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EtherFi (ETHFI): Analysis of the leader in liquid restaking
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How it works, opportunities, risks... Our team of analysts takes a closer look at the EtherFi project and its ETHFI token.
The Big Whale's opinion 🐳
EtherFi is the first liquid restaking protocol, which gives it a significant competitive advantage.
It is one of the best ways to gain exposure to EigenLayer and its future airdrop.
EtherFi offers a significant yield opportunity, designed around ETH, Ethereum's token.
Its governance token, ETHFI, was launched on 18 March, making it very attractive to investors.
Overview 🧬
Launched in early 2023, EtherFi is a liquid restaking protocol designed on Ethereum.
As a reminder, staking involves immobilising cryptocurrencies to secure a blockchain in exchange for rewards. In the case of Ethereum, ethers (ETH) are blocked and this currently yields between 3% and 4% a year.
Restaking, on the other hand, involves blocking ETH in order to secure other decentralised services in addition to the Ethereum blockchain.
This translates into additional returns (and risks) on top of those from staking. This innovation emerged in 2022 with the EigenLayer project, which is the main restaking protocol (read our analysis).
EtherFi provides a simple feature: it allows you to keep your ETH liquid when they are normally blocked. When you immobilise your ETH, you receive an equivalent quantity of eETH, which represents a synthetic version of your stake.
Another advantage: there is no minimum quantity, whereas you need 32 ETH to use EigenLayer directly.
EETH can be used in many other decentralised finance protocols (DeFi) and traded at the same price as ETH.
If you're familiar with Lido (read our analysis), it works very similarly.
EtherFi currently dominates the liquid restaking market (43% market share) and is looking to expand its product offering with deeper integration into DeFi.
Financing 💰
EtherFi has raised a total of $33.3m in two funding rounds.
A $5.3m seed took place in February 2023 from North Island Ventures, Chapter One, Node Capital, Arrington Capital, Version One and Maelstrom Capital.
A $27 million Series A took place in February 2024 from, among others, CoinFund, Bullish, Amber Group, OKX Ventures, Bankless Ventures, ConsenSys Mesh.
These structures are far from unknown, nevertheless, we don't find the usual heavyweights such as a16z, Paradigm, Coinbase Ventures or Binance Labs.
Team and community 👾
Mike Silagadze is co-founder and CEO of EtherFi. Prior to that, he founded and ran Top Hat for 15 years, a well-known digital college book app in the US.
It is used by 24,000 teachers and three million students at more than 750 North American colleges and universities.
Prior to his departure in 2021, Mike Silagadze led a $130 million fundraising round, with a valuation of $500 million.
Rok Kopp is co-founder and Chief of Growth at EtherFi. He has held a number of senior positions at Groupon and also at Top Hat, where he was Sales Director. You can find his interview published on 18 March in The Big Whale.
Jozef Vogel is EtherFi's Chief Operating Officer. He was previously financial controller at Avara, a blockchain-related software development company.
The startup, along with most of the team, is based in the Cayman Islands. The project has 70,000 followers on Twitter and 31,200 members on Discord. It was relatively easy for us to get in touch with the team to ask questions as part of our analysis.
Proposal 🪐
EtherFi works in parallel with EigenLayer and wouldn't exist without it.
When you deposit ETH on EtherFi, the protocol automatically restores them to EigenLayer. In exchange, you get as many eETHs as ETHs deposited. This quantity of eETH increases regularly to pass on the rewards from restaking.
At the moment, EigenLayer is running on its test network; so there are no restaking rewards yet. The only return we currently receive comes from staking on Ethereum.
However, it's still worth using EtherFi or EigenLayer today because it collects EigenLayer "points". These points will serve as a benchmark for the future airdrop of the EigenLayer governance token, which is one of the most eagerly awaited in recent months.
Like its cousin Lido, EtherFi does not stake ETH itself. It relies on selected professional validators. For the moment, the partner validators are: Finoa, Pier Two, Allnodes, DSRV, Cosmostation, NodeMonster, A41, Chainnodes and Nethermind (consult the updated list).
EtherFi is not limited to restaking, as on 18 March the project presented "Liquid", a solution that allows ETH and eETH to be deposited to execute an automated investment strategy in decentralised finance.
This was developed by specialists at Seven Seas Capital and is based on the Pendle, Aave, Morpho, Balancer, Aura, Uniswap V3 and Convex protocols.
At launch, the annual return is around 30% (split between the product's natural return and a subsidy of ETHFI tokens paid by EtherFi to encourage investors to use it). There is a 2% fee to use the strategy.
Risks 🥵
Like any decentralised application, EtherFi is susceptible to hacking. Nevertheless, the project has five audits certified by industry benchmarks (Certik, Omniscia, Nethermind, Solidified), all of which will be carried out in 2023.
Another risk comes from restaking itself. As the rewards obtained via EigenLayer depend on the operators to whom we delegate our ETH, they represent a counterparty risk.
The more services an operator secures, the higher the return it will offer; however, this also increases its risk. EtherFi must therefore choose carefully the operators to which it wishes to delegate users' ETH.
This choice is currently reserved for the EtherFi team, but holders of its governance token, ETHFI, will be able to vote in a while.
The choice of validators will be very important as we are likely to see a dangerous race for returns. Some liquid restaking protocols will choose to offer the highest yields to attract the most users. Except that these higher yields will also come with a higher risk.
Rok Kopp, the co-founder of EtherFi, told us that he wanted above all to offer a secure offering rather than the highest yields. Only time will tell whether this cautious strategy will be followed.
The ETHFI token 🪙
The ETHFI token was distributed on 18 March to its first users in the form of an airdrop.
Holders will soon be able to participate in the protocol's governance. However, governance is not yet fully decentralised. For example, ETHFI owners cannot choose the EigenLayer operators on which EtherFi relies.
The ETHFI token should subsequently be able to be staked in order to obtain part of the revenue generated by the protocol.
One billion ETHFI tokens have been issued. 11% are intended to be distributed in the form of an airdrop. The first airdrop distributed 6.6% of ETHFI tokens. The second airdrop will distribute the remaining 4.4%. The date of this second operation is currently unknown.
23.26% of the tokens are allocated to the project team and 32.5% to private investors.
They cannot be sold for one year from 18 March 2024. They will then be progressively released over two years.
27.24% of the tokens are allocated to cash and 6% for partnerships. They will be used to grow the EtherFi ecosystem.
Regulation ⚖
EtherFi, which operates in the staking sector, could attract the interest of the US regulator, which has been examining this activity since mid-2023. Are staking and its rewards similar to financial securities? This question has yet to be decided in the United States.
Staking is not regulated in Europe either. This should be settled in the next version of the MiCA regulation, as announced by ECB President Christine Lagarde, in mid-2022. Most experts believe that European regulators have a more open attitude than the US.
"For a project like ours, it is too uncertain to be regulated in the US at the moment", explains Rok Kopp to The Big Whale.
The EtherFi system is based on the pooling of ethers (ETH) from users all over the world regardless of nationality. Potentially, the assets of US investors can be mixed with those belonging to Iranians or North Koreans.
The SEC considers that a token that allows income to be received for no consideration is akin to a financial security and should therefore be regulated as such, as it resembles dividends.
Competition ⚔️
EtherFi currently has the largest total locked value (TVL) among liquid restaking protocols at $2.93 billion.
EtherFi is so far the only one to have completed an airdrop of its token.
In second place, Puffer Finance has $1.32 billion in TVL. The protocol relies on a series of quests to engage its community. Puffer eventually wants to create its own layer 2 built on EigenLayer.
Renzo owns $1.03 billion of TVL. The protocol stands out for its ability to deposit ETH directly from Ethereum layer 2s such as Base and Linea.
Kelp DAO has $667 million in TVL. The protocol has introduced the KEP token, which is the representation of EigenLayer points, allowing these points, which are normally non-transferable, to be exchanged. The KEP is not the protocol's governance token.
Roadmap 📅
EtherFi doesn't intend to be just a liquid restaking protocol.
In our interview, Rok Kopp explained that EtherFi's ultimate goal was to become an ether-based "bank".
New automated investment strategies will be added to its Liquid product to offer more opportunities for eETH.
Over the next 12 months, EtherFi wants to roll out another product called "Cash", which will allow users to spend their EtherFi balance in the real world. This will include a crypto wallet with a mobile app as well as a payment card.
To support this, the protocol wants to create its own Ethereum layer 2 to minimise transaction fees. The protocol's governance should also gradually decentralise so that it is fully controlled by ETHFI token holders.
Market analysis by Chadi El Adnani, Head of Content & Research at SUN ZU Lab 📈
ETHFI, EtherFi's governance token, was distributed to attendees of a Binance launchpad and via an airdrop on Monday. The token was listed on Binance and other platforms in the aftermath.
It began trading around $4.2, before losing 30% and dropping to $3 at the time of writing. Declines of this magnitude are common when a new token is launched.
At launch, ETHFI represents a market capitalisation of $350 million and a Fully Diluted Value (FDV) of $3 billion, taking into account the maximum circulation of tokens in the project. This puts it directly in the top 200 tokens by market capitalisation.
Projects such as Lido had started with a similar capitalisation. This is typical of a project that matters in the industry.
The ETHFI/USDT pair generated trading volume in excess of $300 million from midday Monday to midday Tuesday alone, representing a solid start for the token.
Where can you buy the ETHFI token? 🛒
The ETHFI is not available on a large number of exchange platforms, but you can find it on two exchanges regulated in France: Binance and OKX.
It is also possible to acquire it on the decentralised exchange Uniswap.
Conclusion 🧭
EtherFi has the largest fixed value (TVL) among its competitors, but this lead is not irrecoverable.
A fate à la Lido (which is crushing the liquid staking sector) is still premature.
The challenge will be to integrate its synthetic token, ETHFI, into decentralised finance applications as much as possible.
We appreciate the vision beyond restaking (Liquid), which allows us to differentiate ourselves from the competition and offer interesting investment strategies.
The fact that more than half of the ETHFI tokens are reserved for the team and investors will bring selling pressure from 2025 (gradual end of vesting).
The token will enable part of the protocol's revenues to be paid back to its holders, which is a strong point for long-term investors.
Our other analysis 🔍
Before investing in any product, investors should fully understand the risks involved and consult their own legal, tax, financial and accounting advisors.
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