Swell - Liquid Restaking for DeFi

Maximizing yield while securing the Ethereum network.

Mar 26, 2024

September of 2022 saw what is arguably the most significant software update in the cryptocurrency world when Ethereum switched from its mining-intensive Proof-of-Work (PoW) protocol to a faster, more sustainable Proof-of-Stake (PoS) protocol, in an incredible engineering feat dubbed as “The Merge”.

Ethereum, the second largest blockchain network–and housing an overwhelming majority of the world’s decentralized applications (dApps) – pulled off the transition with flawless precision, even as it involved uprooting its reliance on tens of thousands of mining nodes around the world, and utilizing PoS validators instead for securing the entire network.

In simpler terms, this meant that there would be no more need for Ethereum miners with their expensive and energy-intensive GPU mining rigs (a huge win for the environment). Instead all it would take for anyone to participate in the network and earn Ethereum rewards was to put up a financial collateral – or a “stake”.

Now this is the part where new problems spring up from fixing an old one. A network of Ethereum’s reputation would naturally of course, have high staking requirements, the exact amount of which was fixed at 32 ETH after the Merge. As of writing, this translates to around $115K, which is by no means a small amount of money.

What does this mean then for securing the Ethereum network? From the outset, this presents a number of problems:

It creates an extremely high financial barrier and discourages the community from participating as Ethereum validators.
Staking also meant locking up a substantial amount of one’s assets for a long period of time, during which the funds would be illiquid.
It also creates a highly centralized staking environment where only those with significant capital can afford to become validators.
Even if one could reasonably afford setting up one’s own PoS node, the process is a very technical one and requires a lot of infrastructure expertise.

As such, this is where a more inclusive solution is needed to empower anyone to participate as an Ethereum validator, without having to go through the aforementioned financial and technical hurdles. This is where Swell comes in as a platform that seems to offer one of the best liquid solutions to the Ethereum staking dilemma.

What is Swell?

Swell is a non-custodial liquid staking and restaking platform developed by Swell Labs specifically to address the post-Merge issue that arose with the introduction of staking to the Ethereum network. Swell addresses this problem through a straightforward practical approach, by breaking down the role of PoS validator on ETH and delegating the responsibility across a larger number of users who wish to participate in running the node collectively.

In doing so, stakers can now participate in securing the Ethereum network for any nominal amount under 32 ETH and in return, receive a percentage of the profits of the node proportional to their staked amount.

What’s more, being a liquid staking platform, Swell issues a transferrable yield-bearing token, Swell Ether (swETH), that represents their staked ETH. This token can then be traded in the market as needed, or can be restaked to maximize yield using other DeFi strategies.

Through this simple approach, Swell manages to dramatically lower the barrier for participating on Ethereum, and greatly increases decentralization by exponentially increasing the number of users who are supporting the validator nodes for the Ethereum blockchain.

Benefits of using Swell

For the individual user, Swell has the following advantages and benefits:

Swell is a non-custodial staking platform, which means that users retain full control over their private keys.
Swell provides yield without the constraint of locking up capital.
Swell provides higher yield opportunities all in one interface. Aside from earning passive income through staking ETH, users can likewise earn more rewards by restaking swETH to earn other yield-bearing tokens called rswETH.
There is no minimum stake for participating in the Swell network.
No technical knowledge about staking is needed. Users only need to connect their ETH wallet to deposit their stake, as opposed to setting up a PoS node independently which requires technical know-how, appropriate hardware, and sufficient capital.
Users enjoy fully transparent and secure access in a fully democratized ecosystem.
Users can access over 40+ DeFi services which are fully composable and integrated with the Ethereum ecosystem.

How to Stake ETH with Swell.

How does Swell work?

In its initial stages, Swell operated with a permissioned group of professional node operators, which will subsequently expand to a permissionless system wherein new node operators are added once enough liquidity has been collected to stabilize operations.

When users stake their ETH on Swell, an equivalent amount of swETH is minted and sent to the user. Meanwhile, the protocol pools deposits together from different users until the minimum 32 ETH is reached, which the swETH protocol then deposits into the Ethereum contract to acquire a validator key. Once this is done, the ensuing node can then queue in line along the consensus layer of the network for processing transactions and earning network rewards.

The Swell staking process flow.

Meanwhile, the swETH tokens issued to users are ERC-20 liquid staking derivatives (LSD), which represents a user’s staked assets, as well as any rewards and penalties that the users’ funds accrue in the network while being staked. This can include consensus layer rewards, as well as MEV rewards (maximum extractable value) which are additional revenue earned from ‘tips’.

The ingenuity of swETH is that they allow users to utilize their staked assets via proxy, enabling them to stake swETH on other platforms and DeFi protocols, and if they should choose to, sell to other users to instantly regain their liquidity.

The following list outlines the full applications of the swETH token:

Exit staking - swETH can be sold on decentralized exchanges to instantly regain their ETH.
Swell Vaults - extra yield can be earned by swETH holders through liquidity mining in the Swell Vaults.
Liquidity provider - swETH holders can use swETh to provide liquidity in third party platforms for earning extra yield in trading fees and liquidity mining incentives.
Lending and borrowing - swETH can be used to earn additional yield on external lending/borrowing DeFi protocols by supplying swETH, or using swETH as collateral to borrow assets.

Additionally, the underlying value of swETH accrues over time as the users’ ETH remains staked, making it more valuable in the secondary market.

An example of the rate of accrued value can be seen in the exchange rate of ETH and swETH across a four-month period in the chart below:

Rate of accrued rewards for a user holding swETH.

Swell’s exchange rate is managed by Chainlink’s proof-of-reserve oracle, which monitors the returns on Ethereum’s consensus layer on a daily basis and allocates the amount of swETH to be minted and the amount of ETH to return to users after their staking period.

What is restaking?

In the Swell protocol, liquid restaking refers to the restaked liquidity deposited on the EigenLayer, which is used to secure bridges, oracles, Layer 2s, and other essential decentralized applications called Actively Validated Services (AVS) which also help manage and maintain the Swell protocol.

Upon the release of rswETH v2 (Restaked Swell Ether, version 2), by restaking swETH, users will be issued the reward-bearing tokens, rswETH. The liquidity provided will be directed to specialized EigenLayer operators whose role is to validate transactions for the various AVS’s, who in turn issue restaking rewards to the swETH restakers.

Currently users can ‘restake’ ETH directly on the EigenLayer, however, this feature is currently only available for users who can stake the full amount of 32 ETH to run a validator. Likewise, restaked ETH on the EigenLayer remains locked and illiquid for the user.

Meanwhile rswETH will remain liquid and will continue to rise in price as the rewards accrue, regardless of where it is allocated.

Swell vs. other platforms

Swell has many other competitors for providing liquid staking on Ethereum, most prominent among them Lido, which has $35.32 billion in TVL.

Comparatively, Swell offers a more simplified model for liquid staking, as well as one of the lowest cost staking options in the market.

Swell has also invested heavily on interface, focusing on gamification and a “fun” approach to the staking process. For instance, Swell uses a nautical theme to package its Earn page and various features of its DeFi offerings.

Prior to its token generating event (TGE), Swell has been rewarding users with ‘Pearl’ tokens, which can be exchanged for SWELL upon TGE. Meanwhile, the various DeFi stacks available on Swell have been quaintly named ‘Swell Voyage’ which has inspired the Swell community to assume the moniker of ‘Aquanauts’.

Tokenomics and Governance

The Swell protocol is overseen by core contributors of the Swell DAO (decentralized autonomous organization). As a DAO, its members vote over proposals that determine the future directions of the network including matters of smart contract development, protocol parameters, node onboarding and management, treasury allocation, incentivization schemes, as well as future partnerships and programs.

Aside from swETH and rsWETH, Swell will launch its own native token SWELL. Though its specific utilities and supply have yet to be announced, SWELL will serve a couple initial functions including DAO governance and voting, protocol growth incentivization through liquidity mining, referrals and air drop schemes.

Meanwhile, as of writing, swETH has attained a circulating supply of 222,467 according to CoinGecko, with a market capitalization of $820 million. swETH has no maximum supply as its issuance is dependent on the number of ETH staked on its protocol at any given moment.

Comparatively, Swell has accumulated approximately $1 billion in total value locked according to data from DefiLlama as well as from Dune.

Team

Swell was originally created by the Swell Labs team, who serve as core contributors to the Swell DAO.

Swell’s CEO and Founder, Daniel Dizon, is a blockchain entrepreneur and an active angel investor. Prior to foraying into liquid restaking and blockchain infrastructure, he was a Web2 entrepreneur and previously, worked professionally in corporate finance strategy and portfolio management.

Roadmap

Swell has recently successfully launched rswETH, developed with assistance from top-tier DeFi risk management firms Gauntlet and Chaos Labs, and audited by leading blockchain firm Sigma Prime.

Also in the pipeline is a Layer 2 rollup for restaking aided by Swell’s partnership with AltLayer and EigenDA. With a TVL of approximately $1 billion across its restaked assets, Swell's Layer 2 will focus on liquid restaked assets on EigenLayer.

TGE for the SWELL token is expected to take place in mid-April of 2024.

Conclusion

Many liquid staking protocols are plagued by issues such as excessive complexity, subpar user experiences, and high fees that diminish staking returns. However, on all counts, Swell’s straightforward and low-cost approach provides convincing solutions towards enabling broader staking participation and as a result, bolstering the security of the Ethereum blockchain.

The exciting developments with the Swell protocol also seem to be perfectly timed, as the market is experiencing high optimism in anticipation of not only the forthcoming Bitcoin halving, but also a SEC approval of Ethereum ETFs, which are expected to fuel more adoption of cryptocurrencies and increased demand for Ethereum-based DeFi services and products.