How osToken Works

osToken is created through minting — issuing new osTokens against ETH or GNO staked as collateral in a Vault. To keep every osToken fully backed, the protocol caps how much can be minted against a stake through the Loan-to-Value (LTV) ratio. This cap is what makes osToken overcollateralized.

As staking rewards accumulate, the osToken exchange rate rises, making each osToken worth more of the underlying asset over time. If a position's LTV drifts too high, redemptions and liquidations restore it within safe bounds. When a user wants to exit, burning osToken returns it to the Vault and unlocks the underlying stake.

Together, these mechanisms keep osToken safe to hold and use.

Minting

Only registered Vaults with active validator(s) and synced rewards can mint osETH. The ability to mint also serves as a price stability mechanism. Minting helps prevent secondary market premiums on osETH. You can get osETH through simple staking, vault staking, or by buying it on a DEX. How much osETH you can mint against your stake depends on the LTV ratio.

LTV Ratio

The LTV ratio creates a buffer between the collateral and the issued osETH.

Example

With 100 ETH staked in a 90% LTV Vault at 1.05 exchange rate:

• Maximum mintable osETH: 100 × 0.9 ÷ 1.05 = 85.71 osETH
• Overcollateralization: 10 ETH remains as safety buffer

LTV limits vary by Vault type:

Vault Type	Ethereum (osETH)	Gnosis (osGNO)	Safety Mechanism
Standard	90% LTV	90% LTV	10% overcollateralization buffer
DAO-Approved	99.99% LTV	99.95% LTV	5M SWISE operator bond

To qualify for the 99.99% LTV, Vaults must meet strict performance criteria¹ and post a SWISE slashing bond. StakeWise DAO can adjust any individual Vault's LTV based on its risk profile.

LTV is continuously tracked through thresholds that determine position status:

Users maintain healthy positions by keeping LTV well below limits, adding collateral, or burning osETH.

In DAO-approved Vaults these thresholds don't apply: redemptions are handled differently and liquidations are disabled at the contract level.

Exchange Rate

The osETH/ETH exchange rate reflects the fair amount of ETH you receive when redeeming osETH within the protocol. As validators earn rewards, total assets grow, osETH appreciates, and the exchange rate rises — each osETH becomes a claim on more ETH over time.

The rate of appreciation is controlled by the avgRewardPerSecond variable and is set by a decentralized oracle network. Oracles identify the user with the highest LTV across all Vaults and match the rate to that user's Vault APY. This mechanism ensures that osETH appreciation keeps pace with the least collateralized position in the entire protocol. When necessary, oracles adjust avgRewardPerSecond downward so that osETH appreciation does not outpace the collateral backing it. On every state update, this rate determines how much profit accrues to total assets.

Redemption

Redemption acts as early intervention when positions drift toward risky erosion of collateral. In 90% LTV Vaults, redemption activates when a position reaches 91.5% LTV. At this point, anyone can burn part of that position's osETH in exchange for an equivalent share of the Vault's collateral. The burn amount is calculated so that the position's LTV is restored precisely to 90%. Importantly, the staker whose tokens are redeemed does not lose value — they keep the osETH burned on their behalf.

Formula: Redeemable Amount (90% LTV)

$${\small Redeemable\ osETH = \frac{10 \times Minted\ osETH \times Exchange\ Rate - 9 \times Staked\ ETH}{Exchange\ Rate}}$$

Example: Bob's Redemption at 91.6% LTV

Bob stakes 100 ETH and mints 87.238 osETH at an exchange rate of 1.05 ETH/osETH.

• Value of minted osETH: 87.238 × 1.05 = 91.6 ETH
• Loan-to-Value: 91.6 ÷ 100 = 91.6% → above 91.5% threshold

Redemption calculation:

• Redeemable osETH = (10 × 87.238 × 1.05 - 9 × 100) ÷ 1.05 = 15.238
• Redeemer burns 15.238 osETH and receives 16 ETH

After redemption:

• Bob's minted balance: 72 osETH
• Bob's staked collateral: 84 ETH
• New LTV: 90% (restored to safety)
• Bob retains the 15.238 osETH burned on his behalf → no value lost

Positions in 99.99% LTV Vaults are also subject to redemption, with amounts redeemed determined by the protocol's redemption request volume. The LTV of redeemed positions will remain above or equal to 99.99% after redemption, not affecting the position owner in any scenario.

Liquidation

Liquidation serves as the last resort for closing thinly collateralized positions. In 90% LTV Vaults, if a position exceeds the 92% LTV liquidation threshold, anyone can close it entirely by burning all minted osETH against the collateral. The liquidator receives the underlying collateral value plus a 1% liquidation premium, deducted from the staker's collateral as a penalty.

Formula: Liquidation Payout

$${\small ETH\ Payout = (Minted\ osETH \times Exchange\ Rate) \times 1.01}$$

Example: Alice's Liquidation at 92% LTV

Alice stakes 100 ETH and mints 87.629 osETH at an exchange rate of 1.05 ETH/osETH.

• Value of minted osETH: 87.629 × 1.05 = 92.01 ETH
• Loan-to-Value: 92.01 ÷ 100 = 92.01% → above 92% threshold

Liquidation process:

• ETH payout = (87.629 × 1.05) × 1.01 = 92.93 ETH
• Liquidator burns 87.629 osETH and receives 92.93 ETH

After liquidation:

• Alice's minted balance: 0 osETH
• Alice's remaining collateral: 7.07 ETH
• Alice keeps her original 87.629 osETH
• Loss: 1% of collateral as liquidation penalty

Positions in 99.99% LTV Vaults are exempt from liquidation, as their APY parity ensures position health remains stable.

Burning

Burning is the process of returning minted osETH to the Vault in exchange for unlocking the staked collateral that backs it. To fully unstake, a user must burn the entire amount of osETH they minted, plus any protocol fees accrued.

Partial burns are also possible, allowing users to reduce debt, improve LTV, or free up a portion of their stake. The burn amount is calculated using the current fair exchange rate to ensure that the redeemed assets always match the true underlying value of the returned tokens.

The amount of ETH that can be unstaked at any moment is determined by maintaining the osETH position within its healthy LTV range. After unstaking, the value of minted osETH must remain at or below:

• 90% of staked ETH in a 90% LTV Vault
• 99.99% of staked ETH in a 99.99% LTV Vault

The protocol calculates the maximum unstakable ETH as:

Formula - 90% LTV

$${\small MaxUnstakeableETH = StakedETH - \dfrac{osETHMinted \times ExchangeRate}{0.9}}$$

Formula – 99.99% LTV

$${\small MaxUnstakeableETH = StakedETH - \dfrac{osETHMinted \times ExchangeRate}{0.9999}}$$

Example: Bob's 90% LTV Position

Bob stakes 100 ETH and mints 50 osETH at an exchange rate of 1.05 ETH/osETH.

• Value of minted osETH: 50 × 1.05 = 52.5 ETH
• LTV: 52.5 ÷ 100 = 52.5% → safely below 90%
• Maximum unstakable ETH: 100 − (52.5 ÷ 0.9) = 41.667 ETH

After unstaking 41.667 ETH, Bob's LTV = 90%

Alice's 99.99% LTV Position

Alice stakes 100 ETH and mints 50 osETH at the same 1.05 rate.

• Value of minted osETH: 52.5 ETH
• LTV: 52.5 ÷ 100 = 52.5% → well below 99.99%
• Maximum unstakable ETH: 100 − (52.5 ÷ 0.9999) = 47.495 ETH

After unstaking 47.495 ETH, Alice's LTV = 99.99%

When a user burns osETH as part of a full exit, the Vault may not have liquid ETH immediately available — validators must go through the Ethereum exit queue. An escrow system holds the osETH position alongside the underlying stake during this period, unwinding both in lockstep as ETH becomes available. This keeps every osETH fully backed throughout the exit process.

1. DAO-approved Vault requirements: minimum 10,000 ETH staked, maximum 5% Vault fee, consistently above-median network performance, latest Vault version deployed, and 5M SWISE tokens locked as slashing insurance. ↩