Ether.Fi, a decentralized and non-custodial liquid staking platform, said it closed a $5.3 million fundraising round.

Liquid staking, which allows users to earn rewards for locking cryptocurrency to validate a blockchain network while retaining the ability to invest the locked funds elsewhere, recently replaced decentralized finance as the second largest crypto sector, with a total value locked of around $14 billion.

That's a sign ether (ETH) holders taking a keen interest in liquid staking platforms even as the Securities and Exchange Commission (SEC) sets its sights on staking in the U.S. But these platforms are custodial and centralized, making them vulnerable to many of the same threats as Coinbase and Kraken.

Ether.Fi’s answer is to allow users to maintain control of their keys while delegating Ethereum validator operations to a node operator.

"The EtherFi protocol empowers users to maintain custody over their assets, without sacrificing composability," founder and CEO Mike Silagadze said in a statement. "I strongly believe that stakers retaining control of their keys is a critical aspect of a decentralized protocol, and it helps reduce counterparty risk."

Every validator generated through its protocol will be represented as a non-fungible token (NFT). Ethereum stakers depositing a minimum of 32 ETH will hold the NFT, which represents an economic interest in the validator. Once liquidity pool and protocol treasury management smart contracts are implemented, this NFT can be fractionalized.

Arthur Hayes, the founder of the BitMEX crypto exchange, points to Ether.Fi’s non-custodial model as the reason why Maelstrom, his family office, invested in the protocol.

“The majority of today’s ETH staking protocols – which, even after Shanghai, will require node operators to voluntarily return stakers’ assets upon request – could pose a serious threat to the ETH ecosystem if they were to fail,” Hayes said in a statement to CoinDesk, referring to Ethereum's Shanghai upgrade that's due next month. “[Ether.fi] will enable stakers to maintain true custody of their own assets as part of its mission to eliminate staker, node operator, counterparty, and ecosystem risks across proof-of-stake networks.”

Ether.Fi’s team says they are aiming to have 100,000 ether staked by mid-2023. The protocol is set to launch at ETHDenver on March 4.