Glossary

Liquid Collective's Glossary is a reference of key terms related to the Liquid Collective protocol, liquid staking, how Ethereum works, and the technologies powering the staking ecosystem.



Active set #

The active set is the group of validators actively participating in securing a blockchain network, eligible to be selected to perform work and to receive rewards for doing so. A validator could be registered on the network, but not a part of the active set, if they fail to meet certain requirements for participating in the network's consensus—such as by not having enough value staked.

Beacon Chain #

The Beacon Chain introduces proof of stake (PoS) to the Ethereum protocol and coordinates the network's security. In September of 2022 the Beacon Chain was merged with the original Ethereum proof of work (PoW) chain, transitioning Ethereum's consensus from PoW to PoS.

Blockchain infrastructure #

Blockchain infrastructure is a broad category for the resources and frameworks that make a blockchain network function. Infrastructure includes nodes/validators, clients, hardware and cloud-based systems, software implementations, security programs, and more.

Casper-FFG #

Casper the Friendly Finality Gadget (Casper-FFG) is a crucial part of Etheruem’s proof of stake consensus mechanism, responsible for the network’s ability to come to consensus on a block being finalized, as well as for introducing both the slashing conditions to incentivize good validator behavior and the Inactivity Leak that prevents widespread crashes on Ethereum. Casper FFG was developed by Ethereum founder Vitalik Buterin, based on the Practical Byzantine Fault Tolerance (PBFT) state machine algorithm used for distributed systems to implement consensus.

Centralized exchange (CEX) #

A centralized exchange (CEX) is a business that facilitates the trading of digital assets. Unlike a decentralized exchange (DEX), a CEX relies on a centralized intermediary to manage trading order books.

Consensus #

Consensus is the process by which participants in blockchain networks come to agreement on the state of the blockchain, including which blocks and transactions are included, valid, and in what order they took place. Participants in blockchain networks use consensus mechanisms to agree to how they will come to consensus on the blockchain's state, including proof of work consensus (PoW) and proof of stake consensus (PoS).

Consensus layer #

Ethereum's consensus layer focuses on achieving agreement among the network participants (validator nodes).

Consensus layer rewards #

Ethereum consensus layer rewards are those rewards that incentivize validators to act honestly and contribute to the proper functioning of the blockchain, received for creating new blocks and validating transactions.

cToken #

cTokens are a model of Ethereum ERC-20 tokens originally developed by the Compound protocol. The cToken model uses a floating conversion rate—a.k.a. the protocol conversion rate—between a receipt token and the staked tokens to reflect the value of accrued network rewards, penalties, and fees associated with the staked tokens.

This is in contrast to the aToken model, which continuously updates the supply of a representative token to track the underlying token 1:1. The aToken model can also be referred to as a rebase token model. Unlike aTokens, cTokens are Ethereum ERC-20 compliant and are more widely adopted (and thus more useful) than other forms of receipt tokens in DeFi today. The composability of cTokens, and their wider adoption, were factors in the selection of the cToken model for the design of Liquid Collective’s LsTokens.

LsTokens follow the cToken model and will be minted or burned pursuant to the predetermined rules of the Liquid Collective protocol. Because LsTokens follow the cToken model, LsETH evidences ownership of the base amount of ETH staked by the user as well as any accrued staking rewards generated by the blockchain network, minus any potential penalties (e.g., slashing) imposed by the network and protocol service fees. For example, when a user stakes ETH, they mint the equivalent LsETH. As the staked ETH accrues additional staking rewards or is slashed, the same LsETH would represent more or less staked ETH and may be redeemable for a different amount of ETH.

You can learn more about how the LsETH works in the LsETH overview.

Custodian #

A digital asset custodian is an entity that safeguards a customer's digital assets by managing the customer's private keys on their behalf. Non-custodial solutions are those in which the user directly controls their private keys, instead of giving over management to a custodial provider.

Decentralized autonomous organization (DAO) #

Decentralized autonomous organizations (DAOs) are organizing entities with no central authority overseeing their management. Instead, all DAO participants take part in owning and managing the organization. DAOs are generally based on smart contract-based blockchain governance systems, which allow DAO participants to vote in a decentralized manner on what actions the DAO should take.

Decentralized exchange (DEX) #

A decentralized exchange (DEX) is a platform that enables peer-to-peer digital asset transactions to take place online without the need for an intermediary.

Decentralized finance (DeFi) #

Decentralized finance (DeFi) is the sector of decentralized applications (dapps) built on top of decentralized blockchain networks that offer financial products and services. DeFi is a rapidly growing sector which includes peer-to-peer, open-source, and smart-contract based solutions for lending, borrowing, trading, and more.

Distributed validator technology (DVT) #

Distributed validator technology (DVT) is a nascent technology that aims to allow stakers to operate one validator node using multiple validator keys, enabling more decentralized node operation across different entities.

You can learn more about DVT in our recorded event “What's next for ETH staking?” featuring DVT protocol development company Obol Labs’ CEO, Collin Myers.

Enterprise-grade #

Enterprise-grade is to be of the quality suitable for businesses and institutions, who are generally subject to a wide range of regulatory requirements and compliance standards beyond those applying to an average individual. Enterprise-grade blockchain infrastructure, such as Liquid Collective’s, meet a high level of performance, risk, security, and compliance needs.

ERC-20 #

ERC-20 is a standard for tokens on the Ethereum blockchain. It ensures that tokens perform in a predictable way, allowing decentralized applications to interact seamlessly with each other. Liquid Collective’s Ethereum liquid staking token, LsETH, follows the ERC-20 standard using the cToken model.

Ethereum #

Ethereum is a decentralized, open-source blockchain network that allows developers to build and deploy decentralized applications (dapps) by way of the Ethereum Virtual Machine (EVM). Its native coin is called Ether (ETH).

Ethereum activation queue #

Ethereum's activation queue is the amount of time that one must wait in between submitting a transaction to register a validator on the network, and that validator being activated to begin participating in consensus and earning rewards. Before validators are activated on Ethereum they must first wait for a period of at least four epochs. The minimum wait of four epochs to be activated is designed to ensure that RANDAO, the random beacon that chooses validators as block proposers, cannot be manipulated. The churn limit then rate-limits the number of new validators that can be activated, or marked as eligible to be selected to perform work and receive network staking rewards in exchange, per epoch.

You can learn more about how it works in our post on Ethereum’s activation and exit queues.

Ethereum churn limit #

Ethereum's churn limit is a parameter that defines a cap on how many validators can be processed by the network’s activation or exit queue, ensuring that the validator set remains stable and that the chain's finality guarantee is not affected by many validators joining or leaving the network at the same time. This means that there is a defined limit on how much ETH can be staked—and a limit on how many staking withdrawals can be initiated—on Ethereum within a given epoch (≈6.4 minutes). The churn limit depends on the number of validators that are already active on the network. The more validators that are active on Ethereum, the more new validator activations, and exits of existing validators, can be processed per epoch. for every 65,536 additional validators that are active on the Ethereum network, the number of new validators that can be activated per epoch increases by one, and the number of validator exits that can be processed per epoch also increases by one.

You can learn more about how the churn limit works in our post on Ethereum’s activation and exit queues.

Ethereum Deposit Contract #

The Ethereum deposit contract is the core Ethereum contract that facilitates the process of staking ETH on the network. Registering a new validator node on Ethereum requires depositing 32 ETH into the Ethereum deposit contract, submitting a transaction that includes key credentials for the validator. Staked ETH on Liquid Collective is custodied by the core Ethereum Deposit Contract.

Ethereum exit queue #

Ethereum’s exit queue is the amount of time that one must wait in between submitting a transaction to request that a validator on the network is withdrawn, and the ETH staked on that validator being able to be withdrawn to the staker’s wallet. Ethereum's churn limit determines how many validators can start the process of withdrawing ETH and leaving the network's active set at any point in time. However, the full withdrawal lifecycle also includes a separate withdrawal period.

You can learn more about how it works in our post on Ethereum’s activation and exit queues.

ETH staking #

ETH staking is the process contributing to the Ethereum network’s security by staking, or locking up, Ether (ETH) to operate a validator node on the network. Validators are selected to perform work of processing transactions, and proposing and attesting to blocks on the Ethereum blockchain, and received network rewards for doing so. If a validator misbehaves on the network it can be slashed, resulting in the loss of up to 100% of the ETH staked on the validator. Operating a validator on Ethereum requires submitting 32 ETH to the Ethereum Deposit Contract.

ETH liquid staking #

ETH liquid staking is a software solution that enables a participant to stake ETH directly on Ethereum to participate in securing the network, with a liquid staking token (LST) programmatically providing access to liquidity while the user stakes.

Epoch #

In blockchain technology an epoch is a unit that the blockchain uses to measure the passage of time. On Ethereum an epoch represents 32 slots, or validator block proposal and attestation checkpoints, which lasts for approximately 6.4 minutes.

Execution layer #

Ethereum's execution layer is responsible for processing transactions, executing smart contracts, and maintaining the state of the blockchain.

Execution layer rewards #

Ethereum execution layer rewards are generated by processing transactions and executing smart contracts. For the most part, these rewards come in the form of transaction fees, which are paid by users who initiate transactions or interact with smart contracts on the blockchain.

Finality #

Finality is the point at which the transactions on a blockchain can no longer be changed or reverted, considered immutable. On Ethereum, finality is reached when a block cannot be altered or removed from the blockchain without burning at least 33% of the total staked ETH, considered an infeasible cost.

Layer 2 solutions #

Layer 2 solutions, or L2s, are technologies that increase blockchain capacity and speed by handling transactions off the main Ethereum chain.

Lock-up #

In blockchain terms, a lock-up is a period of time during which cryptoassets cannot be withdrawn, swapped, transferred, or otherwise used (they are illiquid). Examples include staking, for which cryptoassets are locked up to contributed to the network’s security by being eligible to be lost to slashing as a result of validator misbehavior, and liquidity providing, when liquidity providers (LPs) agree to a set lockup period in the liquidity pool in exchange for a higher rate of reward.

Liquidity #

In finance, liquidity refers to how quickly (or how easily) an asset can be converted to cash without creating a large change in the asset’s price. In crypto technology, liquidity similarly refers to the ability for a coin or token to be easily converted into fiat, a different digital currency, or to be leveraged in other decentralized finance (DeFi) applications. Liquid staking is an important innovation because staking requires locking up one’s coins to contribute to the network’s security, rendering those coins illiquid. By minting a liquid staking token (LST) to represent the staked token and rewards earned, the staker can use the LST to access liquidity by selling the LST to “trade out” of their staking participation, or otherwise leveraging their LST in the DeFi ecosystem for other yield-earning opportunities.

Liquidity pool #

A liquidity pool is a collection of funds locked in a smart contract. They are used to facilitate peer-to-peer trading by providing liquidity for trades on decentralized exchanges (DEXs).

Liquid staking #

Liquid staking is a rapidly growing software solution that has redefined the landscape of proof of stake (PoS) blockchains. Participants in liquid staking protocols receive a liquid staking token (LST) as evidence of their staked token; that LST can be transferred, traded, and utilized in DeFi or supported dapps, all while continuing to contribute to network security.

You can learn more about liquid staking in our post, What is liquid staking?

Liquid staking token #

Liquid staking tokens, or LSTs, are receipt tokens that allow users to directly participate in securing a proof of stake network by staking, while also maintaining the ability to use their LST elsewhere in decentralized finance (DeFi) or transfer ownership of their staked tokens. LSTs represent legal and beneficial ownership of the staked tokens and any rewards earned from participating in the network.

You can learn more about LSTs in our post, What are Liquid Staking Tokens (LSTs)?

Maximum extractable value #

Maximum extractable value (MEV) is the value of adding and reordering transactions in a block to improve the quality of blocks proposed by validators. MEV has become prominent in the Ethereum staking ecosystem, enabling more efficient and decentralized block creation by dividing responsibilities among specialized agents.

You can learn more about how MEV works in our post on MEV and liquid staking.

Maximum extractable value (MEV) middleware #

Maximum extractable value middleware, or MEV middleware, enables Ethereum validators to source blocks from the builders' marketplace, creating a transparent and mutually beneficial MEV market. MEV-Boost, developed by Flashbots, is one example of open-source MEV middleware. Running MEV middleware has become the industry standard, with over 88% of blocks on Ethereum proposed by validators running MEV-Boost.

Network rewards #

Network rewards refer to the rewards that can be earned for participating in securing a blockchain network by staking. On Ethereum, network rewards generally refer to both execution layer rewards and consensus layer rewards that can be received.

Node #

In blockchain technology a node is a computer that executes the blockchain network’s key functions, such as hosting and maintaining a copy of the blockchain, obtaining information from the blockchain, helping to process transactions, or facilitating inter-node communication. Validator nodes are the core infrastructure used to operate a proof of stake blockchain network; validating transactions, creating blocks, and otherwise participating in the network’s consensus.

Oracles #

In the context of blockchains and smart contracts, oracles are third-party services that provide data from outside the blockchain.

Proof of stake (PoS) #

Proof of stake (PoS) is a consensus mechanism in blockchain technology, used by the network to achieve consensus on the validity of the blockchain. In PoS, validators lock up, or stake, the network’s native coin for the opportunity to be selected to validate transactions and propose new blocks for the blockchain. In most PoS networks, including Ethereum, the validator’s staked tokens can be slashed if they misbehave. Proof of stake was created as an energy-efficient alternative to proof of work (PoW), the original blockchain consensus mechanism used by Bitcoin and other networks.

RANDAO #

RANDAO is the Ethereum-specific random beacon that chooses validators as block proposers. RANDAO essentially allows for a decentralized way of generating a random number that determines which validator will be selected to perform work.

Restaking (Compounding) #

Restaking is the process of taking network rewards earned for staking on a blockchain network and staking those rewards to essentially “compound” one’s staking participation. Staking more than 32 ETH on a validator on Ethereum does not increase one’s chance of being selected to perform work and earn rewards; as such, in order to restake network rewards on Ethereum, a staker must reach a fungible bulk of 32 ETH in order to create a new validator. In some other proof of stake networks the likelihood of being selected to perform work and earn rewards increases as more value is staked to a single validator, so any network rewards earned can be constantly restaked to essentially “compound” one’s potential reward rate earned consistently over time. The Liquid Collective protocol automatically restakes ETH network rewards received by the protocol.

Restaking (Eigenlayer) #

In reference to Eigenlayer, restaking is a nascent technology which aims to allow stakers to use their coins staked on one network to simultaneously secure a different network by opting in to an additional set of slashing parameters.

You can learn more about Eigenlayer’s restaking in our recorded event “What's next for ETH staking?”, featuring Eigenlayer’s CEO Sreeram Kannan.

Rollups #

Rollups are a L2 solution that scales Ethereum by bundling multiple transactions into a single transaction.

Scaling #

In blockchain terms, scaling refers to increasing the capacity of a blockchain network to handle more transactions per second.

Shapella Upgrade #

Ethereum’s Shapella Upgrade took place on April 13, 2023. With this upgrade partial and full withdrawals were enabled for Ethereum validators for the first time, allowing stakers to exit the work of validation or claim network rewards earned.

Sharding #

Sharding is a scalability solution for blockchains. Instead of requiring every node to process every transaction, sharding allows nodes to process only certain portions of the total transactions, reducing the overall computational power required to validate transactions on the blockchain.

Slashing #

Slashing is when the coins staked to a validator participating in a blockchain network’s proof of stake consensus are programmatically seized from the validator for misbehavior. Slashing incidents may result from a node operator's specific fault or inaction, as well as from network-wide events (e.g. a client bug or natural disaster). Slashing is one of the biggest potential risks of participation in staking, with up to 100% of staked funds eligible to be slashed by the network depending on the severity of the validator’s misbehavior and the amount of collusion amongst validators.

You can learn more about slashing in our post on Liquid Collective’s Slashing Coverage Program.

Smart contract #

A smart contract is a self-executing contract with the terms of the contract directly written into lines of code. Smart contracts can be built to programmatically and immutably execute actions based on a diverse range of inputs. For example, a borrowing/lending smart contract could be programmed so that the collateral deposited to the smart contract by a borrower is automatically liquidated and sent to the lender if the borrower fails to make their repayment, with no human intervention required. Smart contracts are crucial to the Ethereum ecosystem and make decentralized applications possible.

Validator #

In blockchain terms, a validator is a participant in a proof of stake (PoS) network that contributes to the network’s security along with processing transactions, creating, and attesting to the validity of blocks.

Validator key #

A validator key is the private key registered to a validator node, used to execute tasks such as proposing or attesting to blocks. In order to participate in a network as a validator, the node’s validator keys must be registered with the network. On Ethereum, this is done by submitting a transaction to the Ethereum Deposit Contract.

Wallet #

A digital wallet, crypto wallet, or web3 wallet, is a hardware- or software-based tool that allows users to interact with a blockchain network. Wallets can be used to store, send, and receive digital assets, along with being used to access and sign into decentralized applications (dapps).

Web3 #

Web3, or the decentralized web, refers to a vision of the internet that is powered by blockchain and peer-to-peer networks.

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