A New Staking Wave in DeFi: Liquid Re-Staking Tokens and Layer2 Public Chains

The innovative application of Liquid Re-Staking Tokens (LRSTs) and the recent launch of Blast, a public chain supporting Layer2 automatic staking, are leading a new wave in the DeFi staking field. This article from Bing Ventures will focus on the background behind this dynamic, the significance of this development for the DeFi staking field, and the current major trends and prospects in this area.

The Latest Innovation in the LSD Field: Liquid Re-Staking Protocols

Source: Bing Ventures

In the Ethereum ecosystem, particularly post the Shanghai upgrade, the development of Liquid Staking Derivatives (LSD) has demonstrated significant innovation and adaptability. It began with Lido, a key player in the Ethereum staking mechanism. By providing a staking solution for Ethereum, Lido addressed a significant issue of liquidity locking. Their approach allows users to stake Ethereum while maintaining a certain level of liquidity, marking a significant leap from traditional, rigid staking paradigms.

Subsequently, the entry of Pendle Finance brought about a new shift, enabling users to trade earnings through tokenized yields via rate-based protocols, introducing new gameplay to the LSD field and opening up new avenues for yield optimization and risk management.

However, the market’s desire for higher yields and more efficient utilization of staked assets remained unfulfilled. This led to the development of more complex mechanisms, such as the re-staking protocol Eigenlayer. Eigenlayer allows stakers to re-stake their Ethereum, enhancing the security and reliability of other protocols. This not only increases the potential returns for stakers but also contributes to the resilience and security of the entire Ethereum network.

Yet, a challenge emerged as tokens locked on Eigenlayer lost liquidity and became inactive, limiting diversity in the DeFi space. This led to the innovation of Liquid Re-Staking Tokens (LRT), a solution that unlocks the liquidity of these re-staked assets while allowing stakers to further enhance returns by participating in DeFi. Users can deposit LRT into liquidity re-staking protocols to earn rewards.

As a result, the LSD field has evolved from its origins of single-layer staking into a more complex and multifaceted ecosystem. Recent developments such as the launch of Blast reflect this trend. Blast is an EVM-compatible Ethereum Layer2 network that offers native ETH and stablecoin staking rewards, democratizing the acquisition of staking rewards and making the process more user-friendly and diverse. This evolution of the LSD narrative underscores a dynamic and adaptive Ethereum ecosystem, continuously innovating to meet users’ demands for higher liquidity and returns while navigating the inherent complexity and risks of the decentralized finance world.

The Next Narrative of DeFi: LRT

Source: Dune, Bing Ventures

The emergence of Liquid Re-Staking Tokens (LRT) in the DeFi space represents a profound innovation in traditional staking models. LRT not only breaks the limitations of single-staking in theory but also promotes the popularization of multi-protocol staking enhancement in practice. Through platforms like EigenLayer, users can transcend the boundaries of individual protocols and diversify their ETH staking across multiple Active Validation Services (AVS), significantly enhancing network security and injecting a more complex security layer into the DeFi ecosystem.

The advantages embodied by LRT are manifold: significant improvement in capital efficiency, enhanced network security, and substantial savings for developers in resource allocation. However, concurrently, we should also be vigilant about the accompanying risks, including potential penalty risks, protocol centralization issues, and revenue dilution caused by intense market competition.

Regarding the market prospects of LRT, we observe the tremendous allure of its high-yield potential. LRT provides additional revenue channels for ETH stakers, including not only basic staking rewards but also EigenLayer rewards and potential token issuance. Additionally, through incentives such as airdrops, LRT is poised to attract a broader range of users, thereby driving overall growth in DeFi leverage, with the potential to replicate or even surpass the frenzy of DeFi summer 2020.

Future trends are promising. With the impetus of LRT, the DeFi space is expected to witness competition akin to the “Curve War,” and token economics may evolve toward more complex veTokenomics models. Simultaneously, the introduction of emerging AVS, with their influence through token rewards or decision-making on token issuance for LRT protocols, could be a key driver in attracting ETH re-staking.

In summary, LRT has demonstrated its unique value in unlocking liquidity, enhancing returns, and optimizing governance and risk management. As such, LRT is not only a staking tool but also a key factor driving innovation and growth in DeFi. Its development and application will bring profound changes to the DeFi ecosystem, opening up new possibilities for users, developers, and the entire blockchain world.

Accompanying Risks and Challenges

Stader Labs, as a dark horse in the industry, has recently launched rsETH, a liquid restaking token on the Ethereum mainnet, attracting widespread attention. Through rsETH, users can restake existing liquid staking tokens (such as Coinbase’s cbETH, Lido’s stETH, and Rocket Pool’s rETH) across multiple different networks for secondary staking, minting new liquid tokens representing their shares in the restaking protocol. This greatly enhances the flexibility and liquidity of staked assets. With support from EigenLayer, rsETH has achieved large-scale restaking of ETH, further strengthening the decentralization characteristics of the Ethereum network.

However, this innovative financial tool also brings many risks. Ethereum co-founder Vitalik Buterin and EigenLayer’s co-founder have pointed out that restaking may lead to complex scenarios, posing a threat to the security of the main network. Additionally, with the emergence of more AVS and LRT, excessive diversification of industry funds and attention may lead to market instability and weakening governance structures.

As a rising force in the Web3 ecosystem, Blast Layer2 public chain injects new vitality into Layer 2 solutions through its innovative automatic compounding feature. Blast’s innovation lies in providing basic returns on deposits on Layer 2 networks, collaborating with protocols like Lido to offer stable staking rewards, while also investing stablecoin assets in protocols like MakerDAO for additional returns. Although Blast’s operating model brings convenience and returns to users, the composition and strategies of its TVL also reveal potential risks of centralization and market sensitivity issues.

The future challenge for Blast lies in how its strategies affect the actual utilization of assets and dynamic capital conversion within the ecosystem. Blast’s TVL strategy needs to shift from static capital preservation to dynamic capital appreciation, ensuring network vitality and liquidity of Dapps. Only then can it truly achieve its goal of driving the growth of blockchain

The future challenge for Blast is how its strategy affects the actual utilization of assets and dynamic capital conversion within the ecosystem. Blast’s TVL strategy needs to change from static capital preservation to dynamic capital appreciation to ensure network vitality and Dapp’s liquidity. Only in this way can it truly achieve its goal of promoting the growth of the blockchain network, rather than just serving as a storage medium for capital.

Overall, the emergence of Stader Labs’ rsETH and Blast Layer2 public chains marks the innovation and progress of the staking model in the DeFi field. But while pursuing maximization of returns, we must also remain alert to the potential risks in these emerging models to ensure the security and healthy development of the Ethereum network. The future DeFi ecosystem will need to find a more robust and sustainable balance between innovation and risk management.

Envisioning New Horizons in Ethereum Staking

We believe that dynamic staking strategies like LRT are having a profound impact on the Ethereum staking market. Firstly, the automation and efficiency of these strategies are lowering the barrier to entry, attracting more individual investors. Secondly, with more funds flowing in, market liquidity is significantly increasing, which helps stabilize the entire DeFi ecosystem. Additionally, dynamic staking strategies are driving market innovation and development by offering diversified and customized investment options. However, the implementation of these strategies also faces technical challenges, particularly in building efficient and accurate algorithm models, as well as ensuring system security and resilience against network attacks.

Source: Bing Ventures

Meanwhile, some Ethereum staking paradigms beyond LRT are also under exploration and worth noting.

The Layered Staking System, as a new model, is emerging against the backdrop of market maturity and diverse investor demands. This system distributes staked assets across different risk levels, each with varying profit potential and risk profiles. Lower-risk levels offer relatively stable returns, suitable for risk-averse investors, while higher-risk levels are suitable for those with higher risk tolerance. The flexibility of this system allows investors to allocate assets based on their risk preferences and market forecasts. Implementing a Layered Staking System requires complex smart contracts and sophisticated risk management strategies to ensure liquidity and security across different levels. The emergence of the Layered Staking System provides investors with more choices and flexibility, driving the Ethereum staking market towards greater maturity and diversification.

Furthermore, automated staking strategies based on smart contracts enhance asset management efficiency and effectiveness by automatically executing staking, unstaking, or reallocating staked assets. The risk management capabilities of automated staking strategies are enhanced through specific risk parameters set in smart contracts. Once market conditions trigger these parameters, smart contracts automatically adjust the staking positions. Despite challenges such as ensuring the security and reliability of smart contracts, it is expected that with technological advancements, the security of smart contracts will be strengthened, driving the wider application of automated staking strategies.

Collective staking and shared revenue models enable multiple investors to collectively stake their assets and share the generated revenue proportionally. This model automatically distributes revenue through smart contracts, providing opportunities for cooperative value-added for small-scale investors. Smart contracts play a central role in the collective staking model by automatically executing revenue distribution, ensuring each participant receives fair returns. Collective staking provides small-scale investors with opportunities to reduce risk and costs, increasing the inclusivity of the DeFi ecosystem.

Finally, linking staked assets to Real World Assets (RWA) is an innovative development in the DeFi field. Under this model, real-world assets such as real estate and art can serve as underlying assets for staked assets, represented and used for staking through tokenization on the blockchain. This provides liquidity for assets that typically lack it, offering new sources of funds for owners of real-world assets. Despite challenges such as ensuring accurate assessment and tokenization of real-world assets, as well as addressing regulatory and compliance issues related to real-world assets, the model of linking staked assets with RWA is expected to have broader applications in the future. This provides traditional asset holders with new funding channels and offers cryptocurrency investors new investment opportunities, deepening the integration between the cryptocurrency market and traditional financial markets.

In conclusion, the DeFi staking field is poised for further innovation and development, making it highly worthy of attention from investors and DeFi enthusiasts.

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