aims to generate an optimized, stable ETH staking yield by backing kETH with these variable-yielding assets. To mint kETH, users can deposit supported assets to the LST optimizer dApp. Blockswap also plans to support additional LSTs in the future as the adoption of kETH grows. kETH is also redeemable for the underlying ETH or ETH equivalents.

kwETH

Blockswap takes the idea of using a basket of yield-bearing assets to back kETH a step further with the kwETH product. However, instead of using a basket of dETH and LSTs, kwETH is backed by only dETH and curates the top Stakehouse validators to generate optimal yield for holders. By using only dETH as its backing, which is connected to savETH, Stakehouse can account for dETH both within and outside of Blockswap’s Stakehouse Protocol, the dETH Vault automated account manager (AMM) uses dETH to claim savETH associated with specific validators sitting in Stakehouse Protocol’s Open Index. savETH holders gain access to the yield generated by that specific validator. The dETH Vault AMM uses dETH and savETH to produce the highest yield for kwETH holders.

Users can obtain kwETH by depositing dETH into the dETH Vault. The value of kETH increases proportionally to the staking yield accrued by the dETH in the vault. When users wish to exit the dETH vault, they can withdraw the underlying ETH, which burns their kwETH and unlocks the underlying ETH. There will be a lock-up period associated with ETH withdrawals when burning kwETH. kETH and kwETH are currently in production and not live on Ethereum Mainnet as of August 12, 2023.

Blockswap’s Proof-of-Neutrality (PON) Relay is a decentralized protocol built to solve censorship issues with centralized relayers. A majority of blocks on the Ethereum network are processed through centralized entities that must comply with jurisdictional restrictions, such as the Office of Foreign Assets Control (OFAC). Currently, 47% of all blocks and 55% of relayed blocks are OFAC compliant due to these centralized parties censoring transactions to maintain OFAC compliance. To solve these issues around censorship, Blockswap created the PoN Relay, a decentralized, permissionless relay protocol neutral to jurisdictional restrictions that follows proposer block builder separation and gives consistent MEV payouts to Solo Stakers.

The PoN Relay actually operates similarly to traditional relays that consist of block builders who submit transaction bundles and validators who confirm the receipt of their fees while maintaining the confidentiality of the block’s contents. PoN Relay differs through its utilization of Zero-Knowledge proofs to facilitate builders’ requests for a validator while using encrypted communication to ensure the same level of privacy and security.

The PoN Relay will bring back neutrality to Ethereum by using zero-knowledge proofs and encryption to ensure privacy and security. The PoN Relay will also be attractive for validators to participate in as it is an avenue for them to earn extra rewards. Validators earn staking rewards with or without relays, but validators also earn Block Bundle Tips from block-builders and MEV payouts every 7 days with the PoN Relay. Not only is PoN Relay infrastructure that solves glaring censorship issues with the current construction of Ethereum’s consensus mechanism, but it also incentivizes participation in the network by providing an additional revenue stream for validators.

So what is the PoN Relay, and how does it work? PoN Relay is software that integrates with the Ethereum consensus client enabling communication between block-builders and validators fairly and securely. Block-builders rely on relays to provide fair routing for blocks, while proposers trust relays to ensure the accuracy of the data in proposed blocks. Block-builders create full blocks aiming for optimal MEV extraction. Once blocks have been built, they are sent to relays, in this case, PoN Relay. The PoN Relay selects the highest tipping block received from various block builders and submits that block to the block proposer. The consensus client then sends the block to the Ethereum network for verification and block inclusion. Reporters are another entity that also participates in the network by monitoring the actions of builders and proposers to ensure against malicious behavior. The reporter can submit a report to earn ETH for securing the protocol if they detect malicious activity.

Blockswap Cloud is a plug-and-play validator staking network that will be a permissionless marketplace for Ethereum validators to connect with middleware service providers to earn additional income by staking their validator for any middleware service provider, L1, or L2 blockchain node-running opportunities. This extends the economic security of Ethereum to these protocols with additional slashing conditions through a Stake Lease Agreement (SLA). Service Providers will post an SLA that validators have the option to opt into. The SLA will define slashing conditions and rewards for the services provided. This increases a validator’s risk of being slashed, although only validators’ LSD/LST tokens will be slashed and not the underlying staked ETH. Ultimately, Blockswap Cloud enables service providers to decentralize their protocol through Blockswap’s network of nodes reducing costs and time associated with starting a new network of decentralized nodes and allowing service providers to focus on user-facing applications instead of the decentralization and operation of the decentralized network they operate on top of.

Blockswap Cloud Entities

Blockswap Cloud consists of three parties required for the function of the Blockswap Cloud infrastructure, Validators, Service Providers, and Reporters.

Validators — Ethereum validators that participate in Stakehouse Self Staking or Stakehouse LSD Networks.

Service Providers — Middleware decentralized networks, blockchains, and dApps that require high-quality service and extend Ethereum security can offer SLAs for validators to opt into. Service provider SLAs indicate the duration, payout, Ethereum stake units, and slashing logic that validators can choose to accept if they want to earn additional yield on their staked ETH. Examples of service providers include bridges, L2s, rollups, MPC, ZK validators, data availability solutions, oracles, light clients, relayers, MEV players, and other blockchains.

Reporters — Enforce the slashing logic validators agree to in an SLA. Reporters earn SLA payouts and penalties from slashing events.

Additional Blockswap Cloud Entities

Blockswap Cloud also consists of other entities that govern or support the protocol, the Cloud DAO, Curators, and the Cloud Grant DAO.

Cloud DAO — Manages the Blockswap Cloud Treasury, manages SLAs, and oversees onboarding and distribution. The Cloud DAO also earns a standard commission as part of its operations.

Curators — Individuals that act as package managers in a dappstore. Individual curators present a selection of projects. They can collect a commission for their product line.

Cloud Grant DAO — The Cloud Grant DAO approves grant applications. Grant recipients are required to stake a specific amount of BSN, and grant funds can only be claimed upon project integration with an SLA. Additionally, the Cloud Grant DAO is made up of users that deposit kETH to Blockswap Cloud.

Blockswap Cloud Benefits

Blockswap Cloud enables networks to launch and decentralize faster and cheaper by using Ethereum’s network of validators that can choose to opt into providing node-running services for other networks. Blockswap Cloud enables projects to hire Ethereum validators with slashable security to provide a plug-and-play consensus system with the security of Ethereum. In return, these validators receive direct payment from these projects, effectively increasing the yield on their staked ETH. Any Ethereum validator will be able to join Blockswap Cloud, including Stakehouse, EigenLayer, Lido, RocketPool, and other liquid staking validators, but Stakehouse validators are already participating in the Stakehouse monitoring system, which already has restaking built into the protocol thus no additional collateral will be needed for Stakehouse validators to restake making it even easier for Stakehouse validators to join Blockswap Cloud.

Cloud Credits

Middleware service providers will be required to pay a subscription fee with Cloud Credits to access the validators. In addition to this subscription fee, service providers will also be required to pay validators for their service in any ERC-20 token. Middleware service providers must burn BSN tokens to mint Cloud Credits. Cloud Credits are burned once a service provider uses them to pay for their subscription. No one actually receives the Cloud Credit; it is simply used to grant access to the validator marketplace. Cloud Credits will be liquid and transferable, being able to be bought and sold on the open market. However, Cloud Credits will also expire at the end of every epoch rendering them useless after their expiration resulting in consistent baseline demand for the BSN token. Ultimately this will benefit the BSN token as it will act as a deflationary mechanic within the economic model.

More details on Blockswap Cloud and Cloud Credits are planned to be released as Blockswap Cloud nears deployment. Additionally, the Blockswap team has requested community feedback on Blockswap Cloud and the role of Cloud Credits. Now is an excellent time to join the Blockswap community and help shape the economic design behind the product that can propel the development of crypto projects forward faster than ever before due to the inefficiencies it solves through the improved capital efficiency of restaking.

BSN is Blockswap Network’s governance and utility token that can be used to vote on governance proposals through the Blockswap DAO on the Blockswap Snapshot page. As of August 12, 2023, this is the only use case for BSN, but Blockswap Cloud will bring additional utility to the BSN token.

As previously stated, Blockswap Cloud plans to use BSN as the primary token for participating in the Blockswap Cloud network. Entities in the Blockswap Cloud hierarchy will be required to use BSN in particular ways according to the currently proposed framework. Roles within Blockswap Cloud and their respective needs for BSN are included below.

Middleware Service Providers

• Burn BSN to acquire Cloud Credits to be listed as a service provider

Reporter

• Stake BSN to be eligible to become a reporter

Cloud DAO Council Member

• Burn BSN for Cloud Credits to be eligible to become a Cloud DAO Council Member

Grant DAO Member

• Burn BSN to be eligible to become a Grant DAO Member

Blockswap plans to create Cloud Credits with a yearly expiration. As demand grows, this may be adjusted to a monthly expiry. This expiration model will create consistent demand for the BSN token. Pricing for Cloud Credits and the subscription for Service Providers has not been determined as of August 11, 2023, but it aims to be competitive compared to the cost of establishing a decentralized node infrastructure. This new utility for the BSN token due to Blockswap Cloud, in addition to its governance capabilities, directly aligns the growth of the network with demand for the token, creating an ecosystem where value accrual to the token is directly tied to network usage.

Author:

0xBoomz — Research Analyst at Magnus Capital and former Research Analyst at The Block.

Twitter: @0xBoomz