Liquid Staking Platform Ether.Fi Deposits Surge Ahead Of Launch

A new entrant in the crowded liquid staking industry has grown quickly since its debut last month, buoyed by a simple promise: you can keep your coins.

Crypto locked in Ether.Fi has grown to more than $37M since it began accepting deposits ahead of its launch on Ethereum mainnet on March 4. Like other liquid staking protocols, it attempts to solve a dilemma posed by Ethereum’s security model.

“Ether.Fi offers truly decentralized staking,” the company boasts on its website. “The staker, not the node operator, owns all the keys.”

In an interview with crypto data company Token Terminal this week, CEO Mike Silagadze said custodial staking “just seemed like it didn’t meet the risk/reward ratio, where you’re getting your 5% yield, but you’re losing custody of your ETH.”

Institutional Investors

Institutional investors are especially wary of taking that risk, Silagadze told The Defiant. He is betting that his non-custodial product will draw institutional money, which has largely sat on the sidelines since Ethereum enabled staking more than two years ago.

Ethereum, like other Proof-of-Stake blockchains, relies on users who are willing to lock up, or stake, their ETH in order to validate transactions. While ETH staked directly in the Beacon Chain comes with a modest annual yield, it cannot be used in more lucrative DeFi protocols.

Liquid staking protocols address this dilemma by staking ETH on users’ behalf, batching deposits and handing them off to so-called “node operators” who run the hardware and software combination required to secure the Ethereum network.

But liquid staking protocols are custodial services, a potential liability in an industry where people are loathe to relinquish control of their assets. Ether.Fi claims to have built a protocol that should make everyone happy.

Non-custodial Staking

Ether.Fi was originally a hedge fund, with plans of staking Ether on customers’ behalf and using DeFi strategies to boost that yield.

“In investigating what options were available for staking, we very quickly reached the conclusion that we weren’t comfortable using any of them, for a number of reasons,” Silagadze told Token Terminal. “One, they were either fully custodial or semi-custodial.”

The company pivoted to build the staking service it wished it had at its disposal.

Users retain custody of their Ether by generating mnemonic withdrawal credentials and validator keys.

“With other protocols, this key generation is performed on a centralized server by the node operator,” according to Ether.Fi. “Via the ether.fi protocol, the staker then shares an encrypted copy of the validator key with the node operator (required for validation duties).”

“Early Adopter”

It’s off to a promising start. As of Friday, more than 14,000 wallets had deposited ETH in the protocol’s “early adopter” smart contract. And deposits have picked up since Wednesday, when Ethereum’s developers upgraded the blockchain to allow for the withdrawal of staked ETH.

Silagadze told Token Terminal he expected the first $20M to $30M in TVL to come from the institutional investors who had been with the company since its hedge fund days.

That hasn’t been the case.

Of the $37M, about $1.4M has come from those investors, Silagadze told The Defiant. The remainder has come from retail investors, with average deposits at 0.2 ETH – stakers can deposit any amount, not the 32 ETH increments required when running a node.

“To be frank, we were kind of surprised at the uptake,” he said.

Fierce Competition

The company closed a $5M funding round in February. Investors include North Island Ventures, Chapter One, Node Capital, and controversial crypto investor Arthur Hayes.

But Ether.Fi faces a tough road ahead. The competition is fierce and entrenched. Ether.Fi’s $37M in deposits represents a rounding error in the $19B staking industry. Lido, the industry leader, accounts for almost two-thirds of that figure.

The company plans on taking a snapshot of its users as of April 30, three days after it debuts on Ethereum mainnet. Early depositors are awarded bonus points that will allow them to get boosted staking rewards “and other benefits” when the protocol moves to mainnet at the end of the month, according to Silagadze.

However, he insists no protocol token is in the works, and that the snapshot has nothing to do with a token airdrop.

[ UPDATE: Article updated April 14 @ 7:40pm to correct the amounts of ETH stakers can deposit when using Ether.fi and the fact that deposits aren’t on test net]