What is Stader Labs? Complete Review 2024

Stader Labs is one of the frontrunners of liquid staking thanks to their development of solutions that enhance both the security and the accessibility of liquid staking. Their work simplifies participation in the staking economy for both delegators and validators alike.

This article explores the role of Stader Labs in Ethereum liquid staking and provides valuable insights into the inner workings of their ecosystem.

Liquid Staking in a Nutshell

Liquid staking allows users to retain the liquidity of their staked crypto through the use of liquid staking tokens (LSTs) that correspond to their original stake. This solves the problem known in traditional staking, where locking tokens for a while basically removes them from circulation. LSTs can be traded across numerous exchanges, used in DeFi applications for lending, borrowing, or yield generation, and basically function as the original tokens, all while the latter accrue rewards for being staked.

Liquid staking has its own set of risks unknown in traditional staking, which this article will cover later, but the pronounced growth of public interest in staking as a yield-generating opportunity is undeniably one of the merits that can easily be attributed to the introduction of liquid staking.

Ethereum, thanks to its massive ecosystem and long history, is arguably an obvious first choice for those interested in staking their crypto or using their ETH for liquid staking (and, more recently, liquid restaking). Some of those opportunities in Ethereum are, however, relatively new, and were not available immediately upon Ethereum’s transition from Proof-of-Work to Proof-of-Stake. The integration of liquid staking into Ethereum’s ecosystem proved to be one of the most important moves in the blockchain’s history. And Stader Labs played a notable role in this endeavor.

Liquid Staking With Stader

Stader Labs was founded in 2021, more than a year before Ethereum went Proof-of-Stake. Since its inception, the company focused on creating a comprehensive liquid staking solution applicable to a vast array of blockchains, including Ethereum, Polygon, BNB Chain, Hedera, and Fantom. 

Stader’s liquid staking model allows users to stake their tokens within Stader’s secure contracts, which both ensures the simplicity of the process and enables the retention of token liquidity. On top of that, Stader’s solution is recognized as one of the most secure ones in the industry, having been audited by leading security companies like Certik, Peckshield, and Halborn. 

There are over $700m worth of crypto assets staked with Stader by over 85,000 users. The solution is also quite accessible thanks to the company’s partnership with some of the most demanded players in the ecosystem, like Aave, Compound, Ledger, and MetaMask. Particularly, Stader is featured in Ledger Live’s Discover section for ETH, MATIC, and BNB liquid staking.

Stader’s ecosystem is governed through its native governance token SD, which entitles its holders to vote for governance decisions and thus potentially benefit from the platform’s growth and success.

Staking Mechanism in Stader

The staking mechanism in Stader works in four phases and leverages its multi-layered architecture and a set of smart contracts.

Initiation

Users deposit their tokens into Stader Labs’ smart contracts, which act as intermediaries facilitating the staking process. The smart contracts then address the staking mechanism of the blockchain in question. 

Tokenization

Stader Labs issues liquid tokens that represent the staked amount on a 1:1 basis, usually having an “x” suffix. This ensures that the stake remains liquid, as the user can employ those liquid tokens at their own discretion.

Leveraging Liquidity

The retained liquidity can then be used across numerous DeFi applications for trading, borrowing, lending, participation in liquidity pools, or other options. All of them enable stakers to put the value of their delegated tokens to full use without forfeiting the staking positions.

Redeeming and Unstaking

When the user decides to withdraw their stake, Stader burns their liquid tokens so that they can reclaim the original assets. Notably, this operation is reversible, so users can switch between original and LS tokens as much as they find necessary, for instance, in case they are engaged in complex multi-step strategies.

Stader Labs and Ethereum

Stader Labs massively lowers the entry threshold for participating in Ethereum staking, which covers both individual delegators and node operators, such as Everstake. Particularly, it allows them all to bypass the standard requirement of locking up 32 ETH and instead pledge only 4 ETH as a bond and receive 32 ETHx (Stader’s liquid-staked ETH), with the rest covered by liquid stakers. This reduces the capital requirement by 85% and makes the liquid staking of ETH dramatically more accessible. This is one of the principal solutions that Everstake uses to act as the network validator on Ethereum.

This system relies on Stader’s architecture design focused on scalability, decentralization, and resilience, which are all required to keep the system secure and on par with Ethereum’s evolution. The design, in turn, is powered by Stader Labs’ multi-pool architecture that can incorporate additional pools on the go. As a result, the entire system maintains high resilience and scalability.

All About ETHx

Stader was among the first to adopt the Distributed Validator Technology (DVT), which is the key feature of the project’s liquid-staked ETH dubbed ETHx. 

In a nutshell, DVT enhances the fault tolerance of staking by distributing the validation process across multiple nodes. This way, ETHx has a noticeably lower risk of slashing and other penalties. On top of that, it has superior yield opportunities and fee efficiency compared to some other ETH LSTs. 

Open graph

The aforementioned multi-pool architecture is the operational backbone of ETHx. When the assets are staked in Stader’s smart contracts, they are allocated between permissionless and permissioned node operator pools. The work is performed by the Stader Staking Manager and ensures the strategic allocation of funds that would boost the system’s overall decentralization and scalability. Economically, this model can also dramatically enhance the yield potential of the staked Ethereum by balancing risks and returns.

Similar to many other LSTs, ETHx is released as an equivalent to the staked ETH to fully represent it. As the user is engaged in DeFi activities, the staked Ethereum generates rewards through its inclusion in the validation process, and therefore the exchange rate of ETHx versus Ethereum grows. This allows it to accumulate the value of the staked ETH.

Governance Through the SD Token

SD is Stader Labs’ governance token. It is based on the ERC-20 standard and has a finite supply of 150 million. Just like most other governance tokens, it entitles its owners to have a say in the project’s development by granting them voting rights. As such, it has four main use cases.

Governance Influence

As was said above, the owners of SD tokens have voting rights within the project’s democratic model. The voting may be concerned with a broad variety of matters, such as reward distribution mechanisms, validator selection criteria, or strategic initiatives. 

Staking for Rewards

SD tokens can be staked, which enhances the protocol’s security and efficiency. If the governance body grants its approval, the staker becomes eligible for a share in the proceeds from protocol fees. This system establishes a mechanism for aligning the interests of the token owners with those of the protocol’s long-term development.

Liquidity Mining Opportunities

SD owners can also provide liquidity on certain DEXs. Upon the approval of the governance body, those liquidity providers can earn rewards for doing so. This measure is aimed at enhancing the efficiency of the Stader ecosystem.

Preferential Delegations

There are preferences for users depending on how many SD tokens they have staked. Since a large stake is indicative of the user’s greater interest and involvement in the project, it grants them more influence over validator selection, which, in turn, impacts the efficiency of the staking. This way, Stader creates a virtuous cycle for users interested in long-term yield generation with their project.

Risks of Liquid Staking

While liquid staking offers numerous advantages and benefits to users, it also comes with its own collection of unique risks that one must always heed before engaging in this activity. Please be mindful of them as you make your decisions.

Smart Contract Flaws

Liquid staking relies on smart contracts, which are essentially pieces of code. Their complexity and the broad range of tasks they may need to perform imply that there may be numerous bugs or vulnerabilities that, if exploited, could lead to irreparable losses. For those reasons, one should also engage with duly audited smart contracts. Even in that case, however, it is paramount to understand that this does not eliminate this risk altogether but only lowers it significantly.

Temporary Losses

Temporary losses can occur due to the price divergence between the staked tokens and their LSTs. This may be caused by a plethora of market-related factors which are beyond the reasonable control of any party. If the value of LSTs drops below that of the staked tokens, it may lead to a temporary loss in case the delegator withdaws their funds. 

Liquidity Risk

In theory, LSTs may not be as liquid as expected, especially during high volatility or market turmoil. Conditions like that seriously affect one’s ability to easily find a buyer.

Regulatory Risks

The regulatory environment with regard to liquid staking is not set in stone, even in jurisdictions that explicitly allow it. Everything may change for better or worse, so it’s important to always keep in mind the prevailing regulatory conditions. Their change may massively impact the value of tokens and even their legal status.

Validator Risks

Validators may face penalties for intended or unintended misbehavior, which, most importantly, means slashing. This is not necessarily the result of dishonest actions and may easily stem from some errors in transaction processing. Still, shortcomings in a validator’s operation can seriously affect the liquidity of LSTs.

Conclusion

Stader is an innovative liquid staking protocol that ensures high degrees of involvement in its governance, security, and readiness for scalability. Its security is proven by several audits by major crypto security companies, and it ensures higher yields compared to numerous other liquid staking providers.

As such, it offers some of the most lucrative ETH staking conditions on the crypto market today.