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StakeWise, a well-established staking protocol, is currently undergoing a significant metamorphosis. Traditionally using a two-token model, the protocol is on the brink of introducing StakeWise V3, an upgraded version that will employ a modular structure enabling users to stake into distinct vaults.
V3
StakeWise V3's modular design presents several distinctive advantages over more monolithic staking protocols such as Lido, Coinbase, and Rocket Pool. For instance, it allows stakers the freedom to select their own validator. Moreover, the protocol significantly mitigates slashing risk, as losses can be easily confined to a single vault. StakeWise V3 also incorporates slashing protection through overcollateralization. Users can only mint osETH, the protocol's Liquid Staked ETH (LSD), against a portion of their stake.
Furthermore, this innovative design allows validators to join the network permissionlessly with minimal capital requirements and provides enhanced customizability over vaults, including the ability to create whitelisted vaults specifically for institutions.
Source: StakeWise
Despite its potential to disrupt the conventional monolithic order, StakeWise V3 is not without its challenges. It's essentially launching a brand new protocol, which implies significant execution risk. Additionally, its design may add a layer of complexity for end-users, especially for those who opt to "liquify" their stake instead of holding onto the minted NFT representing their deposit. These users may need to manage their collateralization ratio consistently to avert liquidation.
StakeWise currently ranks as the fifth most popular liquid staking protocol on Ethereum. Historically, StakeWise's primary offering was StakeWise Pool, which, similar to Lido, featured a permissioned validator set and a 10% commission on earned staking rewards, shared equally between the StakeWise DAO and the validator set.
However, to counter the growing concerns of centralization risk within the ecosystem, StakeWise Labs proposed a major protocol upgrade in September 2022. Termed StakeWise V3, this upgrade can be dissected into two layers.
Vaults & VLT Tokens
The first layer is a marketplace of "vaults" or deposit pools that grant stakers complete control over where they stake their ETH. Each vault operates as its own pool and can be permissionlessly set up by anyone, ranging from a solo staker to a professional validator operator. The creator of a vault can customize various pool parameters, such as who can deposit, participate as a validator operator, the vault's fee structure, and more.
Stakers can browse through the available vaults via StakeWise's UI and stake with whichever one(s) suit their requirements. To aid users in making informed decisions, each vault is evaluated against a transparent set of criteria and assigned a score within the StakeWise UI.
On depositing to a specific vault, stakers receive a proportional amount of Vault Liquid Tokens (VLT) in return. VLT tokens are repricing ERC-20 tokens, meaning their value relative to ETH escalates as the vault earns staking rewards. VLT tokens are unique to the issuing vault and accrue rewards based on the performance of that specific vault's validator set. Thus, only VLT tokens issued from the same vault are fungible.
The StakeWise V3 transition promises to usher in a new phase in the evolution of staking protocols, focusing on customization and risk isolation. This modular approach could potentially redefine how investors interact with staking, enabling a more personalized and controlled experience in the burgeoning decentralized finance landscape.
Overcollateralized Staked ETH (osETH)
The second layer of StakeWise V3 brings into play the protocol’s liquid staking token, osETH, or overcollateralized staked ETH token. Each osETH represents a fraction of all the ETH staked in StakeWise V3 validators. By design, osETH value grows over time as staking rewards are collected, which means simply holding osETH earns ETH rewards for the user.
osETH's design goal is to streamline staking: acquire osETH to start earning staking rewards and convert it back to ETH to cash out your deposited and earned rewards. When new rewards are secured by StakeWise V3 validators, the total ETH in the validators increases, enhancing the value of each osETH share. This increase in value, proportional to the amount of rewards earned by StakeWise V3 validators, accurately mirrors the staking earnings for osETH holders.
VLT Tokens and osETH: A Symbiotic Relationship
VLT token holders can mint osETH by depositing their VLT tokens into a “collateralization contract”. The value of osETH tokens minted will always be less than the value of the deposited VLT tokens. Each osETH minter will have a unique loan-to-value metric, reflecting the utilization of their VLT collateral in minting osETH.
While VLT tokens accrue rewards based on the performance of a specific vault’s validator set, osETH tokens accrue rewards at the average rate of all validators across all vaults in the StakeWise v3 system. This allows all osETH tokens to be fungible and widely usable throughout DeFi.
Anyone can launch a Vault, stake into Vaults, and mint osETH without restrictions. This design promotes inclusivity, offering access to liquid staking for everyone.
Some examples of its potential use include:
- Solo stakers minting osETH against their solo validators
- Staking companies' users minting osETH against their validators
- Groups of Avado/Dappnode owners running Vaults for others and staking their own ETH to mint osETH for liquid staking
- DAOs staking their Treasury into the Vaults they own and operate, and minting osETH against their validators for liquidity on-demand
- Centralized exchanges offering liquid staking to their users out-of-the-box
Through these diverse use cases, decentralization is inherently integrated into the design.
Additionally, StakeWise V3 mandates that for every osETH stakers in Vaults want to mint, they must have over 1 ETH. This overcollateralization offers a form of 'embedded slashing protection'. If slashing occurs, a reserve of ETH absorbs the slashing losses before affecting osETH holders. This safeguards osETH holders from losing their principal, making osETH a safer option for staking and DeFi protocol integrations.
However, stakers who mint osETH are still exposed to the slashing risk of the Vaults where they staked ETH. The excess collateralization ensures that other osETH holders are not affected by this risk.
osETH can be obtained in two ways: by purchasing it from the market or by minting it by staking into any of the Vaults. Each method offers distinct benefits.
Those who buy osETH from the market enjoy the full benefits of embedded slashing protection and diversification. This is similar to purchasing DAI to transact in stable coins. When done staking, users can simply sell osETH back to the market, typically at a higher price than they bought, due to accrued ETH staking rewards, thus making a profit from staking.
Stakers who mint osETH from various Vaults have the advantage of selecting a specific Vault to stake their ETH, offering controlled risk exposure and potentially a higher staking yield. Those who run their own validators for staking (like solo stakers, DAOs, CEXs, and staking-as-a-service companies) might prefer to mint osETH from their Vault rather than buying it.
