Official Release of StaFi Staking Liquidity Solution for Ethereum 2.0

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StaFi

13 min readNov 12, 2020

Ethereum 2.0: A Liquidity Dilemma

On November 4 15:00 UTC, Ethereum 2.0’s deposit contract went live, and the countdown to Ethereum 2.0 Phase 0 has begun — ETH staking is finally right on the corner. According to official documents released by the Ethereum Foundation, a fixed amount of 32 ETH is required for staking, with an expected annualized yield between 5% and 20%. Though lucrative (a lot higher than yields provided by Decentralized Finance (DeFi) applications for ETH specifically), currently, ETH staking is far from being easy due to the following facts:

1) For Stakers

High entry barrier. According to Ethereum 2.0, delegation is not allowed and stakers must run a validator node to start earning. In this case, stakers must possess a lot of knowledge about nodes before actually hosting a validator client. In addition, validator nodes must maintain high uptime and avoid behaviors such as double signing, both of which demands further resources and costs from stakers. If not managed properly, stakers might miss out on their rewards and even face halving on their staked 32 ETH.
Capital intensive. Any staker interested in participating in staking has to prepare for the 32 ETH minimum, which is roughly worth 15,000 dollars, to join staking, making it hard for retail investors holding less than 32 ETH to engage. Especially taking into account that there is no definite information about when the new asset will become, how, and so on — so you must keep that in mind as Peter suggests.

2) For Validators

Insufficient capital to scale. If all the validators have to run the Ethereum 2.0 nodes all by their own funds, the total number of nodes they could establish and maintain may be extremely limited — 100 nodes indicates a stake of 3200 ETH, which is roughly worth 1.5 million dollars!

3) Liquidity Risk for Both Stakers and Validators

Both stakers and validators face a huge liquidity risk when they have staked their ETH possessions, which is unfortunately unavailable for transfer, unstake nor redeem until Phase 2 of Ethereum 2.0 is reached. Uncertainty is further compounded as the launch of Phase 2 might even take years.

rETH Solution

Overview

The illiquidity of staked ETH may deter user participation and calls for an immediate solution. As a project dedicated to addressing the liquidity issue of staked assets, Stafi team hereby propose the rETH solution, which allows for Ethereum 2.0 liquid staking at ease.

1) Stakers

Stakers will be able to participate in ETH Staking through the Staking Contract deployed on Ethereum 1.0 by StaFi, and one would only need as little as 0.01 ETH to start, or any amount at his own discretion, instead of committing a fixed amount of 32 ETH.
Stakers are not required to run validator nodes nor spend time and costs maintaining them. StaFi’s Staking Contract (SC) deployed on Ethereum 1.0 will automatically match a staker’s ETH to “well-performing” validators that are in the “Available” state.

2) Validators

StaFi will allocate staked ETH in SC to a batch of well-performing original validators, who would establish and maintain appropriate amounts of validator nodes to provide staking rewards to stakers net of fees.

3) Solving the Liquidity Dilemma for Both Stakers and Validators

For a specific staker, whenever he stakes ETH to the SC, she will automatically receive a certain amount of rETH Tokens (ERC20 version) in return, which is a synthetic representation of her staked ETH balance and corresponding staking rewards. The rETH token may then be traded on a variety of trading venues, and can be used in other DeFi protocols.
For validators, StaFi will initiate a Liquidity Program, through which they could also sell part of their ETH staked in the SC back to StaFi. Relevant details are specified in the Original Validator portion.

rETH Specifics

The number of rETH Tokens minted and sent to the staker is determined by the number of ETH Staked (Qs) and the rETH exchange rate (Ci) at a specific time:

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

Technology Architecture

StaFi will deploy SC on the Ethereum 1.0 chain, and interact with the Ethereum 2.0 Staking Deposit Contract. Meanwhile, StaFi will also monitor the staking information of the Ethereum 2.0 Beacon Chain. The specific workflow is detailed in the diagram below:

Figure 1: Sequence diagram of rETH contract interaction-user end

Figure 2: Sequence diagram of rETH contract interaction-validator end

The entire back-end architecture of rETH includes 3 layers:

1) The top layer is 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 back rETH based on the amount of ETH Staked and the current exchange rate. The system will also be responsible for the clearance and settlement of funds deposited and redeemed by users.

2) The middle layer is for distribution and settlement of staking 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 to the Ethereum 2.0 Deposit Contract after matching validators.

3) The bottom layer is for management and monitoring of Ethereum 2.0 nodes (Original Validators). StaFi will provide Original Validators with a set of standardized onboarding tools. Validators can use this tool to operate the Ethereum 2.0 node client. At the same time, this tool will also monitor the events of the Ethereum 2.0 beacon chain on a live basis, including but not limited to, node operation status, the issuance of staking proceeds, the time and number of disconnections, the occurrence of Slash, and the validator drop-offs.

Security of Staked ETH

Security has always been a top priority in our thought process and we have been exploring various ways to ensure the security of users’ staked assets. In summary, the following will be adopted to comprehensively ensure fund safety in a decentralized manner:

1) The private keys of the Staking Contract will be comprehensively managed by the StaFi Special Validators (SSV) on the StaFi chain using multi-party secure computing (MPC) and multi-signature. StaFi will adopt the MPC scheme to form 21 fragments of the private key to the Staking Contract Pool, which will be distributed to 21 validators in the SSV Group on the StaFi chain. 16 of the 21 SSVs are needed to fully recover the private key, and then control the operational authority of the Staking Contract deployed on ETH. Regarding how the SSV on the Stafi Chain will be chosen and rotated, please kindly refer to the Stafi official website.

2) Staking Contract is not subject to a single point of failure given it is managed by a group of 21 unspecified SSV, which will be rotated every 1 Era (6hours). Although the security of Staking Contract can be greatly improved under this mechanism, we still need to consider the possibility of SSV collusion. Thus, to further protect against potential collusion, a certain amount of FIS (StaFi native token) will need to be staked by SSV in StaFi’s Insurance Pool, and the overall amount of FIS staking by 21 SSVs will be greater than the value of ETH in the Staking Contract Pool. If collusion really happens, the system will punish the culprits by confiscating SSV’s Staked FIS and use them to repay users.

3) In addition, before the Staking Contract for Ethereum is released, several processes including internal testing, external Bug Bounty incentives, and contract security audits will be completed.

Mint & Burn

As discussed earlier, whenever a user stakes ETH to the Staking Contract, a certain amount of rETH will be minted and sent back in return. Mint handling fee will not be charged to avoid any frictions for participants.

Since transfers and unstaking on Ethereum 2.0 are not supported until Phase 2 starts, stakers are only allowed to redeem ETH from rETH when such functions are available. We will track the latest developments of Ethereum 2.0 closely and open up redemption when it’s ready.

Reward Claiming

According to the current official documents about Ethereum 2.0 released by the Ethereum Foundation, staking rewards are issued on beacon chain every 6.5 minutes, yet they cannot be directly claimed, nor transferred until further notice. Thus, reward claiming will not be an option on StaFi either until more information is made available.

Slashing

When participating in Ethereum 2.0 Staking, the Slash problem is also hard to ignore. Slash refers to the deduction of staked ETH due to disconnection or malicious behavior of validator nodes. To cope with this challenge and further ensure staker interests, the following will be implemented:

1) Original Validators who join the rETH plan will be required to commit a certain amount of ETH as a deposit, and whenever a slash occurs the relevant deposit will be deducted to cover the loss from stakers.

2) Staking Contract will assess original validators’ historical track record and only elect to match staking funds with original validators who haven’t been slashed before.

3) Staking funds will be matched with multiple Original Validators in order to diversify risk and avoid single point of failure. Therefore, even if a certain Original Validator is Slashed (which is highly unlikely), it will not have a major impact on the staking funds pool.

Original Validators

Introduction

Original Validators refer to the Ethereum 2.0 validators who have joined the StaFi Ethereum 2.0 Staking Contract program. Ethereum 2.0 node operators can become a Original Validator after completing the registration process and committing the deposit through the StaFi Validator Onboard tool. In order to avoid the threat of staking funds in StaFi Staking Contract (SC) to the verification security of the original chain, StaFi will not become a validator on Ethereum 2.0. So, the funds deposited by users in SC will only be distributed to Original Validators.

Pledge

To register as an original validator, you need to pledge a certain amount(N) of ETH as deposit, in addition to running the node through the Onboarding tool provided by StaFi. This ETH will be deposited into the Ethereum 2.0 Deposit contract along with the Staker’s funds. The main purpose is to ensure that user funds are not affected when the node is Slashed, and the Slash loss will be compensated by the deposit committed by the node.

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

The specific value of N is determined by factors such as the operation of the Ethereum 2.0 network, the historical performance (Performance) of the node operator, the number of nodes, etc. Considering the rules of Ethereum 2.0, the value of N is expected to range from 4ETH to 16ETH.

At the same time, StaFi will establish a set of intelligent scoring system rules to quantify the performance of each Original Validator. The funds will be allocated by the Original Validators based on the scores automatically calculated by the smart contract. Those who have high scores will have priority. The score will be constantly adjusted.

The main criteria for the scores are:

1) Background of node operator;

2) The drop-off period of a node;

3) Slash record;

4) The amount of Staked FIS tokens;

In order to realize the vision [All for one, one for all], StaFi will regularly issue different amounts of FIS tokens as additional rewards for validator’s support for rETH business.

Validator Liquidity Program

Since the redemption function of Ethereum 2.0 will not be supported until Phase 2 is live, validators cannot receive Commission for a long time to cover operational costs. In order to incentivize participation as rETH Original Validators, we will launch a liquidity program for validators.

Suppose that node operator Bob runs several(X) nodes and the number of ETH deposited for each node is N. As Bob lacks liquidity funds in the short term. Bob can sell a portion of his commission earned and/or security deposit back to Stafi at the current FIS/ETH exchange rate to access liquidity in FIS (either ERC20 or Stafi mainnet).

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

Features of rETH

1) The exchange rate of rETH/ETH will gradually increase as Staking rewards are generated;

2) Users can calculate the amount of rETH obtained according to the rETH exchange rate;

3) Before Ethereum 2.0 unstaking is available, rETH will not be redeemable, yet it represents the staked ETH principal as well as corresponding staking rewards. The StaFi chain and multi-signature staking contracts will ensure the security of funds staked;

4) rETH can be circulated in DEX, CEX and used in DeFi protocols. rETH is also projected to be available on Ethereum, Polkadot and Cosmos through StaFi’s cross-chain bridge service.

Value Propositions of rETH

StaFi solves the following problems for users through rETH:

1) Liquidity risk of staked ETH is mitigated. Users can obtain liquidity by trading rETH;

2) Unstaking unavailability is not an issue either since users can immediately exchange back ETH according to the current rETH/ETH exchange rate on various trading venues;

3) One-click staking experience for ordinary users;

4) Slash risks are mitigated as funds are allocated among different well-performing validators.

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

1) The lack of liquidity for staked ETH greatly reduces the willingness of ordinary users to stake. But through rETH, users will be more willing to stake thus increasing the network staking ratio;

2) StaFi will not become a validator for Ethereum 2.0, therefore no matter how many ETH are 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 validation process of Ethereum 2.0 chain, it is a cooperative relationship with the validators and will not harm their interests.

rETH Secondary Markets

StaFi will create secondary markets for rETH through the following ways:

1) When rETH products are launched, StaFi will establish rETH/ETH trading pairs on DEX such as Uniswap and Balancer, and will also incentivize liquidity providers through FIS rewards.

2) StaFi has reached cooperation with some centralized exchanges that will also facilitate the trading of rETH. That will help the circulation of rETH in multiple centralized exchanges.

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

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

Income Distribution Plan

In the future, the revenue of the rETH solution will be distributed as following:

1) 70% will be given back to FIS token holders, in the form of buyback or token burning;

2) 20% will be deposited in the StaFi Treasury to support the further development and market promotion of the StaFi ecosystem;

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

FIS and rETH

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

1) The amount of ETH staked in the Staking Contract needs to be proportionally backed by FIS token staked by SSV, thus the token value locked (TVL) from rETH is a direct indication of the value of FIS.

2) 70% of the income from the rETH solution will be given back to FIS token holders;

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

4) Original Validators can also stake FIS tokens to increase their credibility and performance score, therefore increasing the likelihood of being staked and matched with.

StaFi Chain and rETH

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

What’s more, rETH can also be integrated with the Polkadot or Cosmos ecosystem through StaFi cross-chain bridge service which is about to be launched together with the bug bounty for developers (stay tuned to participate!). Users can have access to DeFi applications deployed on other chains beyond Ethereum.

In conclusion, StaFi’s vision is to provide liquidity to all staked assets and unlock value through rToken, and we see rETH as an essential part of the rToken‘s universal adoption.

We welcome community feedbacks and questions with regard to the proposed rETH solution, and want to create a quality discussion about other possible solutions, if you are interested, join us telegram: https://t.me/stafi_protocol

About StaFi Protocol

StaFi is the first DeFi protocol unlocking liquidity of staked assets. Users can stake PoS tokens through StaFi and receive rTokens in return, which are available for trading, while still earning staking rewards. FIS is the native token on StaFi Chain. FIS is required to provide security to the network by staking, pay for transaction fees on the StaFi chain, and mint & redeem rTokens.

Website: www.stafi.io
Twitter:@Stafi_Protocol
Telegram Chat: https://t.me/stafi_protocol
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