The crypto space innovates at a rapid pace, and one of the latest developments creating buzz is the concept of "restaking" and its companion, "Liquid Restaked Tokens” (LRTs), poised to redefine the landscape of crypto staking. This article explores the restaking mechanism, the current players in LRT, and EigenLayer—a restaking protocol at the forefront of this new staking derivatives movement. New entrants into the LRT space include Stader Labs, InceptionLRT (formerly InceptionLST), and Astrid Finance, leveraging EigenLayer's capabilities to unlock trapped liquidity and enabling stakers to extend security of their staked ETH to multiple applications (i.e. bridges, oracle networks, keeper networks, sidechains) but with some notable drawbacks.
Restaking: A New Frontier in Liquid Crypto Staking
Traditional crypto staking involves locking up a certain amount of cryptocurrency in a blockchain network to participate in consensus and earn token emissions. (This is in contrast to Bitcoin’s Proof of Work (PoW) model, which does not involve crypto staking.) However, once staked, these assets typically remain inaccessible for other uses such as trading, lending, and transacting. Liquid staking protocols such as Lido and Rocket Pool emerged to solve this issue with liquid staking tokens (LSTs), but a new category of staking and staked tokens has emerged.
Enter: restaking, a novel mechanism popularized by EigenLayer that allows users to repurpose their already staked assets. When you opt in to restaking, you extend Proof of Stake (PoS) security to other applications and services within the network, such as bridges, data availability layers, and oracles. In return, you can earn additional token staking emissions, making your staked assets work harder for you.
However, it is essential to understand that restaking introduces new risks. Users who engage in restaking expose themselves to the increased possibility of "slashing"—token penalties incurred for malicious or faulty behavior by validators in select blockchain networks. In this case, users face the risk of slashing penalties from both the Ethereum consensus layer and the applications being secured using EigenLayer.
EigenLayer: Reshaping Crypto Staking
EigenLayer takes center stage in the restaking revolution. It introduces the concept of restaking, empowering users to maximize the utility of their staked assets. By opting into EigenLayer's smart contracts, users can stake their ETH on multiple networks, extending crypto-economic security to a variety of additional applications on the network and earning extra rewards in the process. The protocol aims to address Ethereum's fragmented security and improve capital inefficiencies. It offers several benefits, including resource sharing (e.g., ETH used to validate Ethereum can also be used to validate an oracle network simultaneously), improved user experience (e.g., being able to validate many networks simultaneously without having to unstake), and potentially higher yields. However, it is crucial to acknowledge and mitigate risks associated with validator collusion, slashing penalties, and the risk of centralization (e.g., Lido protocol has a 33% liquid staking market dominance on Ethereum).
Liquid Restaked Tokens: Bridging Staking and DeFi
LRTs take restaking to the next level. For instance, LRTs such as EigenETH (Stader Labs), function as synthetic tokens layered atop your staked assets, including ETH, stETH (Lido), rETH (Rocketpool), and cbETH (Coinbase). This innovative mechanism allows users to lend, trade, and borrow against their restaked assets and the underlying yield.
Here's how it works: An LRT protocol team or DAO selects validators and service providers for staking. Stakers pledge their ETH or LST to the LRT smart contract, and it allocates tokens across various Network Operators, giving stakers the LRT token in return.
The value of the LRT is closely tied to the underlying rewards and staked asset prices. They can exchange LRTs for other assets on decentralized exchanges (DEXs), redeem the underlying assets, or leverage DeFi's composability to interact with other protocols (e.g., borrow against LRTs as collateral).
Other Protocols Building on EigenLayer: Stader Labs and Beyond
EigenLayer's innovative approach has attracted the attention of LRT protocols seeking to build on top of it. One such project is Stader Labs, which leverages EigenLayer's infrastructure to provide unique staking solutions.
Stader Labs and similar projects aim to offer diverse staking strategies, aiming to increase profitability for ETH staking. These projects diversify staking revenue streams, making involvement in the network more lucrative:
Pros and Cons: Navigating the Restaking Landscape
While EigenLayer and its derivatives offer exciting opportunities, it is essential to weigh the pros and cons of such carefully. The benefits include enhanced staking profitability, resource sharing, and improved security for the Ethereum ecosystem. However, risks such as value destruction and validator centralization must be managed effectively.
In conclusion, restaking and Liquid Restaked Tokens represent a significant evolution in crypto staking, unlocking new possibilities for ETH stakers and the broader blockchain ecosystem. EigenLayer, along with projects like Stader Labs, are leading the charge in reshaping how we think about staking in the crypto world. As these platforms continue to develop, the crypto community must remain vigilant in monitoring their risks while embracing the potential for enhanced network security and profitability.
Disclaimer: This post is for informational purposes only and is not intended as investment advice, an endorsement, or an opinion regarding any specific product or service. The views and opinions expressed are solely those of the author and do not necessarily reflect those of Varys Capital or its affiliates. Varys Capital and its affiliates, employees, or agents make no representations or warranties as to the accuracy, suitability, or completeness of any information presented. Investors and readers should conduct their own due diligence and consult with a qualified professional before making any investment decisions or taking any action based on this content. Past performance is not indicative of future results, and investing involves risks, including the loss of principal. Neither Varys Capital nor any of its affiliates or agents shall be liable for any loss or damage arising from reliance on this information.