SwETH is currently the only LST backed by Chainlink Proof of Reserves (PoR).
To help you understand how this makes Swell secure, we were joined by Chainlink Solutions Architect Michael Imperiale for a Twitter Space.
In case you missed it, here are the top questions from the event.
Chainlink Labs to Swell: There are an increasing number of LSTs in the market today. What makes Swell different?
Swell is one of the fastest-growing protocols in DeFi, and as an LST we are at the center of the hot narrative of LSTFi.
In a matter of weeks since our launch, we have amassed over 28,000 ETH and have nearly 7,000 liquid stakers that have joined us on our Voyage campaign – an early adopter program where users can earn pearls representing governance power in the Swell DAO.
Our focus is to deliver the next generation of Ethereum liquid staking by looking at what has and hasn’t previously worked in the DeFi space, and translating that into providing users with the best possible liquid staking experience.
There are three main areas where we lead in differentiation:
- Community alignment: we make liquid staking fun for our users. We have a strong community that has come together to stake their ETH and that continue to support the security and decentralization of the Ethereum blockchain.
- Upcoming strategy vaults: one of the purposes of LSTs is receiving staking rewards from the Ethereum blockchain, as well as receive incremental yield off DeFi. The current user experience requires users to jump between different dApps but Swell wants to bring all of that in house and abstract the composability of DeFi, making it easier to utilize these strategies.
- Swellnomics: Liquid staking is about the LST, but it is also about the method of governance of that token. We have seen areas of concern with existing models and we believe that there is a real opportunity for us to bring a change for token holders. We’ll be releasing more information on our tokenomics soon.
Chainlink Labs to Swell: How does Swell ETH (swETH) work?
One of the key differences between Swell and other LST tokens is that swETH is a repricing token, which means that your minted 1 swETH will stay 1 swETH, but will increase in value over time.
This is where our integration with Chainlink comes in. Staking rewards from the beacon chain accumulate for users, and every day we reprice and change the value of the swETH token. In order to do this we need to know the total reserves, which is what the total ETH backing each Swell token is.
Chainlink tracks the reserves of Ethereum that back the swETH token, and that becomes the price that you stake at. We believe this is a great model to adopt moving forward.
Chainlink Labs to Swell: What is LSTFi and what is Swell’s role going to be in it?
LSTFi is a major shift in the Ethereum ecosystem where we are beginning to see DeFi protocols reorient towards LSTs.
The fundamental narrative is starting to ring true because we’re starting to see more protocols and builders optimize their offerings towards LSTs, whether that be AMMs, stable coins or money markets.
There are two primary catalysts that have occurred for this to take place: The Merge, and Shapella.
These events in effect ushered two major upgrades to the Ethereum blockchain, with one being a movement towards a full PoS system, and the other the enablement of withdrawals which shifted the liquidity and risk profile for staking – effectively making liquid staking even better.
We are now starting to see the emergence of LSTFi summer, and Swell’s role in this is to serve as a base layer for protocols to utilize swETH as rehypothecated collateral of staked ETH, and then deliver new and interesting use cases within DeFi.
Chainlink Labs to Swell: swETH is currently the only LST backed by Chainlinks PoR. What does that mean for liquid stakers using the protocol?
Chainlink is a decentralized oracle provider, meaning it enables Swell to trustlessly show the entire ecosystem that the ETH reserves are secured on chain.
Thanks to Chainlink, everyone in the ecosystem has the confidence to know that our Swell tokens are backed, and that our reporting is accurate and up to date. This gives stakers greater confidence.
Swell to Chainlink Labs: What does that confidence and PoR enable beyond Swell in the broader DeFi ecosystem?
Proof of reserve enables greater security and transparency for DeFi.
The purpose of PoR is to solve a specific oracle problem in DeFi, which is verifying the state of assets. Blockchains have a problem of being blind to the state of offchain assets so you have to trust the issuing entity about the state of those assets, which is not the crypto-native way.
An example for LSTFi, is that liquid staking has an oracle problem in a cross chain sense because the beacon chain and the execution chain are separate. This means that a user on the execution layer cannot directly reference the state of the beacon chain without the aid of an oracle. This is usually done natively through LSTs.
Chainlink has solved this problem which helps the end-to-end ecosystem in DeFi. DeFi protocols and developers can utilize these assets and use PoR as a circuit breaker to protect their protocols and users from any unexpected activity by referencing it directly on chain. It also helps gain confidence in the collateralisation of these on chain tokens which supports the growth and usage of them.
PoR hits the core concepts of crypto because it moves away from probabilistic guarantees and hope that something is backed and collateralized, and moves towards the deterministic guarantees that make up trust minimized applications, like Swell Network, that harnesses the power of smart contracts to prove that these theories are backed.
Chainlink Labs to Swell: Why did Swell choose Chainlink as an oracle provider?
Chainlink has built a reputable and trusted brand in DeFi, and when we think about the gold standard for oracle feeds in the industry, we think Chainlink. When it comes to the pillars of decentralization and security – Chainlink is second to none.
At Swell, we have big visions of what we want to be in the LST space, and to achieve these goals we want to partner and work with the best. Being backed by Chainlink PoR gives our stakers the greatest transparency and confidence in our liquid staking token, swETH.
Swell to Chainlink Labs: What can we look forward to seeing from Chainlink?
We are building Chainlink to be a standardized web3 services platform that enables the next generation of trust-minimized applications to be built by both web2 and web3 developers.
Two products that we are currently working on are:
- ETH staking APR feeds to provide an on-chain source for the truth of the ETH global staking rate, which in turn will further enable the growth of LSTfi.
- Price feeds for real-world assets, i.e baskets of treasury bulls that are being tokenized and utilized in DeFi. This is another step in connecting the off-chain world to the on-chain world.
Thank you to everyone for attending the Twitter Space!
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