ether.fi Staking
How Ethereum Staking Works
In the Proof of Stake Ethereum, validators are at the core of maintaining the network’s integrity and functionality. Their role is consists of the following:
Stake holding: A validator is a single Beacon Chain address holding 32ETH (the Stake). This ETH is deposited on the Execution Layer and serves as collateral and is meant to incentivize honest behavior.
Block Proposal: Validators are responsible for proposing new blocks to be added to the chain. The opportunity to propose new blocks is determined by a randomized process.
Block Verification: In addition to proposing blocks, validators verify the blocks proposed by others, this is referred to as “attesting”. They check the validity of the transactions and the block’s adherence to the networks rules.
Voting: Validators also participate in a voting process to reach consensus on the validity of proposed blocks. They attest to the correctness of a block and if a significant majority of validators agree on a block, it’s added to the chain.
Reward: For the services highlighted above, validators receive rewards in the form of transaction fees and block rewards. These rewards are intended to compensate for the risk and services they provide. A further breakdown is provided below.
MEV Rewards: The rewards of producing a block can be substantially higher by reordering, including, or excluding transactions in a block, which is known as MEV (maximal extractable value). To maintain the integrity of the network and increase rewards, validators can use relays, such as Flashbots, to obtain a full block from a network of block builders that optimize for MEV extraction. The block that pays the highest fee for using their block is chosen, thus increasing the validators' rewards compared to simply adding transactions based on gas fees.
Penalties (slashing): If a validator acts maliciously by trying to manipulate the network, they can be penalized, which involves losing a portion or all of their staked ETH.
Rewards:
Validators earn rewards from both the Execution and Consensus Layers. These rewards are outlined below:
Attestation
Consensus
Every epoch (6.4 min)
Variable*
Block Proposal
Consensus
Randomised
0.02 ETH*
Slashing Reward
Consensus
Very rarely
Up to 0.0625 ETH
MEV Rewards
Execution
Included in Block Proposals
Typically 0.01 to 0.1 ETH
Priority Fees
Execution
Included in Block Proposals
Typically 0.01 to 0.1 ETH
*The rewards for Attestation, Block Proposal, and Sync Committee could vary depending on the network conditions and the number of active validators. Validators are responsible for attesting to the validity of blocks and proposing new blocks.
MEV (Miner Extractable Value) rewards and Priority Fees are part of the Execution layer rewards, which are included in block proposals. These rewards and fees are related to transaction processing and can vary widely.
The Slashing Reward is a rare occurrence, awarded to honest validators when a malicious validator is caught and penalised.
Ether.fi Node Operators
Solo Stakers
Ether.fi employs a unique approach to staking by integrating Distributed Validator Technology (DVT) to enhance the security and operations of validators on the Ethereum network. This technology aids in the onboarding of solo stakers who wish to run nodes in their home/office, anywhere in the world. The goal of this initiative is to ensure the decentralization of the Ethereum network by further increasing the number of node operators internationally and remove the reliance on a handful of centralised data centres.
Given the large capital requirement to run a solo node (32 ETH), the Ethereum network has experienced increased centralisation with this barrier to entry. However, through the use of DVT, ether.fi has been able to significantly reduce this capital requirement to simply the cost of the hardware, and monthly electricity/internet costs. Participants of this program either sign up to purchase a machine through ether.fi or have purchased their hardware elsewhere and are looking for a protocol that allows them to provide security to the network.
Those interested in becoming a solo node operator must meet certain criteria, including having staking experience, a robust internet connection, be comfortable with disclosure requirements for ether.fi, and agree to the program terms of service. Once they have the hardware and meet the technical requirements demonstrated through the testnet phase, these individuals are able to run staking infrastructure for ether.fi from their own home or office without posting any collateral. This is the benefit of DVT. These participants commit to running a node, and in return, they are put into a solo staking cluster, receiving initially 96ETH to stake, of which, they receive 5% of staking rewards.
Permissioned Node Operators
Ether.fi has a set of permissioned node operator partners that run validators for and on behalf of the protocol. As permissioned validators, these operators are required to submit bids through the protocol auction mechanism, however they are not required to post a bond as collateral. These companies have been onboarded and vetted, and have a reputation within the industry built off their track record of high performance.
5% of all the rewards are paid to these node operators for the validators that they run.
Payouts
Node operators will be paid out quarterly, with the first effective payout date of Feb 31st, 2024. If a NO would like to be paid out earlier, they can pay the associated gas fees. To do so and sweep rewards, NO’s can call partialWithdraw on the etherfiNodesManager contract. Anyone at any time can call "partialWithdraw" for any validator and pay the gas to distrubute the rewards to the 4 parties (NO, TNFT, BNFT, Treasury)
Note that rewards for solo stakers will be socialized. This means that rewards for all DV clusters will be pooled and paid out equally to all participants, based on their time in the pool.
Reward distribution
The sum of all staking rewards is split out between stakers, node operators and the protocol, 90%, 5%, 5%, respectively.
ether.fi staking APR
ether.fi’s staking APR may sometimes be lower than Ethereum’s due to the activation queue for ETH validators and the ether.fi protocol staking rewards fee. Additionally, ETH is held in the ether.fi liquidity pool to facilitate quicker withdrawals, which also contributes to a marginal reduction in returns. Since staking rewards are distributed across all stakers, a significant increase in new stakers can temporarily lower the rate until more validators are onboarded.
With ether.fi, you start receiving staking rewards within 24 hours of your deposit, without needing to wait for validator activation, which helps mitigate the initially lower rate.
Further information on ether.fi node operator performance can be found here.
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