On September 15, 2022, Ethereum successfully completed The Merge. This was the original Ethereum Mainnet merge with a separate proof-of-stake blockchain called the Beacon Chain, now existing as one chain. This event was eagerly awaited by millions of crypto enthusiasts and considered by some to be a groundbreaking industry development.
This move – from PoW to PoS – was also considered by many to be one of the most impressive feats in software history, resulting in an estimated 99.95% fall in energy consumption.
Simply put, the main function of staking ETH is to secure the world’s computer – AKA Ethereum. The network gains strength to repel attacks as more ETH is staked (the greater the sum of ETH, the greater the amount of ETH is needed to control a majority of the network). This means that an entity which threatens to attack would need to
hold a majority of validators – i.e. it would need to control the majority of ETH
within the system. Users earn rewards for providing this service to the network.
The problem with traditional staking is that it locks up funds, making them illiquid. Liquid staking solves this problem by allowing users to stake their cryptocurrencies, while still using them as collateral to access liquidity.
According to DeFi Llama, more than 90% of current ETH LSDs (liquid staking derivatives) are controlled by centralized service providers, led by Lido with almost 75%.
Dear User, We Lost All Your Money. Sorry.
Every few years, crypto gets a rude awakening about the importance of the ethos at its heart: decentralization and self-custody. We all know the mantra “Not your keys, not your coins”, but in “good times” short memory, greed, or a combination of both make some forget and think “This time it’s different”.
Certain aspects of human nature are resistant to change, and throughout history, many folklores and tragedies have been written as cautionary tales, intended to warn future generations against repeating the same mistakes. Whether it’s the three little pigs or the ant and the grasshopper, we must remember that any structure is as strong as its foundation and a good foundation should be built on sound principles. In the infamous 2014 Mt Gox hack, almost 850K bitcoins were lost, totaling around 7% of all bitcoins at the time (equivalent to $20B at the current price).
There’s a saying, “Once burned, twice cautious”, but clearly, human nature being what it is, history keeps repeating itself. Fast forward to June 2022 when the centralized crypto lender Celsius paused all withdrawals. The firm had more than $8 billion lent out to clients and almost $12 billion in assets under management. Fast forward again to November 2022 when FTX paused all withdrawals and further billions of dollars of customers' funds were probably lost forever.
The DeFi movement has emerged out of a need to counter outdated traditional finance (TradiFi) which continue with money printing and devaluing currencies all over the world.
Commandment #1: Not Your Keys, Not Your Coins
“The private key is a unique secret code that is required to access and manage cryptocurrency assets. When using a centralized exchange or custodian to hold your cryptocurrency, you are essentially giving up control of your private keys to that third party. This means that if the exchange or custodian is hacked or goes bankrupt, you could lose access to your cryptocurrency assets”. Unless you’re insured, you will incur loss as these tokens will be gone forever.
Commandment #2: Decentralize The Stack
You can’t build a great building on a weak foundation. Centralization begets more centralization, which leads to more control and power. Social media censorship is no longer a hidden secret and it emerged from the shadows thanks to Elon Musk’s long battle to acquire Twitter.
Decentralization of the stack in crypto means distributing various layers of the technology stack across multiple nodes and participants to increase the security, transparency, and trustworthiness of the system. Some examples of critical layers of decentralization include Consensus Mechanisms (e.g. PoS), Storage, Applications (dApps), and RPC Nodes.
Absolute power corrupts absolutely. That’s human nature. Smart (naïve) systems try to “fix” human nature. Wise, antifragile systems are designed with human nature in mind.
The solution, therefore, is the decentralization of power and control. Without a centralized counterparty, there's no counterparty risk.
Crypto Commandment #3: Don’t Trust, Verify
G. Michael Hopf eloquently said: “Hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times”. Crypto is in a prolonged winter (due to a number of weak people) and as we should have learned from the grasshopper, ant, and pigs, this is the time for building. We should start by going back to basics, laying down strong foundations based on the principles of decentralization, trustlessness (results from open-source and immutability) and self-custody of keys.
Sunlight is the best disinfectant. We must get away from the obscure black boxes of centralized services. The misnomer “proof of reserves” means nothing if you don’t control your keys. We must correct course and return to audited, auditable, open-source, immutable transparent boxes.
You can’t paint all crypto users with the same brush. Some heedlessly use CEXes, oblivious to the risks involved, and some do it knowingly due to its superior UX.
The key to broader adoption is simple and intuitive UX.
ether.fi Joins The Puzzle Pieces Together
ether.fi is a liquid staking protocol that allows stakers to retain control of their keys while delegating validator operations to a node operator. Formed under a shared vision of what DeFi should be, ether.fi offers stakers a decentralized, non-custodial liquid staking solution that can serve as a building block for Web3 infrastructure.
ether.fi has developed a delegated staking protocol that centers on the principle of decentralization. In contrast to the prevalent liquid staking services, the ether.fi protocol allows stakers to maintain full custody of their keys and ETH. This ensures they remain in complete control of their funds and eliminates the risk of centralized control or manipulation.
In addition, the protocol will include a liquid staking derivative token which is composable with other DeFi protocols. This allows stakers to use their staked assets as collateral to access liquidity, while still earning rewards from their staked assets.
ether.fi will also feature trustless node operation, meaning that nodes will operate autonomously, without relying on centralized authorities or intermediaries. This enhances the security of the system and promotes decentralization in the process.
The protocol includes a services layer, which can serve as a foundation for building other services. By providing a platform for developers to build on, ether.fi aims to promote innovation in the staking ecosystem and drive the development of new and useful applications.
Furthermore, stakers and node operators stand to gain economic exposure to the various services that are built on top of the staking infrastructure. As new services emerge, those who participate in the ether.fi protocol stand to benefit from the economic growth and expansion of the ecosystem.
ether.fi is committed to upholding the decentralized principles of the cryptocurrency world. To ensure that the entire crypto community stays true to these principles, it's imperative that we all continue to educate and emphasize the values and logic behind Web3 principles. The history of centralized systems indicates that they tend to become even more
centralized over time. To avoid a regression to the traditional system, we must stand firm and stay true to our principles.
At Node Capital, we consider the Web3 ethos to be our guiding light. We're proud to be a part of ether.fi’s journey and to support its efforts. The team’s commitment to decentralization aligns perfectly with our own principles, and we're excited to see the progress they make. We firmly believe that we can help shape the future of finance together, in a more resilient and decentralized manner.
If you have any questions, feel free to ask the ether.fi team.
If you want to share your thoughts, please do.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice