Episode 21
ether.fi: Innovations in solo staking

Our guest today is Rok Kopp, co-founder of ether.fi, a non-custodial liquid staking protocol that is launching the first liquid 'restaking' token, eETH.

In this episode, we talked about how ether.fi enables stakers to retain control of their keys, the upcoming launch of their liquid staking token (eETH), and the associated benefits and risks involved in restaking.



Hey everyone, this is Dawei from Exponential and you're listening to Degen Responsibly, a podcast where we invite protocol builders to showcase their innovations, how they work, as well as do a deep dive on risk. Exponential is an investment platform that makes it easy to discover, assess, and invest in DeFi yield opportunities. We want to help you understand the trade-offs and opportunities so you can degen responsibly. This week we chatted with Rock Cobb, the co-founder and chief growth officer at EtherFi, to talk about how the platform enables stakers to retain control of their keys. We also talked about the upcoming launch of their liquid staking token, eETH, and the associated benefits and risks involved in restaking via eigenlayer. Hey Ron, thanks for joining the show. Yeah, thanks for having me and I decided to chat. Nice nice. So before we dive into EtherFi, could you just give us a high-level review of your background and what led to EtherFi? Yeah, so I came into crypto from the web 2 world. So I've been a startup person my whole life and Mike, who's our CEO and founder, we worked together in his last company. And so we stayed in touch, I ran a sales team over there. We had stayed in touch actually in 2012, 2013, started dabbling a bit in crypto. Mike bought some Bitcoin, doing like a sketchy PayPal transfer thing. He didn't end up keeping it, but anyway, we kind of stayed around the crypto stuff and messed around with it. And then in 2021, after Mike sold the company, Top Hat, the web 2 company, we started a crypto hedge fund. And so we had two strategies. One was like a market neutral strategy and then one was an e-staking strategy that was gaining a lot of traction. And what we found is that there was a ton of interest in the staking strategy, but we weren't happy with any of the counterparty risk that was out there for the staking options. So the options were either a very centralized staking providers, which provide a great service, and so they do a really good job and there's professional node operators. And then the decentralized options, we thought either had issues with scaling, or would have issues with scaling, or were very pseudo decentralized. So we started looking into it and like, hey, there's an opportunity to build something here. That's kind of why we focused on building the protocol and doing what we did. Nice. Yeah. Before we talk a bit about some of those other competitors you mentioned, at a high level, what does EtherFi do? How does it work? Yeah. Good question. So EtherFi is a non-custodial liquid staking. And so we're built on Ethereum. The stakers control their keys, which is something unique to our protocol that no one else has. And so they can use permissioned or non-permissioned node operators. We're very big on decentralization and making sure that we're doing the right thing for the Ethereum network and also for the stakers. And so basically the biggest two things that we are always focused on is that you keep your keys and that we're very decentralized. There's just a lot of uncertainty, I think, around staking specifically and in the U.S. specifically, I guess, as well. Kraken got shut down, Coinbase had a couple of things. So it seems like the SEC is really putting staking between the crosshairs, I'll say. And so I think that's one thing that we're really trying to pay attention to and do good at. The other thing that we're doing that's unique is we're the first liquid staking token that is going to be natively restaked. So we're going to work with Eigenlayer and BlockSwap, like there's other restaking people that are coming here. Eigenlayer, I think, is kind of dominated so far, but there's a lot of really other cool players that are coming up, which is super exciting. So the unique thing about us and it being natively staked is you can get the points from restaking that Eigenlayer gives out, which it seems like could lead to an airdrop based off like what they've said, but who knows. But these Eigenpods are filled up with like, you know, ST ETH or CD ETH or RETH. When people commit their liquid staking token to those Eigenpods, they lock them up and they lose all composability in DeFi. They can't go LP into pools or do any of that fun stuff that people like to do in DeFi. So with ours, you can actually, you still maintain the ability to go LP into pools while gaining the points of the Eigenlayer, you know, Eigenpod, and then you also gain staking rewards from EtherFi and then EtherFi loyalty points as well. So it's kind of like a quadruple dip, which we think will play pretty well with the Dgens. So yeah. Awesome. Yeah, you guys, I think in my mind, have the two really interesting differentiators. It's what you mentioned about EtherFi being the only, I guess, non-custodial liquid staking solution where the users actually retain control of their keys. And the second thing is the integration with Eigenlayer. Just to jump back onto the concept of holding your own keys, could we just like talk about that a little bit more, go a little deeper in terms of what that means? My understanding is right now, there's two keys essentially that matter for stakers. You have the validator key, which is essentially like a hotkey for the validators to test and sign blocks. And then you have a withdrawal key, which kind of points to an address where if you wanted to exit your stake, that's where the ETH would be sent. I guess my question is, how does that all work with EtherFi in the back end? Yeah, really good question. So you're right. So the evolution that Ethereum went through going from proof of work to proof of stake made staking more unique, right, and more difficult, we'll call it. So like other proof of stake chains, staking is pretty straightforward, pretty easy. But since Ethereum transitioned from proof of work to proof of stake, it caused some complications. So there are two keys. And so how ours work on EtherFi is the staker generates those keys. And so the BNFT, that's our two ETH bonds that is on the validators. And so those keys are generated and the staker holds the withdrawal keys. So they can exit the validator at any moment. What they do is they send an encrypted file over to the node operator. So the node operator can then spin up the validator to do the necessary things that they have to do. But should something happen to one of our like permission node operators where, you know, let's say like there's a sanction or they have to, you know, shut down, whatever it might be, right, there's a variety of different things that can happen. Well, the staker still has full control of the validator. So they are able to exit and take their ETH at that point. So at no point can anyone outside of the staker take the ETH out of the validator. So we just think that's like a super advantageous. thing and it was non-trivial to build it. But it's kind of like one of the really, really big differentiators for us that we thought was making sure the stakers had full custody in full control of their ETH at all times. Yeah. And then how would you say this compares to some of the large incumbents that we see in the market today, whether that's a Lido or a Rockit pool or a FraxETH. For those players, I think your assessment is that there's a lot of tail risk there since they do hold the validator or withdrawal keys. Yeah. So I think that there's a lot of great options that are out there. Lido obviously is kind of dominated the liquid staking space. I mean, they created the space and they made this whole space a reality of this massive, massive market. I think if you were to talk to anyone on the Lido team or any of the founders, they probably would not build the protocol the way they did if they had the information they did now. But when they built it, they just gave their best guess of what withdrawals would look like. Withdrawals had not been actually finalized by Ethereum, so no one knew really what it looked like. So anyway, that's kind of what they did and why they focused on that. 32, I think it was 31, 32 node operators control all the keys for Lido stake. So if you think about that, 32 node operators control all the keys for 32.5% of the stake on Ethereum right now, which is pretty crazy, right? So somebody has one of those node operators and hopefully nothing does. But again, staking seems to be the thing that is in the crosshairs of governments. And there's other things, right? Say an employee got the keys or whatever. It's a lot of concentration and not a lot of values. So yes, that's one thing. Frax I think is just a whole different ballgame as far as staking goes and what they will do. I think Frax has their huge fans and then they have their huge turrets. But they're doing good stuff in the space. We really like what Rocket Pool is doing. I think they've done amazing stuff. They're super focused on the good of Ethereum and decentralization. The biggest thing I think that has been a challenge for them is scaling because their bonding mechanism of 8-bit has just been a challenge. They've tried to do these mini pools and stuff, but it's still like a challenge. So anyway, there's tons of options and we think that it's good to have options, right? There's more people that are coming out too, like StakeWise v3 is coming out. And then there's other great protocols out there as well that give people options too. When you say staker holds their own keys, this is not correlated with the ETH holders, right? For an ETH holder, they don't actually hold any keys. They're just minting a liquid staking token that represents a share of the stake token with one of your permission or permissionless node operators. That's correct. Yeah. So ETH does not hold any keys, but the greater staking community holds the keys on that. But that's correct. ETH just comes from the liquidity pool that is created. Okay. Got it. And then, so what would be the process for someone who comes to EtherFi, they deposit their ETH to MintETH. Where does that ETH get routed to? How does that work? Yeah. So our launch actually, our wait list is going out later this week. So we'll have our first stakers go through and then actually everyone will be able to stake starting next week. We think it's going to be Wednesday, but who knows? Dev's dev. And so sometimes that gets pushed back. But next Wednesday, November 15th, anyone should be able to go to Ether.Fi. You connect your wallet, you swap your ETH for ETH. And then basically what happens with that ETH is when groups of 32 get positioned, we will match them up with a staker and then a node operator who's made a bid on it. The staker generates keys, they control the keys. Node operator then gets the encrypted keys and they spin up the validator. And then you start earning rewards. So for the user, it looks fairly simple. You just connect your wallet, you get the ETH, you see the rewards that you're going to get, and then you'll have stats as far as the APR that's given through the thing, etc. Nice. Pretty timely call with the ETH launch coming up. Yeah. So I guess now on the topic of ETH, I wanted to dive into the concept of liquid restaking. Could you just talk about what restaking is and your partnership with Eigenlayer on that? Yeah, totally. So we think restaking is going to be massive. And so Eigenlayer is the first one who came up with this idea and what they're doing. And so currently there is no restaking. Like Eigenlayer has been sexy and probably the hottest startup of the last 12 months in the crypto world. And they kind of came up with this idea of restaking, but they're still working on building out their protocol. The only way that you can interact with Eigenlayer currently is by going into these Eigen pods where then you collect points. So that's kind of the reality of restaking and where it is currently. But ultimately what restaking will do is for end users, the easiest way to think about it is that it will increase rewards. It also increases risk because you are repurposing the ETH that you have. And so you know, through these what are called AVSs. And I think there's still a lot to be seen of how these AVSs are going to be routed. But basically you point your withdrawal address from the validator to these AVSs. EtherFi, each individual validator has its own withdrawal address instead of being like a pooled thing like most LSTs. So we should have some pretty good flexibility in AVSs. I think one of the biggest things is that restaking, I would be shocked if it's not popular just because people will always search for rewards or yields. And so if they can get increased yield, and they deem that it's worth the risk, they will do it. But I think one of the biggest things is there's other flavors of restaking and not just Eigenlayer. So we have a great relationship with Eigenlayer. We think they're a great team and super excited about what they're building. But we also think there's some other great teams out there too, like Restaking Club. Cloud is building some good stuff right now. And I think you'll see several other people pop up over the upcoming weeks or months here. Yeah, yeah, so I guess to recap on that, basically, the state need is being essentially restaked into EigerLayer to provide these validation services to these middleware protocols, like bridges or oracles. And then the main draw, I think, here is to your point, you get that additional yield, but you also get that additional risk with, I think, there's additional slashing mechanisms that EigerLayer can take onto the ETH. That's right, yep. OK, so yeah, I guess my question is, what if someone who mints ETH doesn't want that additional risk factor? Are they just automatically subject to that? Nope, so you're going to be able to toggle. When you go to stake, you're going to be able to say, yes, that I want to restake, or no, I do not want to restake. And you'll kind of go from there. So in the short term, I don't know why you wouldn't want to restake, because, again, you're just accruing points. There's no, like no AVSs exist yet. So the functionality of an LST, a liquid staking token, is very similar to the, is exactly the same as the function of a liquid restaking token or an LRT. But once those AVSs go live, that's when you would expect to generate higher rewards. But again, yeah, you'd have increased risk and then extra slashing conditions. So things get a little more complex, and I think the provider probably matters quite a bit at that time. Yeah, I think the, and then once the marketplace opens up, is how would you choose where to deploy that restake deed to different validator services? Is that a governance decision, or? So yeah, so yes, we are working on our path towards decentralization. And I think governance will certainly play a role in that. But there's too many unknowns really to say, I guess like at this point, like whether our full governance process is implemented by the time AVS has come online or not, like that's kind of TBD. So it's a fairly fluid situation, like we're trying to see into the future of where things are going. But what we know now is that the best way to get the upside of restaking is by going into these eigenpods and collecting points for whatever those might yield in the future. Got it. OK, nice, nice. And then kind of moving back to the protocol side, what are the fees involved with staking with EtherPhi? Yeah, like commission rates for node operators, the treasury, et cetera? Yeah, great question. So it's similar to every other liquid staking provider, 90% goes to the staker, 5% goes to the protocol, and then 5% goes. OK, yeah, pretty simple fees there. And then I wanted to kind of ask about the withdrawal mechanism as well, now that that's been opened up since Shapello. But just curious about your unique position with EETH and that being natively restaked via eigenlayer. Is there a sort of additional process that it needs to go through to withdraw your ETH? No, well, so yes, I guess the ETH takes seven days to withdraw. From the liquid staking protocol, one of the benefits I think is just having that quick withdrawal mechanism. So we'll enable that for people and allow them to move in and out as they see fit. So it's really on the validator side that that becomes the challenge where you have to get in and out of validators. I think it's like seven days or something that takes something like seven days, I think, on the eigenlayer side once you get into these eigenpods to get unrestate, we'll call it, in quotes. Yeah, yeah, I think that's right. OK, yeah, I wanted to touch on another subject as well. I think you guys have the Operation Solar Staker initiative. Can you kind of talk about what that is and how you guys are building that process? Yeah, for sure. Operation Solar Staker is super cool. So we have this thesis that one of the biggest deterrents of people running their own nodes across the world or from their home was the cost of it. And not only the hardware costs, but you also needed 32 ETH, which in today's world, that's $64,000 USD. So it's not cheap. Add on top of that the hardware you need. Anyway, there's some really unique things that kind of brought this and made it a reality. One, since the staker creates the withdrawal keys, we are able to create those withdrawal keys and then distribute the shards to node operators in other areas. So that's why we use professional node operators. We can also do the Solar Staker option. And so the Solar Staker option were unique in the sense that no one else could do this because you would send the ETH to these nodes, but then they would have the ability to withdraw. So we are giving this withdrawal mechanism and so it keeps the ETH safe. And then the other thing is distributed validator technology. So there's a company called Oval. There's another company called SSV. But basically what it does is it doesn't rely on just one validator to attest each block. It just needs some mechanism or some percentage of people on there. So it could be like three out of four validators. It could be seven out of 10 validators need to attest the block. So you basically remove the risk of one validator having to have 100% uptime basically in fear of missing a block. And so DBT really allows that. So Solar Staker became a reality for two main reasons. One, the evolution of DBT. And then number two, the way that we created our protocol where we could distribute ETH while still maintaining control if there was a bad validator acting. The validator can't get access to the ETH either. So yeah, that was kind of our idea. And it's gone super well. Like we've grown immensely. I think we're on six continents now. So the biggest thing is trying to figure out how to scale it. It's still very manual. But yeah, it's something that we really kind of want to move forward on. Yeah, that's super cool, the distributed validator technology. It's starting to hear about that a little bit more. And I think to me, it sounds pretty much like a multi-sig on your validator keys where it gets sharded. between these four different node operators and you just need three out of four to attest to these transactions. Yes, pretty cool stuff. Wanted to kind of move on to the risk aspect a little bit more. What would you say today in your view is sort of the biggest risks to Ether5, whether that's like the smart contract side or maybe infrastructure side with ETH and its staking evolution? Yeah, so I mean, I think that like the smart contract risk is always something. We invested a lot in audits. We have a bug bounty program. So like, you know, we take security very, very important or we like hold it to a very high bar. So we're doing everything we can to make sure the product is secure. Ultimately is our protocol of the utmost importance to make sure that stakers or investors funds are always secure. We prioritize that over rewards. And so, you know, we're taking all the steps, making sure that we're doing all the things and we obsess over security and making it, you know, good. I think that, you know, people were concerned about slashing from a risk standpoint when staking. Candidly, like there's just not a, like, you know, slashing has turned out to not be that big of a threat, I would say. So like, I don't really have concern about that. We do have insurance like set up in case there is, you know, some slashing incident. I think as ABS evolves, that will start to be the riskiest thing. You know, but other than that, I think ETH itself is pretty secure. You know, it's just, it's not that complex of a smart contract. And we, you know, got it audited six times. We've gone through bug bounty programs. And so, you know, I think it's in a good place and secure and people's funds are secure because we make it a very big priority. The other thing is obviously if you go mess around in DeFi too, I can, you know, start to, when we come out in the next week or so, there'll be pools that people can LP into and whatnot. So I think there's like counterparty risk that comes when you start to do stuff like that. But yeah, in a high level, you know, we feel pretty good about, you know, the investment we've kind of made there. Yeah. And you mentioned earlier, you know, progressive decentralization. And I think in the roadmaps, what's the outlook there in your view? Do you think the protocol will eventually be non-upgradable or controlled on chain by maybe a governance token? Yeah, you know, I think that both options are in play. I think that you'd love to get to a point where I think a lot of contracts will become non-upgradable, but we always want to evolve, you know? And so like, you know, making things mutable, like especially when you're starting out, like I think makes things challenging. The other thing is that, you know, when you, in our path towards decentralization, I think it's an advantage to not have that when you're small, and ultimately becomes an advantage for all participants in the protocol too, because you need to move fast when you're small in a startup. And so like, you know, if I go back the past 12 months, like, you know, if we had to go through like a governance vote every time to get things done, like, I just don't think we'd be where we were. And so you certainly put some trust in the team on that, but over time, I think it totally makes sense to, you know, to rely on governance and, you know, get there. I think we have a blog that we put up about this, but I think it's Q1 or Q2 of 2024 that we're aiming to finalize that. Yeah, yeah, it's always a hard dilemma for younger projects on whether to give up too much of that control early on in the name of decentralization. Yeah, I think that all makes sense. Wanted to ask what's next for EtherFi? I know you mentioned EETH will be launching next week. What can we expect in terms of DeFi yield opportunities? Anything to speak of? Yeah, so we have a lot of stuff coming up. I mean, I think that the, I guess, the biggest thing that, you know, if you're, if you are a yield maxi, I'll call it, you get a lot of exposure. So you get staking rewards from EtherFi, you gain loyalty points from EtherFi, you gain eigenlayer points from EtherFi, and then the DeFi protocols that we're, you know, gonna be integrating with, a lot of your standard ones that are out there, we can't technically like save them until things come up, but they'll be out in the next couple of weeks and everyone is very familiar with these places. And I think there should be some good rewards and incentivization out there. And like, you know, looking in the mid to upper teens, APY, obviously it depends how popular the pools are and where they are. But, you know, there's a lot of people who've done great stuff in this. And, you know, like there's the pendals of the world and the balancers of the world, Curve, Maverick. So like, we'll make sure that you can have capital in a variety of different places and go earn some rewards if you got the degen and yeah, so to speak. Nice, nice. Yeah, on that topic, you know, we're seeing since the Shapello upgrade, we've seen a lot of new LiquidState tokens kind of pop up to market, trying to take share away from some of the larger incumbents. I guess, what do you see as sort of the end game here with all these different LiquidState and tokens? Do you see it kind of just consolidating among maybe top four or will it just keep kind of expanding to newer players? I think it just depends. Like there's people that, there's like different strokes for different folks, right? And what they depend. Like when you get into a protocol too, RocketPool has been extremely sticky. So like there's tons of advantage of, once you get your validator spun up, like you get in a pretty good position and like they have a great community and stuff. So I think they'll hang around. Lido's liquidity is like unmatched, and so I think the market has to bring something that can kind of match the depth that they offer before that like stronghold of the market becomes a change. StakeTracks ETH, I think is like I said, it's probably the most polarizing. Like there's huge haters and there's huge lovers of it. So I think there'll always be a lot. I think the hardest thing for these protocols and us included is how to make money and how to stay in business. As a protocol, you don't make a lot of money just off staking. And so, we're constantly thinking of different ways to monetize that helps the protocol like propel forward and continue to like integrate and help the stakers. So it's like, but you also need to reward stakers and have the best rewards. And it almost becomes like the spy wheel. So yeah, anyway, it's one of the reasons why we launched this NFT called EtherFan. And so, you have to pay. pay to mint an NFT and then pay to burn it. All that revenue is given back to stakers, but we think high rewards is super, super important because you kind of create that flywheel where you can keep people on board with that. Yeah, yeah, that makes sense. EtherFan, it looks pretty interesting. It's like, I think, a gamified experience for StakeShare ETH. Maybe could you talk a little bit more about what's the game there and does that change at all with the ETH launch coming up? So the, sorry, just to confirm, like with EtherFan and the ETH, does anything change? Yeah, yeah, yeah. So there's no changes really. So EtherFan is wrapped ETH, is essentially what the EtherFan is, the NFT. People are gonna be able to migrate over to ETH if they want. Other people will still stay with EtherFan, I'm sure, because it's one of those things that you can kind of just hold and you're gonna gain rewards. We will still repurpose all EtherFan revenues back to EtherFan holders. So I actually think there's gonna be quite a bit of, I think rewards will be high over the next six months or so because people will burn their NFTs to get ETH, but with that, they will pay a point of buying ETH to burn that NFT. So I think that, yeah, EtherFan will still be there and we'll still keep EtherFan running because there's a great community and crowd that we have kind of on that. I think ETH is gonna be more of the mainstream liquid staking that people are used to. Gotcha, gotcha. Yeah, and then just, I think lastly for me, I was curious about what your outlook is on all chain deployments, whether that's another alt layer one or layer twos. Yeah. Yeah, so we announced a grant that we got from Polygon. So we will be building on their ZK EVM, we'll be the first native ETH staking on their ZK EVM. Yeah, there's other great L2s out there too. So I think L2s are gonna be, you know, there's gonna be a play there. And so we're talking with a lot of those teams and, you know, building on them, I think is probably a reality, you know, over the upcoming weeks, months here, because I think that there's just a ton of value that is created by the L2s. Awesome. Well, that's all the questions I had. Rokt, is there anything else that you wanted to cover on today's call? Thanks for having me is great. Really appreciate it. And yeah, for anyone who wants to ether.fi, you can apply to be whitelisted and then we should open up for everyone in the next week or so. So I really appreciate you having us on and yeah, love hopping on and appreciate the feedback people have. We hope to see some people on ether.fi. All right, awesome. Thanks Rok. And yeah, definitely looking forward to eating lunch next week. Thanks everyone. Sounds good, sir. Thank you. Bye-bye. All right, bye. This show was brought to you by Exponential. Exponential is on a mission to democratize access to the best yield opportunities in DeFi. Join Exponential.fi now to start your DeFi investing journey. Exponential.fi.