The LsETH User Agreement describes how LsETH holders maintain legal and beneficial ownership of staked ETH while directly participating in Ethereum staking.
The Liquid Collective protocol is a decentralized liquid staking solution enabling users to stake Ether (ETH) and participate directly in the Ethereum proof of stake network. Stakers can stake ETH via the Liquid Collective protocol, which will programmatically mint LsETH to evidence the stakers' legal and beneficial ownership of their staked ETH plus any network rewards that accrue to such staked ETH in accordance with the terms of the Ethereum network. Each unit of LsETH is designed to serve as an electronic document of title to a corresponding amount of fungible ETH within the protocol.
Liquid Collective is designed to meet the needs of institutions and solve for institutional blockers to staking by programmatically enforcing compliance standards. We believe another feature of the protocol that serves to further unlock institutional participation in liquid staking is the LsETH User Agreement.
By obtaining LsETH, users agree to the terms of the LsETH User Agreement, a checkpoint in the Integrators' onboarding flow that participants review and consent to when staking ETH via the Liquid Collective protocol. The agreement remains in effect for as long as the participant holds LsETH. To ensure open transparency into the agreement's terms, the LsETH User Agreement is additionally both encoded into the metadata of the LsETH smart contract and stored onchain in IPFS.
The LsETH User Agreement is a legal agreement that outlines the terms and conditions of using the Liquid Collective protocol and holding LsETH. It contains important information about the protocol's token specifications and ownership characteristics, protocol service fees, slashing and slashing coverage, AML/KYC compliance, and risks associated with staking on Ethereum via the Liquid Collective protocol.
The LsETH User Agreement plays an important role in the protocol:
LsETH, the liquid staking receipt token for Liquid Collective's Ethereum Liquid Staking solution, is an ERC-20 token that follows the cToken model and evidences the holder's legal and beneficial ownership of the staked ETH, plus any network rewards that accrue to such staked ETH and minus any fees and penalties.
LsETH is non-custodial at the protocol level, freely transferable, and can be used in dapps, DeFi, and generally to access the broader crypto ecosystem while contributing to the security of the Ethereum network. Once withdrawals are enabled on Ethereum, LsETH will be redeemable for ETH subject to the Ethereum network withdrawal restrictions and unbonding periods as applicable.
One of the key features of the LsETH User Agreement is that it expressly states that the staked ETH, as well as the LsETH, are user-owned and will not change hands. In other words, legal and beneficial ownership of a staker's ETH will always remain with the staker and will never pass to any other third party. Moreover, only the staker controls when and how crypto assets are staked as there is no discretion held by any other third party.
The LsETH User Agreement could also help protect stakers if there were to be a liquidation of the Liquid Foundation, such as in the event of a default or bankruptcy. The LsETH User Agreement provides that LsETH is a cryptographic receipt that evidences legal and beneficial ownership of a corresponding amount of ETH, which is subject to increase as a result of the accrual of Ethereum network rewards. The LsETH User Agreement, which is governed by New York law, was drafted to conform to the requirements of Article 7 of the New York Uniform Commercial Code. Assuming that LsETH is deemed to be a document of title under NY UCC Article 7, and as such that the ETH associated with each LsETH would be distributed to LsETH holders in accordance with UCC Article 7, we believe that the insolvency of the Liquid Foundation would not impact the LsETH holder’s right and title to the associated ETH because goods associated with a document of title (i.e., liquid stakers’ ETH) would not be part of the Liquid Foundation’s bankruptcy estate. Instead, the document of title holders would be entitled to such goods.
Staking ETH carries the risk of slashing, or the loss of staked crypto assets due to poor validator behavior. As institutional participation in staking continues to grow, enterprises and institutions are increasingly concerned with mitigating risks associated with slashing.
To address this concern, the Liquid Collective protocol offers Slashing Coverage within the LsETH User Agreement, which provides web3-native slashing coverage to all participants that hold LsETH. The protocol's slashing coverage provides coverage for both network-wide events, such as outages, as well as node operator failures.
This built-in access to slashing coverage is another important differentiator of the LsETH User Agreement as compared to other protocols. While any staker can access slashing coverage themselves through web3-native providers like Nexus Mutual, who provides the protocol's Slashing Coverage, the process represents an additional pain point for participants. Despite the importance of protecting against slashing, many stakers forgo obtaining coverage instead of taking the time to complete the steps to access coverage. With the LsETH User Agreement, participants can now access coverage by holding LsETH.
It's important to restate that the LsETH User Agreement does not eliminate risk. Participants still bear meaningful risks, including slashing risk, technology risk and financial risk. As outlined in the LsETH User Agreement, The Liquid Foundation makes no representations or warranties with regards to the performance of the protocol or network rewards generated by the protocol. Any rewards that accrue to staked ETH while staking via the Liquid Collective protocol are determined by the Ethereum protocol, which determines network rewards and distribution according to its protocol parameters.
The LsETH user agreement also provides full transparency to the Protocol Service Fee, which is automatically collected from all LsETH holders for the administrative services provided by the protocol. The Liquid Collective protocol charges a service fee set at 15.0% of ETH network rewards generated by the protocol, split amongst Validators, Integrators, Tech Providers, the protocol's Slashing Coverage Treasury, and the Liquid Collective DAO, which comprises a broad and dispersed community of protocol participants.
The structure of the LsETH User Agreement and Protocol Service Fee illustrate the potential for the protocol's technological solutions to innovate on digital participation. Traditional web2 user agreements are typically associated with data usage, and the financial industry has long had agreements with users that allow charging fees in exchange for services. The LsETH User Agreement is different in that it represents a new type of user agreement—one in which users agree with full transparency to allocate a portion of potential network rewards that accrue to their staked ETH back to the protocol in the form of the Slashing Coverage Fund via the Protocol Service Fee.
We believe that this represents the true power of programmable money as a technological software innovation: a tool allowing users to opt-in to direct participation in staking, using programmatic developments to simplify their participation. The LsETH User Agreement represents a shift in the financial industry toward decentralization, with ever-more barriers to widespread adoption of decentralized technologies being reduced via smart contract code.
You can learn more about LsETH including its technical design here. Just getting started with Liquid Collective? Read the Liquid Collective Litepaper for a comprehensive overview on how Liquid Collective works.
LsETH users may still be subject to slashing losses. If slashing losses were to occur, they would be socialized pro rata for all LsETH user's starting with earned but unredeemed network rewards.
Liquid staking via the Liquid Collective protocol and using LsETH involves significant risks. You should not enter into any transactions or otherwise engage with the protocol or LsETH unless you fully understand such risks and have independently determined that such transactions are appropriate for you.
Any discussion of the risks contained herein should not be considered to be a disclosure of all risks or a complete discussion of the risks that are mentioned. The material contained herein is not and should not be construed as financial, legal, regulatory, tax, or accounting advice.